Caution: Math Geek at Work

Ok, here's the image (minus the charts) from the site after tonight's update. I'll use this to go over the calculations for the order sizing.



Starting from the top, the projected month starting and ending positions are just from the projection table on the explanation page of the site. The "Projected Position Size Today" is just interpolated from those (it's approximate because I actually subtract the starting date from today's date in Excel and assume a 30 day month). So 14/30 of the way from 11484 to 12701 is 12052.

Next comes the key formula which reflects my contrarian view of long term forex markets. There are powerful fundamental business, economic and political forces which tend to react against strong moves in one direction, so eventually we get a top or bottom.

So remembering that "Deposit" just really means cash in the account, today's (D/E)*P - A result is:

(2049.99/2151.07)*12052 - 10560 = (95.3%)*12052 - 10560 = 926.

The explanation of why I set it up like this is on the site, but basically since my equity is greater than my cash (D/E < 1) I'm in profit, and would prefer to have a lighter position than my projection. Specifically today my target is to have only about 95.3% of my projected position, but I actually have even less than that (since a bunch of liquidation orders filled today). So I'm still short 926. Now to the question of how I allocate this 926 among the various positions.

First of all, I set up target allocations for each pair based on the interest rate returns. The sum of all three rates is 16.15%, and USD/HUF for example contributes 5.15% of that or 32% of the total.

Now I just use the (D/E)*P - A formula for each position, but to get the projected position size I use the target allocation percentage we just calculated. So let's do the order size for USD/HUF as an example.

P: The projected position size is (5.15/16.15)*12052 = 3843

Now since the Deposit (cash balance) and Equity are "Actual" type numbers, I use the actual allocations for their adjustment factors. I have 3370 USD/HUF out of a total of 10560 in total positions, so:

D: The portion of my total Deposit (cash balance) that I "allocate" to USD/HUF is:
(3370/10560)*2049.99 = 654

E: The portion of my total Equity that I "allocate" to USD/HUF is:
(3370/10560)*2151.07 = 686

A: My actual position is 3370.

So my order is (D/E)*P - A which is:

(654/686)*3843 - 3370 = 293

But I'm not building a Swiss watch, so I round everything to 10 units so it's 290. A positive number means an increase in my position, so this is a SELL of 290 to increase my short USD/HUF.



OK! It's tuna melt and New England clam chowder time for me!!!

Thank you for your info, that's quite interesting. You like math, don't you.

This is an informative thread. Just found it while searching for something else.

Welcome Trendylines!

Most of this journal at the beginning is really kind of rambling I guess, since I didn't really settle on a method that worked for me until the end of 2009.

w00t! It was a good March. That's month #15 in the can. Here's the summary chart of the results so far:



I've added a new column at the end showing the return on equity for each month. In March it was 22% with the contributing factors as follows:

Change in open P/L: 16%
Booked P/L: 4%
Interest: 2%

As you can see, the lion's share of March's performance came from open profit which can, of course, disappear at the drop of a hat.

(whoops! Umm... can someone get my hat?? Thanks. )

Keep pipping up!

Hi.
Been lurking around for a while simply learning your approach.
I just find it very good. You set realistic and achievable goals for yourself.
I wish I'll still be around to congratulate you when you reach the 1k$ mark, at 10/1/2017.
For now, keep on doing a good job, like the one you did this past month.

Pips Ahoy, marx85!

I may be a little late. My actual monthly interest never hits the projected number because my orders sometimes take so long to fill that my position sizes are always lower than projected.

On the other hand, it's possible that booked profits and increasing world interest rates over the next few years may more than make up for it.

At any rate, you're welcome to pop in any time!

Hi, Scott.

Glad everything goes smoothly for you.

I have closed all my positions last thursday.

Will prepare to start all over again if the pairs weaken, ie. AUD/JPY, AUD/USD, ZAR/JPY

Regards,
Judy

Good to still see you popping in every once in a while Judy.

I had a 16% return on equity for April. Here's the updated results table from www.market-geeks.com





Note that just about all of this growth is in open profit, which can disappear rather quickly if the market turns. However, since I'm trailing buy orders behind these short USD positions, a turnaround would trigger some hefty booked profits.

Keep pipping up!!

I had a negative 11% ROE for May, breaking the record for the worst month since I started keeping records. Bleh. The drawdown during the month was worse, but there was a nice recovery in the last few days. Here's the updated results table from www.market-geeks.com. Keep pipping up!

Good Evening Scott,

Thank you for sharing and providing daily updates on your website, it is greatly appreciated. I am currently blowing up my 3rd account trying to learn. So a carry trade based approach sounds like the path I should be traveling.

I am wondering how you deal with Uncle Sam's long arm of the I.R.S. Are you reporting all carry rollover and profits from the price action under the IRC 988 code? Or alternatively are you reporting the gains from the price action only on Form 6781 using the Section 1256 code?

Thank you,

Jay

Hi JayMic,

Last year, Oanda sent me a 1099INT, so I just reported the income from that on the 1040EZ. I haven't seen anything from them for booked gains (comparable to a schedule D I suppose), but maybe I will this year. I just go with whatever Oanda sends me, just like I do with Fidelity.

Last month was flat (not counting the deposit of course). Here's the updated table:

Here are some questions I received in PM, posted and answered here by permission:


Why do you trade such exotic pairs? I imagine the spread isn't very beneficial.

