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Three way Hedge

  • #21
  • Feb 24, 2007 1:57pm Feb 24, 2007 1:57pm
For those who believe hedges don't work or are skeptical of them, how long would you need to see it work in a demo acct. For example if you had been given a 3 currency hedge in late october of last here and demo'd it till now and it was still working would that be long enough?
Taking Life One Pip At A Time I officially have my own opinion.
  • #22
  • Feb 24, 2007 2:38pm Feb 24, 2007 2:38pm
Rule of thumb is - nothing works in Forex.
Because if it did, eveone would be doing it and then of course it would stop working.
So be nimble and be lucky, get in and out, and don't let them see you come and go.
  • #23
  • Feb 24, 2007 2:46pm Feb 24, 2007 2:46pm
So there is no possible hedge that could or could have possibly worked, that is either stayed profitable or had a very tight swing of say max 300 pips, for any period of time longer than six months?

Quoting irusoh
Rule of thumb is - nothing works in Forex.
Because if it did, eveone would be doing it and then of course it would stop working.

So be nimble and be lucky, get in and out, and don't let them see you come and go.
Taking Life One Pip At A Time I officially have my own opinion.
  • #24
  • Feb 24, 2007 6:21pm Feb 24, 2007 6:21pm
Here is my calculation on original post if I held these pairs from 1/206 to 1/2/07:

Inserted Code
 
Symbol Type   Open  Close  Pips TickValue TickProfit     Swap SwapProfit NetProfit
GBPUSD Sell 1 7210 1 9657 -2447   10.00        -24470    0.40       146     -24324
USDJPY Sell 117 88 118 65   -77    8.26          -636  -10.82     -3949      -4585
GBPJPY Buy  202 99 234 50  3151    8.26         26027    9.75      3559      29586
                                                -----             -----     ------
Totals                                            921              -244        677

Correct me if I am wrong, but swap would be negative and the whole thing would be $677 profit. Pure luck.
  • #25
  • Feb 25, 2007 8:22am Feb 25, 2007 8:22am
Quoting irusoh
Correct me if I am wrong, but swap would be negative and the whole thing would be $677 profit. Pure luck.
But obviously you're basing your opinion upon using the wrong broker.

If you're losing on the swap - of course success IS IMPOSSIBLE - since this whole concept is based upon collecting an outstanding rate of interest for as long as the fundamentals stay in place. And that's PRECISELY why the fundamentals tend to stay in place.

In my demo acount on fx-dd, I last took profits on 2/12/07. Since then my swap has accumulated the following numbers:

GBP/JPY = + $349.19
GBP/USD = - $ 13.13
USD/JPY = - $198.13

Bottom Line is a positive $137.93 - or nearly $10 per day in net interest earned. And again, that equates to about 35% interest per year on a $10,000 account - which can be scaled down to meet any individual's budget.

I've been involved in Forex for several years. At the beginning of each of those years is the question: Will this be the year that the Japanese carry trades crash and burn?

We do NOT know the answer to that question. That's the same as trying to pick tops and bottoms. But we DO know that the carry trade has been going strong for about 7 years. And if I had to GUESS - I'd say that the fundamentals were in place to drive the carry trades for another year. Of course, that guess is nothing more than going with the existing trend - and we do have some resistance points that date back to the late 1990's.

Regarding rules of thumb: To say that nothing works in Forex seems to be a little self-defeating.

If I had to invent a rule of thumb on the spot, I think I'd say: What works in Forex, works in Forex - and everything else needs to be tested.

And as far as "everybody" doing the same thing... Well, there's very little risk of that ever happening in a diverse, global marketplace like Forex which is roughly divided into commercial interests and speculators - each of whom have entirely different goals.

But that's part of what makes Forex so great. You can trade in any manner that appeals to you. But to pretend that there aren't time-tested methods that succeed in the long-haul, indicates to me that you're left with little in your tool chest other than a rotating system that's dependent upon pure luck.

I like to gamble as much as anyone who's not an addict. But when it comes to Forex - I long ago learned that you can't beat going with the trend and having a posititve expectancy for earning your bread and butter.

So as long as you're not over-leveraged, my INITIAL testing indicates that this 3-way hedge may well have the positive expectancy that I look for.

Now that does not mean that I'll use this technique - it simply means that it's not a loser. And I'm the only one who's put any facts on the table in support of their position.
  • #26
  • Feb 25, 2007 9:34am Feb 25, 2007 9:34am
I am a little busy right now.
But I will post an excellent metatrader script that will calculate your profit on any any combination of pairs between 2 dates very soon.
  • #27
  • Feb 25, 2007 10:05am Feb 25, 2007 10:05am
I look forward to seeing that.

