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Profit on Fluctuation System: Hedged

  • #1
  • First Post: May 16, 2007 10:01am May 16, 2007 10:01am
Greetings,

I am introducing you here to a system I have only been trading for 1 week, but it has averaged approximately 1-2% per day, is very safe, and can be done at any time of the day or night.

Here are the rules:

Open 1 position long EUR/USD
Open 1 position long USD/CHF

Take profit (close both orders) at 1% profit

Repeat

What we are doing here is trading the fluctuation of the pairs, and since we are hedged approximately 95-98% we can sleep at night with the trade open.

I use 40% of my account balance on both trades (for a total of 80% of my account balance).

Please give comments as able.

p.s. I believe someone is developing an EA for this method which should make us even more profitable, as I am only able to close trades when I happen to check my computer and see I am in profit.
  • #2
  • May 16, 2007 10:02am May 16, 2007 10:02am
This concept was started in another thread, and I thought I would post some of the questions/answers and posts from that thread to give us some background:

Quoting kevinsw
Okay, I will bite on this one I guess.

I am no super trader or anything but one thing I know is that these two pairs go in the opposite direction about 95% of the time. I have made some nice pips when buying one and selling on the other pair. This being said I must ask how you can trade both pairs in the same direction and make pips?

kevin
Hi Kevin,

Yes, you can make nice pips buying one and selling the other, IF you can guess the direction of the market. But since these pairs do move in opposing direction approximately 98% of the time, why would you not merely double the lot size of your trade and stick with one pair?

It is because these pairs move in opposing direction most of the time that this way of trading (purchasing both pairs) is a very safe way to trade. It is simply called hedging. The benefit of trading safely this way, that is, of hedging, is that you can use much more of your account balance in these trades. In fact, in the short time I have been doing this, the max drawdown I have had has been 3%.

What we are really doing here is simply trading the daily "fluctuation" in these pairs. When they are fluctuating against us, we don't do anything, we accept the minimal drawdown. When they fluctuate in our favor we simply grab the profit.

As an example, I opened this trade last night before going to bed (Eastern time) and checked it immediately before going to sleep and it had fluctuated against me by about $22.00 (on a $1,000 account). I went to sleep, and slept peacefully knowing I was fully hedged, and when I woke up this morning it had fluctuated in my favor of about $25.00. I closed the trades, took the $25.00 profit which was 2.5% of my account balance, and then reopened the trades again.

My goal is to see if we can make 1% per day. So far I have doubled that. I do believe I am going to open a new thread just for this system, and will post the URL here in the next thread.

Thank you all.

Mike
  • #3
  • May 16, 2007 10:05am May 16, 2007 10:05am
Mrmikal said:

"The pairs go in opposite directions 95% of the time (well, I don't know how accurate that is, since I'm sure the percentages are off), but still...since (more than likely), the USD will continue it's weakening against the majors, AND considering that you're technically buying more EUR than you are selling CHF, AND considering that the pairs COULD move in the same direction 5% of the time, the expectation could easily be that you would make money not only from the swap (of which you would be collecting on your USD/CHF long), but from congruent movements between the rates.

Furthermore, leveraging 40% of the account at say 100:1 would require a movement of 0.025% on the leveraged money to make 1% of the account balance.

So, if you have $1000 in your account, and you invest $400 of your margin in
this, you need the $40000 of leverage to reap $10 of gain (1% of $1000).

I guess the weird thing is, why we're cutting profit off at 1% (other than for compounding)...still, I have a feeling it may be "cheaper" (there is a cost associated with opening AND closing positions) to simply add positions since your margin will be determined by the amount of margin you have (not equity). In theory, i suspect you could just monitor margin and ensure that you always have 40% margined by adding the smallest available lots. It's essentially the same thing, and you'd be saving money by not reopening positions."
  • #4
  • May 16, 2007 10:07am May 16, 2007 10:07am
Mrmikal,

I agree with you, excellent thoughts here. Originally the reason I wanted to take profit at 1% is exactly as you stated, for compounding. I heard somewhere that compounding interest is the 8th wonder of the world, and this system is poised to capture that, especially when we get the EA developed.

