carry trade for 3--5 years

Quoting paogeh

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I knew lately the market is not easy on Carry Trade ,

Since I'm from Malaysia, and the bank is offering only 3.7% on Fixed Deposit,
I plan to transfer $$$ to Oanda and use AUD as based currency which give interest of 6.45%

on top of that , I plan to trade only TRY/JPY by doing
EUR/JPY---LONG
EUR/TRY---SHORT
Using only AUD5000 (1AUD==RM2.94)

Just buy 25,000 unit of EUR/TRY, EUR/JPY
which would translate to
EUR/TRY---AUD12.8
EUR/JPY---AUD3.37
Daily AUD interest---AUD0.35
Total ===AUD16.52


Capital ==AUD5000
margin used on 25,000unit
EUR/TRY==1620AUD ==2.6AUD
EUR/JPY==810AUD =1pip=2.3AUD
Total margin ==AUD2430AUD
Total AUD used ==40,000
Leverage ==5000/40,000==0.125==12.5%==1:8

daily swap ==AUD16.52
1month =16.52X30 ==495.60
3month -------------1486.80
6month--------------2976.30
12month-------------5947.20
24month-------------11894.40
36month-------------17841.60
48month-------------23788.80
60month-------------29736.00

from the table above, taking just ONE year, the return would be
5947.20/5000X100% ==118.944%

the return is much better compare to any mutual fund on the world ....

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Quoting byorkFX

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The biggest thing you are missing in your calculation would be the loss from rate changes. Your calcualtion assumes that rates remain constant (or fluctuate, but not enough to cause a margin call). If the currency pairs move in the direction opposite your trades (EUR/TRY up, EUR/JPY down) then you will lose money (it could all be unrealized, but if the rates move far enough you'll get a margin call and it will become realized).

I don't have the examples in AUD, but I'll give them to you in USD. If you performed your setup on current prices, you would be selling EUR/TRY @ 1.7532 and you would be buying EUR/JPY @ 157.59. If I understand correctly, you would be selling 25,000 units of EUR/TRY and buying 25,000 units of EUR/JPY. With an account balance of $5,000 this would give you a margin used of $2,367.89 and would cause a margin call to happen at $1,183.91. Just to make the math easier, let's say you would have the margin call at an even $1,000 which means that you would need to lose $4,000 to be margin called. There are an incredibly large number of scenarios that can cause you to lose $4,000 with these pairs, but for simplicity I will choose one to demonstrate - I'll choose the scenario where you lose $2,000 on the EUR/TRY trade and you lose $2,000 on the EUR/JPY trade. In order to lose $2,000 on the EUR/TRY trade the rate would need to move against your short position to 1.8493. That's not at all an unreasonable possibility (this pair was trading at this rate last August). In order to lose $2,000 on the EUR/JPY trade the rate would need to move against your long position to 148.93. This is not out of the current range of this pair since the pair was trading just above that level last August when we had a nice panic carry unwind.

Another simple senario to see would be the scenario where the EUR/TRY pair went up to trade at 1.8880 which it traded at multiple times last year. This would be an unrealized loss of nearly $3,600 which is very near a margin call. It would only take a minor rate movement in the wrong direction on your other pair to get margin called.

Once you are margin called you lose the capital and the trades (all of them, even if only one caused the margin call) and your positive 118% has turned into negative 80% (without taking into account any interest that was earned before the margin call occured).

Also worth mentioning is the fact that since your account is denominated in AUD and you're not trading AUD pairs, you also have to consider the rates of the pairs you are converting to (EUR, TRY, and/or JPY) in order to make the trades. Fluctuations in the exchange rate between these currencies and AUD can also cause losses or lower returns when you close out your positions.

I hope that helps illustrate why everyone isn't doing this - it's a pretty big gamble.

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Quoting paogeh

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Thanks for bringing this scenario up,

well, I believe this possibility is true, but with Oanda account, the SWAP is credited daily . So the account is actually growing everyday .

and Once in few month we add-in small lot (pump-in more $$$), doing it like the Dollar Cost Averaging tactics......Its quite hard to have MC, unless the un-wind is too severed ......


anyway, I understand the risk. But the reward and setup of this tactic is just simply too attractive to reject ......

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Quoting byorkFX

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As I mentioned, I don't have an account in AUD, but I took this setup on my USD demo account. I don't have time to add to the position or manage the demo account, but I'll keep you informed of the trade when I can. The trade is running on an extra demo account, so I will not be making any other trades on the account while this trade is running.

Current status (took the trade on the numbers provided in my first post):
Unrealized P/L: -202.55
Interest: +47.76

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Quoting paogeh

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Thanks for running this setup,

Yes, I have account in USD too .Now deep in Negative, but I opened the account last year October till now, so the swap collected is still more that the loss, ....

The AUD is doing not bad currently too.

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Quoting byorkFX

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After running this setup for just this short amount of time, I definitely see that the interest added to the account will greatly help in avoiding a margin call. I'd be a little nervous that adding to the position might make a margin call more likely, but it appears that leaving the position open long enough for the interest to take care of losses might keep the trade out of a margin call, especially with a managed stop loss once enough interest was earned.

Thank you for the input.