Quoting irusoh
I am a little busy right now.
But I will post an excellent metatrader script that will calculate your profit on any any combination of pairs between 2 dates very soon.
Taking Life One Pip At A Time I officially have my own opinion.
  • #28
  • Feb 25, 2007 11:33am Feb 25, 2007 11:33am
Quoting irusoh
I am a little busy right now.
But I will post an excellent metatrader script that will calculate your profit on any any combination of pairs between 2 dates very soon.
That sounds like a worthy project Irusoh, best wishes, i'm looking forward to seeing your work.

Does anyone know of a simple excel spread sheet that may assist in the math?

THX in advance.
: ) Thom
  • #29
  • Edited 1:58pm Feb 25, 2007 1:56pm | Edited 1:58pm
Quoting accrete
That sounds like a worthy project Irusoh, best wishes, i'm looking forward to seeing your work.

Does anyone know of a simple excel spread sheet that may assist in the math?

THX in advance.
: ) Thom

Thom,

Not sure if this is what you're looking for, but the attached spread sheets will calculate a theoretical profit yeild base on a two currency pair hedge over a five year period. The current configuration is set-up for a short CHF/JPY to long GBP/JPY hedge at a lot ratio of 1.3:1, but these parameters can be adjusted as well as the pairs used for the hedge. The profit yield arrived at by the calculator is strictly based on the interest income derived from the daily "rollover" or "swap" differential between the two pairs and is compounded by what I call the "Bieler Progression". This algorithm simply increases the number of lots opened in each pair as the account equity grows in accordance with the trade leverage selected as an initial condition by the user. There are two versions of the calculator, (revG & revG2). The method used by an individual's broker to determine the required margin for a position will determine which version a trader should use.

I cannot take credit for the original idea of the hedged positions based on the lot ratio approach nor the compounding progression, but the work on the spread sheet calculator is all mine. (ie: I take full responsibility for any inaccuracies or errant results produced by the mathamatical methods employed within the calcualtor).

The use of this calculator is strictly for educational purposes and not to be used as a reccommendation to place trades. This is stricly a theoretical model of a protracted trading strategy based on current market conditions.

There is an instruction set on pg. 2 of the file that gives a fairly comprehensive explanation of the calculator and it's various option fields.

let me know what you think. I am intersted in hearing any feedback, good or bad from anyone.
"You can make money or you can make excuses, you can't do both". unknown
  • #30
  • Feb 25, 2007 2:13pm Feb 25, 2007 2:13pm
had to zip the files, they're pretty large.
Attached File(s)
File Type: zip profit calc.zip.zip   802 KB | 865 downloads
"You can make money or you can make excuses, you can't do both". unknown
  • #31
  • Feb 25, 2007 2:45pm Feb 25, 2007 2:45pm
Quoting mpotis
had to zip the files, they're pretty large.
Good God! The example you've got programmed in there seems to produce more than 100% interest.

Again, the account may need to be larger to be comfortable - and I don't know if your numbers are correct. But what I see is very impressive.

May need to fire up another demo account!
  • #32
  • Feb 25, 2007 5:10pm Feb 25, 2007 5:10pm
Thanks brentmack,

I do believe the calculations to be accurate. Please remember this is a theoretical yield based on interest income only and does not include P/L from fluctuations in the exchange rates of the currency positions. That is a whole other set of problems to overcome that we are currently working on.

M
"You can make money or you can make excuses, you can't do both". unknown
  • #33
  • Feb 25, 2007 6:23pm Feb 25, 2007 6:23pm
Ok, it is time for me to do some pruning here. I will go ahead and remove the off topic stuff and we can just continue with the discussion

Scott
Moderator
  • #34
  • Feb 25, 2007 6:27pm Feb 25, 2007 6:27pm
Quoting smjones
Ok, it is time for me to do some pruning here. I will go ahead and remove the off topic stuff and we can just continue with the discussion

Scott Moderator
heh heh heh
Caught it before you got it off Jonesy and 100% understand why you did so.

Let's hear it for the Mods...
Hip Hip....
  • #35
  • Feb 25, 2007 7:07pm Feb 25, 2007 7:07pm
Here is Hedge Calculator.

It can calculate any number of pairs (with reason) in any combination.
First parm "Pairs" works as follows:

Pairs = symbol=lots;symbol=lots;...

symbol to buy when lots positive, to sell when lots negative
separated by semicolons.

Pairs for this thread will be "GBPUSD=-1;USDJPY=-1;GBPJPY=1"

start, end times shluld be at least one day.

Check it out, see if it works for you.
Attached File(s)
File Type: ex4 HedgeCalculator.ex4   10 KB | 697 downloads
  • #36
  • Feb 25, 2007 7:10pm Feb 25, 2007 7:10pm
Quoting irusoh
Here is Hedge Calculator.