Thank you for any and all thoughts.

Mike

Quoting mikejody
Mrmikal said:

"The pairs go in opposite directions 95% of the time (well, I don't know how accurate that is, since I'm sure the percentages are off), but still...since (more than likely), the USD will continue it's weakening against the majors, AND considering that you're technically buying more EUR than you are selling CHF, AND considering that the pairs COULD move in the same direction 5% of the time, the expectation could easily be that you would make money not only from the swap (of which you would be collecting on your USD/CHF long), but from congruent movements between the rates.

Furthermore, leveraging 40% of the account at say 100:1 would require a movement of 0.025% on the leveraged money to make 1% of the account balance.

So, if you have $1000 in your account, and you invest $400 of your margin in
this, you need the $40000 of leverage to reap $10 of gain (1% of $1000).

I guess the weird thing is, why we're cutting profit off at 1% (other than for compounding)...still, I have a feeling it may be "cheaper" (there is a cost associated with opening AND closing positions) to simply add positions since your margin will be determined by the amount of margin you have (not equity). In theory, i suspect you could just monitor margin and ensure that you always have 40% margined by adding the smallest available lots. It's essentially the same thing, and you'd be saving money by not reopening positions."
  • #5
  • May 16, 2007 10:13am May 16, 2007 10:13am
Hi Mike

By buying 1 EUR/USD and 1 USD/CHF, in effect you are buying 1 EUR/CHF and you are in effect trading fluctuations of EUR/CHF.

The reason you were down $22 at night and up $25 in the morning has been due to EUR/CHF going up, this pair has now been in an up trend for some time.
Regards
  • #6
  • May 16, 2007 10:16am May 16, 2007 10:16am
Quoting howard
Hi Mike

By buying 1 EUR/USD and 1 USD/CHF, in effect you are buying 1 EUR/CHF and you are in effect trading fluctuations of EUR/CHF.

The reason you were down $22 at night and up $25 in the morning has been due to EUR/CHF going up, this pair has now been in an up trend for some time.
This makes sense, however, remember that my way of trading this includes the US dollar. Additionally, if I were to simply trade the EUR/CHF by itself there would be no hedging.

By trading EUR/USD and USD/CHF we are hedged so that if the dollar suddenly sunk we would survive just fine.
  • #7
  • May 16, 2007 10:25am May 16, 2007 10:25am
http://www.forexfactory.com/showpost...4&postcount=15

Please read this and answer my questions...

Your system "seems" poised to take advantage of compounding interest, but I think you set yourself back by opening and closing your positions over and over again.

Look, the truth of the matter is that you're betting on the weighted combination of both pairs to always rise. I guess I'm having a hard time understanding why you would ever close a position if that fundamental truth is intact. In my head, if you're always in the market anyways, then why would you close your positions instead of just adding to them as your margin increase (which it will as the price of your pairs goes up). Anyway you look at it, "capturing" the profit comes at a cost once you reopening the positions.

Here's what I mean:

If the bid/ask of pair X is 1.000/1.003 and you buy at 1.003, then the price goes up to 1.0013/1.0016. you can sell and collect 10 pips (booking your profit). Now, if you were to buy again, then you'd have to buy at 1.0016 and the price would have to travel to 1.0026/1.0029 in order for you to book another 10 pips. However, if you were to hold onto that first position, then the price would only have to travel to 1.0023/1.0026 to create a profit of 20 pips.

The opposite direction works the same way...no matter how you slice it if you CLOSE a position for a profit OR a loss and reopen that same position (maybe with a few more lots added), you will lose the spread that you technically already paid.

So the question remains...why would you EVER close your position until you needed to withdraw money from the account? don't forget the number of positions you can buy is dictated by your margin, not your account balance. As your profit grows, your margin should increase even if the profit is unrealized.

Quoting mikejody
Mrmikal,

I agree with you, excellent thoughts here. Originally the reason I wanted to take profit at 1% is exactly as you stated, for compounding. I heard somewhere that compounding interest is the 8th wonder of the world, and this system is poised to capture that, especially when we get the EA developed.

Thank you for any and all thoughts.

