Extreme long term Hedged Carry Trade Position Building journal

Hello,

If you're looking to make 100 of pips a day then this journal is not for you. I am going to be building an INVESTMENT strategy that harnesses the power of interest differentials. For example, a popular carry trade is AUD/USD or AUD/JPY because of AUD's high interest rate. We earn 1.3 pips a day when we buy AUD/USD. Thus, removing any market movements, we would only need to build our position size to 10-20 standard lots over time to earn around $130-260 a day in interest. This also assumes that interest rates don't change. We know that won't happen, but we can easily monitor interest rates to decide where the carry trade is at.

I don't want to be exposed to market movements, and therefore will look to hedge major price movements against my carry trade position by taking hedging positions in other currency pairs that have high positive/negative correlations against my interest earning currency pair. In the above example I would hedge my AUD/JPY position by taking a similar trade in USD/CAD or USD/CHF for example because they both have very high negative correlations. I may earn something around 4.5% interest on the AUD/JPY trade, but might have to pay .5%-.75% interest on the hedge. In my opinion this is worth it if it helps remove volatility from the account; to a degree.

Positions are placed with ZERO stop loss and ZERO take profit. We want to monitor leverage very carefully and increase our position size over time as we make deposits and earn interest. There will be a heavy amount of math going into this system. I want to eventually get to the point where I can say, "For ever $500 deposited into the account it will allow me to increase my position on all the pairs I am trading by 1 minilot or something along those lines.

Without a stoploss/takeprofit we are worried about the divergence between the hedged pairs and not necessarily how many thousands of pips they move since while one loses, the other wins. In my opinion right now I would like to calculate how many lots I can enter for each position based on a divergence of 1000 pips between each hedged pair. To me, this feels like a somewhat reasonable amount right now to consider. I feel this way for several reasons.

1.The first being that the differential could go in my favor where the pair that is more volatile is in the correct direction of the trade.
2. Earning interest each day means that our average entry price is adjusted to our favor and for there to be a divergence of 1000 pips will take some time. If it takes several months then there is more of a cushion for us to play with.
3. If it takes several months for the divergence between the pairs to occur then it is also reasonable to have made a deposit to the account to enter more positions. Thus, the average entry price is manually adjusted to be closer to the current price. Therefore it is easier for the account to recover back to a neutral state.
4. So far the discussion has only been about trading one hedged pair. What if we are able to trade 4 pairs total for 2 hedged carry trades? Will this remove more volatility to the account or add to it? I believe diversification will only further protect me from market volatility.

These are my thoughts for now. I will come back later to begin tackling some of the math. Current assignments will be to understand how to calculate position size based on pip values, volatility differentials between pairs, correlations, and so forth. Also, should I be afraid of exotic pairs that offer higher interest rates? I think it might be worth it especially since this will allow me to play several hedged pairs and not worry about having each hedge pair becoming too correlated.

Feel free to interject with thoughts.

Thanks,
Matt

I`m looking into a carry trade myself, but with BLR/USD as my pair.

rather than hedging I will try to get in after a retrace and bring my position to b/e

I will do these trades with futures `cos it is safer, but ofcourse you cant do it with a small account.

good luck with your venture.

Hi Matt,

Did you test out your strategy yet? I had the same idea in mind.

I would like to know before I open an account are certain brokers better than others when it comes to paying carry trade rollover rates Or are all
brokerages basically equel.

2. do you know of a website I can access the interest rates on.

Thanks
Ben

Dead thread but what the heck. Try scrolling the calendar page down on this forum, look on the bottom left hand side.

If you want to hedge yourself for a carry trade try buying aud/jpy and nzd/jpy and selling usd/jpy and chf/jpy, pays a good swap but be prepared to sit through some drawdown. It will come back though. You could make this safer by adding more jpy pairs just remember to balance out the buys against the sells.

You might want to read
http://www.investopedia.com/articles...arry_trade.asp, it says somewhere on that page that interest rates will fluctuate on a daily basis.

As for a comparison of interest rates, check out http://www.cbrates.com/, it also shows some of the more exotic central banks. I didn't check all the bank rates, but the ones I did were up to date and correct.

So, looking at the cbrates website, I think the brazilian real has a pretty awesome interest rate, so look for a broker that has a good spread on BRLJPY (or even offers BRLJPY at all).

On a related note, you should check out the charts: In Germany the swap is paid at 23:00 (or 22:59, I think?). Now look at the 1H-Chart of the AUDJPY: Almost every bar at 23:00 (or whatever that is in your timezone) is red (or at least neutral, except on Fridays?), and since you're long AUDJPY for the carry you better watch out!