It can calculate any number of pairs (with reason) in any combination.
First parm "Pairs" works as follows:

Pairs = symbol=lots;symbol=lots;...

symbol to buy when lots positive, to sell when lots negative
separated by semicolons.

Pairs for this thread will be "GBPUSD=-1;USDJPY=-1;GBPJPY=1"

start, end times shluld be at least one day.

Check it out, see if it works for you.
When you say a calculator, is this a indicator, or a EA or a script?
  • #37
  • Feb 25, 2007 7:33pm Feb 25, 2007 7:33pm
Quoting smjones
When you say a calculator, is this a indicator, or a EA or a script?
oh it's a script, can be run on any chart.
  • #38
  • Feb 25, 2007 8:13pm Feb 25, 2007 8:13pm
The calculations are correct assuming daily positioning.

The problem I see has to do with not accounting for the fluctuations in the pairs.

During the last 5 years (understandably), the Yen has been in a pretty steep decline anyways, so of course, anyone who followed this with a pretty sizeable account would have survived the downswings...AND made a pretty profit. I can't tell you how well the CHF did against the JPY for the last 5 years, but I can say that the GBP pretty much started around 160 and has been in a pretty steady uptrend ever since.

I can only assume that the uptrend on the CHF was similar to slightly less angled as the GBPCHF has been in a bit of an modest uptrend (with sideways movement forever) until recently.

The 2 pair hedge would have done well IF you had gotten in 5 years ago, however, I will say that had you gotten in the GBP/JPY in 1998 to try this hedge, you would have gotten killed in the first year as the GBP started the year off even HIGHER than what it's at today only to fall about 8000 pips in about 2 years. The GBPCHF does not show nearly a dramatic downtrend (although there is clearly a downtrend during this period), but it's possible that the JPY was stronger than most currencies during that period.

But then again, I say...if you traded 5 years ago, you'd have come out a winner...hell...if you traded JUST the GBPJPY, you'd have been a REAL winner.

So, again, it seems that the hedge is almost solely based on betting for or against a particular currency...in our case, we're betting against the Yen...Should the Yen start outperforming its peers, the hedges based on this theory would be crushed.

For now, the Yen remains in a well defined downtrend with very little in the way of incentive for traders to start betting with it...Fundamentally, betting on the hedge seems like a pretty good bet...

Just don't underestimate the amount of capital you would need to survive a short-term downtrend (which seems inevitable at this point...at least from these levels).

Quoting mpotis
Thanks brentmack,

I do believe the calculations to be accurate. Please remember this is a theoretical yield based on interest income only and does not include P/L from fluctuations in the exchange rates of the currency positions. That is a whole other set of problems to overcome that we are currently working on.

M
  • #39
  • Feb 25, 2007 8:34pm Feb 25, 2007 8:34pm
1 gbp-jpy usualy 10 pip spread
1 usd-jpy usualy 3 pip spread
with gbp-jpy volatility ussualy about 3 times from usd-jpy too.

if we really go into swap, i really consider 2 usd-jpy instead 1 gbp-jpy.

and to make thing better & smooth, split that 2 lot into 4 mini/micro lot, or even 20 and place it on 20pip interval ,eg: 120,80 121,00 121,20, ect (or by 15Minute Support &resistant) with take profit about 45 pip since the 1,3 swap in a month is almost equall with 45 pip profit.......

i have use this technique for 3 month, but since i only use $200 and micro lot per trade, i only profit about 3% a month, i use the spare margin for intra day trading. with 15% margin max
  • #40
  • Feb 25, 2007 11:31pm Feb 25, 2007 11:31pm
Gwan,

I agree, somewhat with your analysis. The USD/JPY is a safer pair to trade if you were going to use it as a hedge with something else (like the GBP/USD)...

However, I will say that while there has been a recent uptrend in the USD/JPY, the 5 year trend for the USD/JPY has actually been somewhat down. Compare that chart to the GBP/JPY and you'll see the big difference.

GBP could still raise rates which would offset any major effects of JPY rate increases. The USD on the other hand probably will ease rates over the next year...SO...given those factors, I'm not sure which pair you'd want to bet on if you were to want to carry.

Quoting Gwan
1 gbp-jpy usualy 10 pip spread
1 usd-jpy usualy 3 pip spread
with gbp-jpy volatility ussualy about 3 times from usd-jpy too.

if we really go into swap, i really consider 2 usd-jpy instead 1 gbp-jpy.

and to make thing better & smooth, split that 2 lot into 4 mini/micro lot, or even 20 and place it on 20pip interval ,eg: 120,80 121,00 121,20, ect (or by 15Minute Support &resistant) with take profit about 45 pip since the 1,3 swap in a month is almost equall with 45 pip profit.......

i have use this technique for 3 month, but since i only use $200 and micro lot per trade, i only profit about 3% a month, i use the spare margin for intra day trading. with 15% margin max
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