Mike
  • #8
  • May 16, 2007 10:37am May 16, 2007 10:37am
Quoting mikejody
This makes sense, however, remember that my way of trading this includes the US dollar. Additionally, if I were to simply trade the EUR/CHF by itself there would be no hedging.

By trading EUR/USD and USD/CHF we are hedged so that if the dollar suddenly sunk we would survive just fine.
Mikejody,

It doesn't matter that you are including the US dollar, you are actually trading EUR/CHF. The only thing that may be different are the spreads, that could be different for the EUR/CHF than the resulting one from the combination.

Think of it as algebra a/b * b/c = a/c. Don't fool yourself, you're not hedging 100%, you are trading EUR/CHF. Why don't you look at a chart of EUR/CHF and see for yourself where your profit came from?
Pablo
  • #9
  • May 16, 2007 10:52am May 16, 2007 10:52am
Hi Pablo,

I can agree that the profit came from there this time, but I do not agree it does so everytime. For instance, the movement of EUR/CHF, in my opinion, is not dependant upon any movement of the USD.

The US dollar drives both pairs I am trading.

Quoting ptejerina
Mikejody,

It doesn't matter that you are including the US dollar, you are actually trading EUR/CHF. The only thing that may be different are the spreads, that could be different for the EUR/CHF than the resulting one from the combination.

Think of it as algebra a/b * b/c = a/c. Don't fool yourself, you're not hedging 100%, you are trading EUR/CHF. Why don't you look at a chart of EUR/CHF and see for yourself where your profit came from?
  • #10
  • May 16, 2007 10:54am May 16, 2007 10:54am
Pt,

While you would think that, it's not actually true.

You're buying a weighted basket (which is more heavily weighted EUR).

If you were to try and simulate the EUR/CHF, you would have to buy about 1.35 lots of the USD/CHF in order to get an equivalent single lot of the EUR/CHF.

This overweight EUR means that fluctations in the dollar actually come into play. Whether this is good or bad really depends. Technically, you still see the EUR/CHF rise if this basket is doing well, but the basket isn't specifically tied.

Quoting ptejerina
Mikejody,

It doesn't matter that you are including the US dollar, you are actually trading EUR/CHF. The only thing that may be different are the spreads, that could be different for the EUR/CHF than the resulting one from the combination.

Think of it as algebra a/b * b/c = a/c. Don't fool yourself, you're not hedging 100%, you are trading EUR/CHF. Why don't you look at a chart of EUR/CHF and see for yourself where your profit came from?
  • #11
  • May 16, 2007 10:58am May 16, 2007 10:58am
Mike...all things being equal, this isn't 100% accurate.

While the USD "drives" both pairs, IF you were to be equally weighted on the EUR/USD and USD/CHF then essentially you'd have the EUR/CHF

Let's just say for the sake of simplicity that both rates were 1.000. At that point, you'd be buying 100K EUR while selling 100K USD and then buying 100K USD with 100K CHF...well, we cancel out the USD buy and sell, and what do you get? 100K EUR buy with 100K CHF sold.

Because you're overweighting the EUR/USD (since you're not buying the same amount of USD as you are selling agains the EUR), the dollar does come into play...but not because there isn't a relationship to the EUR/CHF...

Quoting mikejody
Hi Pablo,

I can agree that the profit came from there this time, but I do not agree it does so everytime. For instance, the movement of EUR/CHF, in my opinion, is not dependant upon any movement of the USD.

The US dollar drives both pairs I am trading.
  • #12
  • May 16, 2007 10:59am May 16, 2007 10:59am
Mrmikal,

I can definitely see your point. I am not here to defend this method. Shucks I've only tried it for a week .

So what you are saying is that when we are up, say 1%, we should just open more positions? Is that correct?

The way I am doing it has seen an increase in my account balance of nearly 5% in 5 trading days. Let's say this continued and increased the account balance by 30% in 30 days. Is this not a viable way to trade?

The reason I am "taking profit" at 1% is because as I'm checking there is profit at times and loss at times. I want to take the profit when it comes, because if I don't it never will come, it will simply fluctuate back down.