I chose the 3 pairs yielding the highest spread against the USD. You're right, the spreads are huge! However, since my fills tend to be weeks or even months apart, my trades are hundreds or even thousands (in the case of USD/ZAR) of pips apart, so the spread as a percentage of the trading range isn't much different than that of someone trading EU over the course of a dull day.

You increase your positions more slowly when in highly profitable territory and vice versa for when at a loss. How do you determine when you're at profit/loss when you potentially have positions that have been open for years?

It's always possible to keep track of the average entry price. Oanda does this automatically on the chart using FIFO (which I think is a broker requirment now). Each time I have a fill, I adjust the "Entry" price in my spreadsheet. You can see it under the "Actual Current Positions" section in the summary table on the front page of the site.

If you're only interested in the interest then wouldn't you want to enter positions as fast as possible? I say this especially since you're on a 10 year plan then the interest will adjust your position thousands of pips in your favor eventually anyways.

I'm not only interested in the interest, but in the total yield and the minimization of wipe-out probability as well. Thus, I try to take advantage of mid/long term price movements to improve my average position cost. Note also that interest forms only a small part of the change in equity for any given time period. If you look at the monthly breakdown chart on the site, (or in the post above this one actually), you'll see some months where the change in open P/L was something like 10x the interest.

This approach of waiting to for better entry prices and dumping part of the positions when the opportunity arises does tend to slow down the accumulation rate of the position. But the algorithm I use keeps up the pressure to increase the size, so I've tended to remain somewhere around 80-90% of the projected size.


Have you ever considered hedge strategies?

Not really since I always want to be short my home currency (USD) in each position. There are two reasons for this. First, it allows me to be short a currency that I can actually deliver to the broker, thus allowing me to eventually reduce the margin call risk to zero. Secondly, I have a fundamentally bearish outlook on the USD over the long term, unless the political, cultural, moral, psychological, and ideological trend of the US changes radically pretty soon. More specifically, I think the US will have no choice but to monetize the debt, causing a continued devaluation of the Dollar.

So this is partially a directional strategy, not a neutral one.


Have you accounted for deposits to the account over time in that chart on your website?

Yes. You can see the data table below the projection chart by clicking on the "complete explanation" link at the top of the home page.


Has your strategy changed at all in the year you've been trading it?

Some of the details have changed, and you can see those in the blog type posts on the home page. I usually make a post whenever I change something.


What have you learned?

I think I've learned what sort of trading style works for me. I used to think I wanted to spend the day in front of the screen, frantically making buy and sell decisions. I've been there and done that though and it's really not for me. Developing and testing system after system isn't for me either. What I do now is simply check the market each night, make adjustments to the my open orders, update the site and wait until the next day. I read a little of the Turkish, Hungarian and South African press each night too, but that's about it. I like the very laid back tortoise-like approach, which is also why I'm not on the other FF boards that much anymore.


Why does your site look like a fugitive from the early 90's?

Ok, no one really asked me this (except my artistic web-designer/marketing guru friend at work), but I thought it would be fun to throw it in. Basically, I don't really want to pay anyone to beautify a site that only gets about 30 visits a day, and I just haven't gotten around to overhauling it myself. I made the site in 2005, back when I could barely write HTML. I'll get a "round tuit" one of these years.

Maybe you could use one of these..

http://www.seykota.com/tt/tuit/default.html

joke

Thanks for getting back to me.

I'll have to read up on why being short USD to your broker reduces the margin call risk to zero. I have never blown up an account because of solid MM/leverage and never had to consider that sort of implication. I am worried about it in this carry strategy though as there are no stop losses and I expect some positions to carry a negative balance of several hundred of even thousands of pips.

If you are trading a directional system then what will you do when the USD does turn around?

This is why I asked you about if you hedge or not. I thought that since you've gone through all the trouble of doing the math to project the results out 10 months and so forth that the system wasn't as price driven. Ha, I almost feel like I'm calling you out for not being a true statistically driven person, but I'm not trying to.

The reason I asked your opinion on a hedged carry system is because I believe the results would be much easier to accurately project and rely on. Also, in my opinion the risk of a margin call is reduced as there is less affect on the P/L from price movement. In all honestly I was very surprised to see how closely your actual results have compared to your projected results. How the hell did you do that?

This is somewhat of an unimportant question, but why did you include $150 deposits every year for every month? Is that an expected average deposit? How do you actually trade it? Have you gained more trust in the system such that now that you're past year one you're considering increasing each deposit size? Do you predict you won't make any more deposits as the account size would be largely unaffected by anything you'll deposit?

Do you think you would apply your position entry size formula to a carry trade system that is hedged? This is mainly why I PM'd you rather than originally post here. You found your carry system style, but I am looking for a hedged approach. I don't want to have an opinion about USD or any other currency beyond the interest rates. I don't know if I'd like the exposure to market fluctuations that you might be experience or will experience. I'm trying to wrap my head around what would be a reasonable entry formula to determine position sizing that still very safely avoids the terrible margin call for my style. I don't want to hi-jack your thread to divulge into some other trading system though.

Feel free to answer what you want and either here or through PM if you agree this would be taking away from your thread.

Also, it's almost 4 AM where I am. Sorry for the incoherent rambling.

BWWAAAHAHAHAHAHA!!

Wow, is that the real Ed Seykota's site?

Yup the FAQ section is interesting... to say the least lol.