Hello,

If you're looking to make 100 of pips a day then this journal is not for you. I am going to be building an INVESTMENT strategy that harnesses the power of interest differentials. For example, a popular carry trade is AUD/USD or AUD/JPY because of AUD's high interest rate. We earn 1.3 pips a day when we buy AUD/USD. Thus, removing any market movements, we would only need to build our position size to 10-20 standard lots over time to earn around $130-260 a day in interest. This also assumes that interest rates don't change. We know that won't happen, but we can easily monitor interest rates to decide where the carry trade is at.

I don't want to be exposed to market movements, and therefore will look to hedge major price movements against my carry trade position by taking hedging positions in other currency pairs that have high positive/negative correlations against my interest earning currency pair. In the above example I would hedge my AUD/JPY position by taking a similar trade in USD/CAD or USD/CHF for example because they both have very high negative correlations. I may earn something around 4.5% interest on the AUD/JPY trade, but might have to pay .5%-.75% interest on the hedge. In my opinion this is worth it if it helps remove volatility from the account; to a degree.

Positions are placed with ZERO stop loss and ZERO take profit. We want to monitor leverage very carefully and increase our position size over time as we make deposits and earn interest. There will be a heavy amount of math going into this system. I want to eventually get to the point where I can say, "For ever $500 deposited into the account it will allow me to increase my position on all the pairs I am trading by 1 minilot or something along those lines.

Without a stoploss/takeprofit we are worried about the divergence between the hedged pairs and not necessarily how many thousands of pips they move since while one loses, the other wins. In my opinion right now I would like to calculate how many lots I can enter for each position based on a divergence of 1000 pips between each hedged pair. To me, this feels like a somewhat reasonable amount right now to consider. I feel this way for several reasons.

1.The first being that the differential could go in my favor where the pair that is more volatile is in the correct direction of the trade.

2. Earning interest each day means that our average entry price is adjusted to our favor and for there to be a divergence of 1000 pips will take some time. If it takes several months then there is more of a cushion for us to play with.

3. If it takes several months for the divergence between the pairs to occur then it is also reasonable to have made a deposit to the account to enter more positions. Thus, the average entry price is manually adjusted to be closer to the current price. Therefore it is easier for the account to recover back to a neutral state.

4. So far the discussion has only been about trading one hedged pair. What if we are able to trade 4 pairs total for 2 hedged carry trades? Will this remove more volatility to the account or add to it? I believe diversification will only further protect me from market volatility.

These are my thoughts for now. I will come back later to begin tackling some of the math. Current assignments will be to understand how to calculate position size based on pip values, volatility differentials between pairs, correlations, and so forth. Also, should I be afraid of exotic pairs that offer higher interest rates? I think it might be worth it especially since this will allow me to play several hedged pairs and not worry about having each hedge pair becoming too correlated.

Feel free to interject with thoughts.

Thanks,

Matt

If you're looking to make 100 of pips a day then this journal is not for you. I am going to be building an INVESTMENT strategy that harnesses the power of interest differentials. For example, a popular carry trade is AUD/USD or AUD/JPY because of AUD's high interest rate. We earn 1.3 pips a day when we buy AUD/USD. Thus, removing any market movements, we would only need to build our position size to 10-20 standard lots over time to earn around $130-260 a day in interest. This also assumes that interest rates don't change. We know that won't happen, but we can easily monitor interest rates to decide where the carry trade is at.

I don't want to be exposed to market movements, and therefore will look to hedge major price movements against my carry trade position by taking hedging positions in other currency pairs that have high positive/negative correlations against my interest earning currency pair. In the above example I would hedge my AUD/JPY position by taking a similar trade in USD/CAD or USD/CHF for example because they both have very high negative correlations. I may earn something around 4.5% interest on the AUD/JPY trade, but might have to pay .5%-.75% interest on the hedge. In my opinion this is worth it if it helps remove volatility from the account; to a degree.

Positions are placed with ZERO stop loss and ZERO take profit. We want to monitor leverage very carefully and increase our position size over time as we make deposits and earn interest. There will be a heavy amount of math going into this system. I want to eventually get to the point where I can say, "For ever $500 deposited into the account it will allow me to increase my position on all the pairs I am trading by 1 minilot or something along those lines.

Without a stoploss/takeprofit we are worried about the divergence between the hedged pairs and not necessarily how many thousands of pips they move since while one loses, the other wins. In my opinion right now I would like to calculate how many lots I can enter for each position based on a divergence of 1000 pips between each hedged pair. To me, this feels like a somewhat reasonable amount right now to consider. I feel this way for several reasons.

1.The first being that the differential could go in my favor where the pair that is more volatile is in the correct direction of the trade.

2. Earning interest each day means that our average entry price is adjusted to our favor and for there to be a divergence of 1000 pips will take some time. If it takes several months then there is more of a cushion for us to play with.

3. If it takes several months for the divergence between the pairs to occur then it is also reasonable to have made a deposit to the account to enter more positions. Thus, the average entry price is manually adjusted to be closer to the current price. Therefore it is easier for the account to recover back to a neutral state.

4. So far the discussion has only been about trading one hedged pair. What if we are able to trade 4 pairs total for 2 hedged carry trades? Will this remove more volatility to the account or add to it? I believe diversification will only further protect me from market volatility.

These are my thoughts for now. I will come back later to begin tackling some of the math. Current assignments will be to understand how to calculate position size based on pip values, volatility differentials between pairs, correlations, and so forth. Also, should I be afraid of exotic pairs that offer higher interest rates? I think it might be worth it especially since this will allow me to play several hedged pairs and not worry about having each hedge pair becoming too correlated.

Feel free to interject with thoughts.

Thanks,

Matt