I must admit I've taken this method from Freedom Rocks. While I am not in Freedom Rocks I do have a friend who is and he described to me what they are doing. They are hedging their trades with the same pair and taking profit at 5%.

So this was an attempt to copy them, without using their method obviously. And 5% in five trading days ought to be acknowledged as a viable way to trade.

If it needs improvement, let's do so. If it would be better to simply add to our position when the profit comes, then please show me how to do so. Do you simply add a certain percentage of available margin once you get to 1%? 2%? 5%? Or What?

Let's not slam the method, let's improve it. Meanwhile, I will continue taking my 1% per day and not cry too badly over that kind of profit. After all, most people in the corporate world think we're doing something illegal if we can get 300% per year.

Quoting mrmikal
http://www.forexfactory.com/showpost...4&postcount=15

Please read this and answer my questions...

Your system "seems" poised to take advantage of compounding interest, but I think you set yourself back by opening and closing your positions over and over again.

Look, the truth of the matter is that you're betting on the weighted combination of both pairs to always rise. I guess I'm having a hard time understanding why you would ever close a position if that fundamental truth is intact. In my head, if you're always in the market anyways, then why would you close your positions instead of just adding to them as your margin increase (which it will as the price of your pairs goes up). Anyway you look at it, "capturing" the profit comes at a cost once you reopening the positions.

Here's what I mean:

If the bid/ask of pair X is 1.000/1.003 and you buy at 1.003, then the price goes up to 1.0013/1.0016. you can sell and collect 10 pips (booking your profit). Now, if you were to buy again, then you'd have to buy at 1.0016 and the price would have to travel to 1.0026/1.0029 in order for you to book another 10 pips. However, if you were to hold onto that first position, then the price would only have to travel to 1.0023/1.0026 to create a profit of 20 pips.

The opposite direction works the same way...no matter how you slice it if you CLOSE a position for a profit OR a loss and reopen that same position (maybe with a few more lots added), you will lose the spread that you technically already paid.

So the question remains...why would you EVER close your position until you needed to withdraw money from the account? don't forget the number of positions you can buy is dictated by your margin, not your account balance. As your profit grows, your margin should increase even if the profit is unrealized.
  • #13
  • May 16, 2007 11:04am May 16, 2007 11:04am
Do you ever go Short?


[quote=mikejody;1442681]Greetings,

I am introducing you here to a system I have only been trading for 1 week, but it has averaged approximately 1-2% per day, is very safe, and can be done at any time of the day or night.

Here are the rules:

Open 1 position long EUR/USD
Open 1 position long USD/CHF

Take profit (close both orders) at 1% profit
  • #14
  • May 16, 2007 11:07am May 16, 2007 11:07am
You short the USD every time you enter a long EUR/USD.

The reason I only buy these two pairs is because you do make a little on the swap.

[quote=Tw0eleven;1442783]Do you ever go Short?


Quoting mikejody
Greetings,

I am introducing you here to a system I have only been trading for 1 week, but it has averaged approximately 1-2% per day, is very safe, and can be done at any time of the day or night.

Here are the rules:

Open 1 position long EUR/USD
Open 1 position long USD/CHF

Take profit (close both orders) at 1% profit
  • #15
  • May 16, 2007 11:14am May 16, 2007 11:14am
what about the spread ??

are we only looking to go long ??
Every moment in the market is unique
  • #16
  • May 16, 2007 11:16am May 16, 2007 11:16am
Quoting andimozza
what about the spread ??

are we only looking to go long ??
The 1% profit is net of spreads. We only go long on both pairs, to take advantage of swap.
  • #17
  • May 16, 2007 11:21am May 16, 2007 11:21am
Yes ,I tried this system also one month ago with Oanda,first it was going good,it was in profit sometimes ,sometimes loss.After 2 weeks,I could not get in profit anymore,always loss......just my experience
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  • #18
  • May 16, 2007 11:23am May 16, 2007 11:23am
This is a very interesting strategy. Thanks for introducing it, Mike. And the big thing is we know that it works. Since you said this is what Freedom Rocks is all about.
  • #19
  • May 16, 2007 11:42am May 16, 2007 11:42am
Quoting Pinkpanter
Yes ,I tried this system also one month ago with Oanda,first it was going good,it was in profit sometimes ,sometimes loss.After 2 weeks,I could not get in profit anymore,always loss......just my experience
Were you taking profit of 1%? And then it just stopped profiting again? I think had you continued on you would be profiting again, as I have been the previous 5 days.