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Quoting paogeh

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Something keep running in my mind ,

since in FX, we have leverage of 1:100/200/400,

example, taking NZD/JPY,
NZD=8.25%
JPY=0.5%
leverage of 1:100
net interest=8.25-0.5==7.75%

buying 1 standard lot and leave it there for long time (1--3 years? or more? )
at the end, the swap we earn will be alot. In the mean time, ignore the fluctuation of the market, unless NZD dropped interest rate or JPY increase.



If we do this well, with enough MM and discipline,
the return would definately better that Mutual fund or index fund .

what do u all think ?
Please give me positive+negative feedback .Thanks

with add-on like Dollar Cost Averaging tactic once every few months to add small lot, the return would be even better. I'm planning to trade this model in actual FX account using the mutual fund concept. Feedback much apprciated . Thanks.



PS::The advantage of this is we do not need to guess the market, and can safely+consistently earn as time go . I lost a few LIVE accounts due to go in/out market too often, and the only account that survive the test of time is of this concept.

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Quoting StockKJay

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Paogeh,

I really like your mindset and view of the market, though I think I may say a few things you do not like very much. Take into account though, this is just my view and my opinion. It has financial and psychological perspectives involved.

Your goal is long term investment, thus ... you may have to treat it as such. It may be unfortunate, especially because you don't have a whole lot of funds to work with, though you may have to attack this strategy unleveraged. Yes, I did say that. If you use leverage, I would advise no more than perhaps 3:1 on the position size. Note the previous post and what can occur with higher leverage, if this person has perhaps just a $5000 account value, they are getting close to the end and there is still great chances that the pair will go down further. I hope he survives.

So if you have $300, use perhaps just $900 worth of positioning? Somewhere around there. I have to try to explain why I have this view.

Right when you take that position and decide "This is for the long term and I will trust my fundamental perspective and benefit off of interest rate differentials." This immediately takes the element of "trading" almost completely out of the picture. You no longer have a stop loss in place, you don't have the "I will get out and let it go down and get back in" mindset either. Because of this, your position, as events may unfold, can go down 20, 30, 40 or even 50%. Is this likely? No, probably not. However, it does happen. It happened back in 98 - 2000 with the GBP/JPY pair. So allow me to crunch some numbers quickly.

You enter the market, GBP/JPY, with $300 at 240. Yes, 240 is worst case scenario. Now, you place a trade of 450 units, which is close to $900 of market value. Then, you watch in horror as you don't get out, the pair goes all the way down to 180 before returning. So as bad as 240 was of an entry, you escaped with a 180 low instead of 150 or even lower. Well, your 3:1 leverage worked, you didn't get stopped. Your account was at -$250 or so at its worst draw down, you survived. At least, I believe so. I have never been margin called, nor do I know the rules of being margin called (as I never actually plan to be in that situation). That whole swing took the time of 3 full years. The average interest differential was + 4.25%. You earned a heck of a lot more interest than you would have just giving the money to the bank at that rate, though it did come with the risk.

Also, perhaps at 180, you had an additional $300 to fund your account with. Now you can again leverage 3:1 or perhaps risk a tad more and go 5:1 now that the market has moved so much. Two years later, BOOM, the rate is up at 230 and you now have a lot more money interest factoring and you also have the profit off the second positions gains.

If you noticed, I outlined a possible 5 year scenario. The kicker is that realistically, to be safe, I didn't go over 5:1 leverage. Not close to even the 50:1 leverage Oanda offers. If you used all of that, you would bust out in a short time. This is the bitter reality of investing. Investing is the safest way, at least in my opinion to approach the markets, though unless you have big money to start out with, it will likely do little more than help you add a little extra comfort at the end of the year.

Again Paogeh, this is just my view. I cheer for you and your efforts! PM me when and if you get your Oanda account open. Other times too if you wish Perhaps we can discuss other forms of exploiting the markets using interest.

Have a great day,

- By the way, if my calculations are off, I do apologize. I figured these numbers quickly, as the post was long enough as it was. However, people will get the general idea.

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Quoting Lionbrokers

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yes, it seems good and it works..but now I am -3200 P/L with 210 SWAP (rollover), you mean that is good...!!!???, I can not sleep 2 1/2 months for only 210, GAIN..does it worth....???

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Quoting ultraboy

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I am planing something similar with TRY/JPY but more conservative
1. Use 3x leverage (or less)
The interest gain per year will be 3X ( TRY intestest -JPY interest - other) about 3X13% =39%

2. open my trading a/c in yen base, so the my base currency will be partially protected if carry trade unwind

3. My broker takes 8% initial Margin for each std lot of TRY/JPY, may increase to 12% if unwind happened. At worst case, the 3X leverage means 3X12% =36% of my fund will be locked for initial margin, so I left with 64% of the fund to withstand the TRYJPY drops.
Let say TRY/JPY is 84.20 today and it drops 1800 point to 66.20 in a short time, my fund will be reduced by 3X 18.00/84.20 = 64.1% and margin call will come.
If the TRYJPY drops only 1 year later then no margin call due to my fund increases 39% already

4. Enter this trade when TRY/JPY is bottomed
5. Hope TRY's interest will not cut futher.

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