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hanover Jul 19, 2007 12:07pm | Post# 1

information on hedging for newbies
 
Hedging schemes like Freedom Rocks (FR) claim that investors can make "returns comparable to those that the big institutions make", at negligible risk, and with absolutely no forex knowledge, or trading experience: no charts, no analysis required; a "color by numbers" method.

I haven't subscribed to FR, but I've attended their presentation, and watched their videos. I'm familiar with the concepts behind hedging schemes.

The primary income source from FR is the swap interest that gets credited to your account, which is the difference between the net interest offered by the hedged currency pairs. Hedging inversely correlated currency pairs (e.g. EURUSD and USDCHF) means that you simultaneously buy or sell both currency pairs, hence you're effectively trading the cross pair (EURCHF in this case). If the correlation was 100%, then the EURCHF price would never move, and there would be zero risk. What the FR sales pitch doesn't tell you is that the cross pair could easily move 5%-10% within the course of a year, while the interest differential between the pairs remains something like 1%-2%. This price movement could either be favorable or unfavorable: that is completely fortuitous. Given a large enough time period, it should eventually sum to zero, but in the meantime your account must somehow survive fluctuations that could be several times the amount of the interest received.

Now, to make decent returns from an interest differential of 1%-2%, you need to apply very high leverage. In the FR presentation I attended, they were promoting up to 400:1 leverage. This ramps up both the interest payments and the effect of the price movement, in exactly like proportion, by up to 400 times, depending on what percentage of your account ("margin") you choose to place at risk. (So if the interest differential was 1.5%, then at 400:1 leverage and 10% margin, the return from the interest would be 1.5% x 400 x 10% = 60% p.a.; if you chose to risk 20% margin, the return would be 120% p.a., and so on).

One thing that the videos don't mention is that when countries' banking authorities adjust their interest rates, your broker will adjust his swap rate accordingly. This could either work in your favor, or against. An adjustment could mean that the differential between the rates in the inversely correlated pairs is no longer significantly positive, hence negating the main income stream.

FR also promotes a buy low/sell high concept, while saying that it's not necessary to analyze the market. This is fallacious, since without any analysis, there is exactly a 50/50 chance of being right or wrong in trying to guess price direction (or a 50/50 chance of price reverting to the mean, as they show in their video) at any point. Hence any gains made through the price movement are completely fortuitous.

Keep in mind that your bottom line at any point includes not only any profits that you might have "locked in", but also the profit/loss situation of any currently open positions; e.g. if you "lock in" $1,000 by closing your current position, and then later incur a loss of $700 on another position, the net effect is still $300, regardless of whether the first position had been closed, or not. Hence "locking in profit" (which was discussed during the presentation I attended) is an illusory concept.

You also need to keep in mind that every time you buy and/or sell a currency pair (i.e. to apparently lock in any profits gained), your broker effectively charges you the "spread" (which is how the broker makes his income). The more often you buy or sell, the more often this cost applies. Ironically, the better the correlation, then the lower the movement in the cross pair, and hence the greater the amount of the spread relative to any profit that is fortuitously made from the price movement.

And in addition to the spread cost, don't forget that you'll be paying a monthly fee to FR, irrespective of your investment performance.

In summary, then, as long as the inverse correlation remains close to 100%, applying high leverage will give you inflated returns from the interest differential. However, during periods where the correlation weakens, the risk (i.e. drawdown) involved could be several times the return.

Put simply, there is no such thing as a "free lunch" in forex. The only way to make a consistent income - whether hedging or not - is to have a real "edge", in terms of a directional system of entries and exits, while operating at a low enough level of leverage to preserve your capital long enough to allow your edge to eventually prevail. An edge is made possible only through many hours of dedicated analysis and study, to provide the necessary knowledge of the markets, and trading experience.

Finally, FR also offers network marketing, which will doubtless appeal to many. I live in New Zealand, where schemes like Amway - which sell consumable products - are legitimate, but network marketing of "intangible" products (like investment schemes unable to promise an absolute guarantee of profit) are likely to be classed as illegal pyramid selling. Hence I suggest that you first seek legal advice, with regard to your own country's or state's legislation, in this context.

David

megadave5000 Jul 19, 2007 1:33pm | Post# 2

yikes
 
This is an excellent post.

There are a number of "scams" out there - especially in regards to financial markets. While I wouldn't say that what is indicated above is a "scam" per se, it certainly sounds like there are plenty of enormous risks involved in this type of trading scheme. High leverage + no analysis = recipe for disaster.

While I'm at it, I may as well try to invoke a little critical thinking on the part of newcomers that could be swayed by the amount of literature and programs that prey on their lack of experience. If somebody is trying to sell you ebooks, software, programs, schemes, ideas, etc. that promise or claim high returns, ask youself why the seller wouldn't simply use their knowledge to make their own fortune in trading.

Seriously, if you had found a way to earn the same returns that big institutions realize with little to no market analysis, would you even consider for a second to sell it people?? No way! You'd trade it yourself and turn your favorite currency pair(s) into your personal ATM.

Unfortunately, I can speak from experience. I have purchased ebooks in the past and paid anywhere from less than $10 to more than $75 depending upon the circumstance. Let me tell you that what I learned in these ebooks is almost completely useless. Please please please, if you're considering an ebook or signal advisor or something else along those lines, have a look at some of the money management and price action threads on FF before you pay money to somebody for garbage information. You can learn a lot here for free.

-=DAVE=-

hanover Jul 19, 2007 5:08pm | Post# 3

Thanks, MegaDave
 
MegaDave, you also make some great points.

A couple more points about Freedom Rocks.....