Thanks for sharing your experience.
  • #20
  • May 16, 2007 12:49pm May 16, 2007 12:49pm
Mike,

I know this is new for you, and i'm not saying that it's a horrible system (yet :-)) but, I want you to see the point of view I'm taking.

Ok, here's some more math...the first day, the hedge goes up 1%, and the second day, the hedge goes down 1%...in the real world, this would be equivalent whether you bought and sold in between. The BIG difference is that when you open the next position, you pay the spread...

I realize that you don't want your loss to evaporate, but face it, the math works out the same way...you have an account of $10K...so the first day, you make 1%. At the end of the first day, you have $10,100. The second day, you LOSE 1% so at the end of the second day, you have $9,999. Well, guess what...if your investment starts at 100% and it goes up to 101%, and the next day you lose 1% of 101%, you end up with 99.99% of your original balance. The math works out no matter what way you do this since you're ALWAYS betting in the same direction.

I see where psychologically, you don't want to turn a winner into a loser, sort of thing, but if you're ALWAYS betting long and you're ALWAYS in the market, then at some point, the price will retrace. Maybe it won't ever go back to the original price, but since you're never out of the market during a retracement, it makes no difference (other than you paying the spread).

My recommendation (if you're going to go with this "the price of the hedge will ALWAYS go up, and if it goes down, the swap will save us"-mentality) is to always keep 40% invested...so as your margin grows to a point where you can add positions, do so...otherwise, you're unnecessarily paying the spread. The only time you should sell your positions is when you need to actually withdraw money.

This is the only problem I have with this, is that you're still betting that the hedge will always have to rise in value, continuously. It's different if you were to buy the hedge at 3pm EST every day, and held until the swap passed and then if you made 1%, then close it and wait for the next 3pm EST period. Then, you run the possibility of the price of the hedge coming down during that period. Obviously, if you catch it at a lower price than you previously sold for, that's where you start to take advantage of compounding.

So for example, let's say you monitor the price of the hedge. At 3pm, it's at price X. You collect the swap, and the price rises to Y which is > than X * 1.01 (1% gain). If at 3pm the next day the price goes to Z which is < Y, then you start to see some benefit because you're counting on the price of the hedge to rise continuously. Even if the price were to rise to W which is > than Y, you have no expectation of the price until the next 3pm period.

It's like the whole dollar cost averaging thing...Dollar cost averaging has it's best performance if the price dips and then comes back up (and you buy lower as the price goes down). If you buy as the price rises, you only benefit if the price continues to rise because the BEST position to be held will be the lowest price (which would be the first).

Quoting mikejody
Mrmikal,

I can definitely see your point. I am not here to defend this method. Shucks I've only tried it for a week .

So what you are saying is that when we are up, say 1%, we should just open more positions? Is that correct?

The way I am doing it has seen an increase in my account balance of nearly 5% in 5 trading days. Let's say this continued and increased the account balance by 30% in 30 days. Is this not a viable way to trade?

The reason I am "taking profit" at 1% is because as I'm checking there is profit at times and loss at times. I want to take the profit when it comes, because if I don't it never will come, it will simply fluctuate back down.

I must admit I've taken this method from Freedom Rocks. While I am not in Freedom Rocks I do have a friend who is and he described to me what they are doing. They are hedging their trades with the same pair and taking profit at 5%.

So this was an attempt to copy them, without using their method obviously. And 5% in five trading days ought to be acknowledged as a viable way to trade.

If it needs improvement, let's do so. If it would be better to simply add to our position when the profit comes, then please show me how to do so. Do you simply add a certain percentage of available margin once you get to 1%? 2%? 5%? Or What?

Let's not slam the method, let's improve it. Meanwhile, I will continue taking my 1% per day and not cry too badly over that kind of profit. After all, most people in the corporate world think we're doing something illegal if we can get 300% per year.
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