Dear Neo
(and all interested readers of this thread)
I have reviewed your thread last night, because it kept me interested.
Although I have to admit it seems appealing at first sight, I am strongly afraid that you will get into deep trouble if the market turns for a longer period. The reason is: you are only partially hedged.
Burger King and others, like Yukoner and Jas did a fairly good job on calculating this. My thanks for this!
To recall (with last night's data) and to make others better understanding this, I will break mentally the combined transaction into its parts:
* BUY 1 Lot (100K) GBP/JPY means to have 100 K in assets and to receive a dept of JPY 23,892,000 as liability accordingly (this is what you SELL, it equated 100K GBP in form of JPY last night).
* SELL1 Lot GBP/USD will annullate your assets of GBP 100K from the former transaction with the new liabilty of GBP 100 K and you will keep a remaining asset of USD 197,440 (this is what you BUY at the same time).
Resume:
You have, for entering those two positions NO risk at GBP (you own and owe at the same time 100K), but you have 23 something million of JPY you owe and USD 197,440 you own. Those two positions are now similar but will not stay like this as markets move on. But your transactions are leading further on anyway.
Now you
*SELL 1Lot CHF/JPY means selling CHF 100 K (1 Lot), which is a dept of CHF 100K which buys for your balance JPY 9,883,000 on assets. These assets are netted with your open liabilities of JPY 23,892,000 and you will still have liabilities of JPY14,009,000.
*SELL 1 Lot USD/CHF means selling USD 100K, which will give you a new liabilty of USD 100K. It is again partly netted with your assets of USD 197,440 you already own. Now you have a remaining portion of USD 97,440 as an asset still in your balance. From the buying part of this deal you will receive CHF 122,000 that will be netted partly with your liability of CHF 100K of the earlier step.
Fact after all:
You are ending with a balance of JPY 14,009,000 in liabilities and USD 97,440 and CHF 22.220 in assets after all. These are equal, but just for the moment. A minute later on quotes will have changed and they start becoming different. There you will find your risk. Your "Hedge" will only work as long as the JPY is weakening and the USD and CHF are getting stronger over time compared against the JPY.
This is and was the case over a long period and it will remain like this as long as the theme "carry trades" will fuel this trade-off. But for 100% sure, it will not remain like this for all times. Markets and conditions change, as we all know fairly well. So if the general trend changes to the opposite, your trade will run into constant losses.
OK. You say that your stop-loss on GBP/JPY protects you. Good enough. But then, why don't you just BUY GBP/JPY and set a trailing stop and hold? The swap rate is even higher and you are consuming much less margin. You get USD 24.30 per Lot presently, not only USD 11.90 per 4 Lot. I think that is much more rewarding.
If you would want to build a 100% Hedge, you would have to get rid of all your assets and liabilties on your balance sheet. For achieving this, you would have to structure the transaction accordingly:
BUY 1 Lot GBP/JPY
SELL 2.4 Lot CHF/JPY
SELL 1 Lot GBP/USD
SELL 2 Lot USD/CHF
THIS and only this will (according to yesterday night's prices) net all of your assets and liabilties to ZERO. Which means: NO CURRENCY RISK.
This means accordingly: no harvesting of pips, but you are onto swap-rates anyway, like you said.
Hint: If a transaction gains you pips, it is somewhat unbalanced and not completely hedged. It is nice to harvest pips, but you are risking losses at the same time, too and there are usually much easier ways to do that.
Coming to swaps: For the fully hedged position you get USD 24.30 and pay 8.40 for the CHF/JPY, 0.60 for the GBP/USD and 17.60 for the USD/CHF. This results in a negative Swap rate of USD -2.30 per day.
Ergo: you are constantly loosing money on this fully hedged transaction.
Ergo 2: There is NO FREE LUNCH. Gaining swaps is constantly combined with risking pips. Guess what you pay, if you simultaneously buy and sell GBP/JPY? (i.e. no pips risked). My broker wants USD -1.5 from me for that! Unfair, but this is the truth and this is how the markets are structured.
Hopefully this thread will now be better informed about the underlying risk of your favoured transaction.
Ride it, as long as the major trend is against the Yen. When the trend turns, you will get stopped out more often and later on when the full tide swells into the other direction, you will not be able to harvest any gains with this transaction. Your swap rate gains will be annihilated by pip losses and your equity will vanish in the haze. This is the time when you should forget about this trade and be thankful for what you have got and think of a new and better venture.
Regards
t.
... still building up again after having burnt EUR 50K own trading money.
Neo is a very talented forexer speaking of this system.
I did as his instruction for 10 days so far, it looks good.
Thank you, Neo.
I guess that this partial imbalance is actually magic of your system, cos everyone knows jpy will continue weaking for a long period, and before it ends, we can always do this.
My concern that i cannot work it out mathematically, is that if gbp/usd keeps rising (assuming jpy continues weakening), will this system still earning pips?
So far my pips won came 50% from gbp/jpy rising, and 50% from gbp/usd dropping.
Thanks for Tiku's input too. Nice insights!