Firstly, if anybody wants to view their product and business videos:
http://www.freedomrocks.com/

For some independent reviews:
http://www.forexbastards.com/public/...eedomrocks.com
http://www.gurubusters.com/Not_Recom...dom_Rocks.html

There are currently 64 reviews of FR on the forexbastards site. Notice how polarized opinion is: there are some who rate it 5-star fantastic, and others who rate it as a dirty scam. Like MegaDave says, it's not necessarily a scam, but people need to be aware of the risks involved.

Why the polarized opinions?

Well, the EURUSD and USDCHF are apparently more than 95% inversely correlated. In very generalized terms, this means that the real risk occurs perhaps less than 5% of the time, but if one is highly leveraged enough, it is enough to wipe out one's account. That's apparently what's happened to those who claim that they lost money, and are therefore rating FR a scam. This would occur when FR's black box algorithm is recommending buys on both EURUSD and USDCHF (effectively the EURCHF), but the EURCHF happens to fall significantly; or vice versa.

Conversely, those who are raving about FR obviously have been fortunate enough to encounter a period, or periods, where the correlation has remained sufficiently strong. Under these circumstances, and given high enough leverage, they will prosper handsomely. (I guess if I wanted to be cynical, I could also suggest that some are reviewing it positively simply to attract members into their networking downlines.)

At the presentation I attended, FR was being promoted as a "long term investment" scheme. The irony is that, the longer one stays in the scheme, the more likely one is to eventually strike a period where the correlation eventually breaks down, and if one has over-leveraged one's positions, it could mean wipeout. This could occur, without warning (especially as one is not performing any market analysis), at any time.

Of course one can reduce this risk by lowering the leverage, but then the returns are lowered in like proportion.

No matter how clever one tries to be with position sizing systems (e.g. martingale, anti-martingale), scaling up or down, in or out, pyramiding, or hedging, there is no way around these facts:

1. High leverage = high return = high risk.

2. Long term positive expectancy can't be obtained without an underlying entry/exit method that somehow identifies and exploits recurring inefficiencies (i.e. bias or non-randomness) in price behavior.

David

raczekfx Jul 19, 2007 7:46pm | Post# 4

..

And in addition to the spread cost, don't forget that you'll be paying a monthly fee to FR, irrespective of your investment performance.
...
David
Don't waste your time, Dave.
That fee invested in PF will show you 'how to fish...'!
I'm sure that after one year, you won't be looking for one, you'll be fish'n ..

R.

WHTenn Jul 19, 2007 8:27pm | Post# 5

FreedomRock is a pyramid scheme

Their office is a mail drop in Las Vegas.

Forex is open 24 hours a day... their office is open 6 hours a day...no support.

If you call to inquire about names of company holders, they hang up on you.

I can go on and on...but no matter how you look at it, it is a pyramid scheme. One makes money by recruiting others.

Vensik Jul 20, 2007 12:16am | Post# 6

The only bad things I've heard from freedom rocks subscribers are from people who overleverage. I don't believe the correlated hedge is the entire strategy, but interest certainly plays a big part in profits and a positive interest scenario is always considered.

Apparently February was their large down month, meaning the correlation broke. A friend of mine that trades them is up a little over 60% since last September, but he only needs to log in once a day and check over the trades for 15 minutes. He has not recruited anyone to FR, so that apparently isn't needed to make money with it. It's more about trading their methodology conservatively.

fxloot Jul 20, 2007 12:21am | Post# 7

Amazing how all the experts of this thread are folks who have not tried the concept.......but thats fine ......... we'll keep taking your cash.... thanks again


Vensik Jul 20, 2007 12:34am | Post# 8

There's plenty to be made, and lost, for all.

Your certainly not taking my cash. Though I don't believe I said anything negative toward FR. I've got nothing against a positive interest hedge. I personally trade a basket of currencies on some of my larger clients, so that risk is spread across a small percentage of the account with a positive interest scenario. Interest isn't something that should be ignored if you trade on larger compressions.

hanover Jul 20, 2007 8:12am | Post# 9

Vensik, I suspect that FXloot’s comment was more likely directed at me. I still stand by my original review.

I’m not saying that people shouldn’t give Freedom Rocks a try; I was just trying to point out some of the potential risks involved. IMO FR’s understandably positive sales pitch glossed over some important points, and I was attempting to redress the balance.

The review links I provided cite both success stories, and also scathing comments from people who have apparently blown their accounts, which suggests that with imprudent leveraging, this is a real possibility.

We have no way of knowing to what extent FR’s black box algorithm attempts to forecast price direction, i.e. in deciding whether to buy or sell both pairs in the initial hedge, and/or select the levels at which positions should be added to, or closed. There may be some in-built sophistication that somehow enhances the probabilities, and alleviates risk. But the fact remains that the inverse correlation will never be exactly 100%, and the higher the margin the trader chooses to deploy, the greater the risk (drawdown). Of course the latter is true with any trading system.

FXloot, I’m very happy for you to keep taking my cash.

David

blueruby Jul 22, 2007 9:42am | Post# 10

Amazing how all the experts of this thread are folks who have not tried the concept.......but thats fine ......... we'll keep taking your cash.... thanks again

I'm not an expert, but I did try it. On a demo, wisely, in February. I lost 40% of the account very quickly, and was not highly leveraged. It was supposed to be hedged, correlated, and is purported to be "safe". So I traded 20:1, which is conservative to many traders. I usually keep it under 10:1 in normal, un-hedged trading.

Events like that are when traders usually make money. FR failed the test.

AND, you must always take reviews with a grain of salt when the reviewer is selling the program. They're trying to pay their monthly fee by recruiting.

There's no way around it. If you're going to trade, you have to learn to be a trader.

Thanks, David. I always get a lot out of your intelligent posts.


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