Hedged Carry Trade ..... Or Not?
You had 20$ profit in positions is good...what if it was the reverse???
That's the question I pose.
The interest or rollover is guaranteed to be favourable(while interest rates remain as they are). Initially when I opened these positions I expected to be in the negative by the spread I paid on the 3x trades, and that I would have to wait for the rollover to pay for this before I would be in profit.... however this is not the case, the amount of pips that I am up or down does not remain constant - so far it hasn't gone up or down very much, but the fact that it is going up and down suggests to me that either there is arbitrage taking place or the size of the individual trades are not identical, thus giving us an overall long or short position between the three trades. Does this make sense? - it's difficult to explain.
GBPJPY move downward are much faster then GBPUSD moveup, whilst USDJPY may not equavalent the speed moving down as GBPJPY. So, you may hit a margin call that time. Unless you have an account size of 50k, you only trade <5k(less then 10%) with 1:100 leverage. MAY BE will survive. On the other hand, what IF GBP cut rate... or JPY raise rate? I think your strategy still too early to decide whether its good. May be you need a carry trade backtester. If I'm not mistaken there is a commercial service, but I cant remember who did that. Or if you can write a simple backtest routine that will joint a 3 backtest report into 1, then you'll be able to record their drawdown, equity maximal drawdown, and realized drawdown. Will be much more accurate compare to few weeks forward testing. As you mentioned, it takes a year to figure out whether it gaves you 30%. Therefore, before you able to withdraw all your capital, you need atleast more then 3 years of profit, to barely survive 1 full stop(wipe out, or Margin Call in FXCM) that will not harm your initial capital. Am I worrying TOO much? Just my two pips. Hope this will not offend anyone.
Regards
David
just a clarification because the way your post is writed juggest that you believed that you are fully hedged and it is not the case.
That's why you have some positive interest rates and the your P/L fluctuates more than with a full hedge.
Let's summarize taking 1 lot for each pair:
Buy 1 lot GBP/CHF = Buy 100 000 GBP, Sell 215 000 CHF (I rounded up)
Sell 1 lot GBP/USD = Sell 100 000 GBP, Buy 196 000 USD
Sell 1 lot USD/CHF = Sell 100 000 USD, Buy 110 000 CHF
Result Buy 96 000 USD Sell 105 000 CHF
So basically it's like trading Buy 1 lot USD/CHF so no surprise about the interest rate result, and the fluctuations.
I've tried this system one year ago. It's not working! You will end up with large drawdowns. I've tried them all: martingale, custom indicator to show tops/bottoms ... no success.
This Makes Sense
just a clarification because the way your post is writed juggest that you believed that you are fully hedged and it is not the case.
That's why you have some positive interest rates and the your P/L fluctuates more than with a full hedge.
Let's summarize taking 1 lot for each pair:
Buy 1 lot GBP/CHF = Buy 100 000 GBP, Sell 215 000 CHF (I rounded up)
Sell 1 lot GBP/USD = Sell 100 000 GBP, Buy 196 000 USD
Sell 1 lot USD/CHF = Sell 100 000 USD, Buy 110 000 CHF
Result Buy 96 000 USD Sell 105 000 CHF
So basically it's like trading Buy 1 lot USD/CHF so no surprise about the interest rate result, and the fluctuations.This explanation makes sense to me; I always suspected the position sizes were not equal and that the result was that a long or short position had been taken. My understanding of what occurs when a trade takes place was incorrect. Previously I thought that both the base and cross currency was bought and sold in 100k units ie buy USD/CHF meant buy 100k USD and sell 100k CHF - however your explanation clears it up. Thanx heaps.
This explanation makes sense to me; I always suspected the position sizes were not equal and that the result was that a long or short position had been taken. My understanding of what occurs when a trade takes place was incorrect. Previously I thought that both the base and cross currency was bought and sold in 100k units ie buy USD/CHF meant buy 100k USD and sell 100k CHF - however your explanation clears it up. Thanx heaps.
That's good that it is clear.
Because I see very often this kind of misunderstanding on the hedges.
Sometimes it is good to come back to the basic: what buying 1 lot actually means
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Hi, I have noticed that there are circumstances at the moment due to the significant interest rate differentials we have between various countries, whereby a hedged carry trade can be opened utilising 3x crosses. I opened a couple of demo accounts to trial my theory about two weeks ago and thus far the results have been promising.
Both accounts have received +ve interest payments - which was easy enough to calculate would be the case, however the accounts definitely appear to 'breath' if that makes sense - obviously when you open a position you are in the hole by the amount of the three spreads - but this amount seems to vary. My question is this.... Is this due to the three trades not being of equal size/value(hence we have taken an overall position), or is this arbitrage takiing place? I hope I have made sense. I will detail the trades I made below and post attach some screen shots.
Buy GBP/CHF +$56.70
Sell GBP/USD -$39.00
Sell USD/CHF -$ 9.00 (These are FXCM's interest rates on a Wed)
----------
Interest +$ 8.70
If you look at the positions, each currency has been both bought and sold at the same time.
Buy GBP/JPY +$92.80
Sell GBP/USD -$39.00
Sell USD/JPY -$33.20
---------
+$ 20.60
Now the amount of interest may not seem much, but if you utilised this strategy with say 5k ( leaving 2k for the position to 'breath'), then I have calculated yields of 15 - 30% per annum, which sure beats any bank account that I am aware of. There are other crosses that present the opportunity also. (eg Sell AUD/NZD, Buy GBP/JPY, Sell EUR/CAD, Sell GBP/AUD & more).
So there you have it. Please comment if you think there is something in this/or wrong with this theory. (and support with the math if you can). I suspect the positions are still exposed due to either different 'pip values' or position sizes but the math has me a little puzzled at the moment.
Cheers, Jase.