I wonder why there are so few threads/discussions on this trading method. It seems really solid to me. Right now I'm using a demo account to experiment with short CHF/JPY long AUD/JPY and it's working well. I'm +1.66% on one and -1.66% on the other, the correlation has been great, but I'm making nice nightly interest profits.

EXTREMELY INTERESTING!!!

Guys, keep updated

i think alos it depends on the brooker

recnetly i make a real calculation on 1 year interest with a deposit of 400 USD to buy the AUD CHF

it gives me +47% with my brooker with a +8 % said interest but i convert the swap daily to be sure to have the real point at the end of the year

without doing nothing! with 0.8 lots for one year. Of course it can fluctuate a bit the rate interest but wil lbe around

if you invest at 0.978 and if it doesnt goes down than 0.92 you win the interest. Of course if it goes up to 1.00/ 1.03 cut everything and take your all 30 to 60% profit year

LETS WORK ON THESE KIND STRATEGY
POST YOUR RESEARCH LETS EXPERIMENT FROM OUR SWAP BROOKERS

I've been adopting a similar strategy for the last 7 weeks. (Work in progress)

using 7 or 8 pairs each returning (on average) about $0.10 per micro lot (0.01) ie a $1.00 a mini lot

key condition was that monthly trend must be in an upward or at-least sideways trend, and i generally only add to the positions, once one pair has moved sufficiently against the trend. (ie trades sufficiently in the red)

The only time i ever close a position is when it has gained in value equivalent to at-least 6 months or more worth of it's daily swap rate gain (exclusive of the the swap income that trades already generated)

I've set up a portfolio similar to the OP in my Oanda practice account. With $100,000 I've purchased $200,000 each of the following high yielding currencies ($1 million total):

ZAR

TRY

PLN

MXN

AUD

And shorted the following low yielding currencies in equal amounts of $166,666 each:

USD

EUR

DKK

CHF

SGD

JPY

I'm currently making $88.40 a day in carry interest which is $32,266 a year on $100,000 at risk.

Here is the problem that I see. Even though you have diversified your central bank risk you are still subject to these "risk on" and "risk off" movements in that all the high yielding currencies tend to sell off at once. After doing some back testing on google finance I'm sure that at some point my account will be liquidated.

I could use less margin but had I put this portfolio on in December of 2010 I would have been liquidated by August of 2011 as timing is still everything. At the leverage I'm running I couldn't take more than a 4% decline in the value of my positions and these emerging market currencies are far more volatile than that.

Unfortunately emerging market currencies are the only ones yielding anything.

I have been reading on forex carry for many month and I've just funded my Oanda account to start real trading. I agree with jhl72's observation that the key is risk control and that carry trading tend to be a "risk on" strategy that will turn sour at the worst times, during overall market crises. Assuming 3-4% yield spread, and assuming no extra gain or loss from exchange rate movement, there is no need for 10x leverage. Personally I'd be very happy with 3-5x leverage (~10-20% annual profit). More leverage than this may do well for months or even years but is likely to be wiped out during the next crises.

jhl72: I am also thinking of a ~5 long / 5 short port. I was curious though about the reason you skipped HUF and INR as longs even though they are have some of the highest yields.

Update. So far I've earned $7,934.87 in interest. The most my NAV was down was about 10% at the end of December 2012 when Congress was voting on making the Bush tax cuts permanent. That has been the only "risk off" event to date

Today is the day after the Cypress banking crisis announcement and the market yawns. A weakening Euro is helping. Currently my NAV is up 11.51% plus my interest earnings making me + 20.3% since 12/18/12. I see the biggest contributor to that as Japan announcing it's massive QE program and really trashing the yen. All of my short yen positions are up big, big enough to offset any losing positions.

Except my long MXN all of my long positions are down with the largest being the South African Rand but as the dollar continues to rally my short positions are out performing my long positions giving me the positive NAV.

Do I use complex computer algorithms and and an Ivy League education to run this trade? I guess if someone were actually paying me to do this I'd have to pretend to but the reality I just prop my feet up and watch what it does.

Will this change six months from now? Who knows.

Just curious for anyone that's run institutional money. Would my positions violate risk management guidelines or would I be the star of the office (until they carried me out in a box)?

"jhl72: I am also thinking of a ~5 long / 5 short port. I was curious though about the reason you skipped HUF and INR as longs even though they are have some of the highest yields."

Simply because I didn't think of them but keep in mind that the Indian Gov forbids currency trading and in reality I see that as a problem in actually getting paid.

I figured I'd fully embrace the currency wars so I added a gold position. Only leverage you can use now after Dodd Frank is 1:1 (hmm wonder why?) so that's what I'm doing

Long gold and short: EUR, USD, JPY, GBP all in equal weighting.

Let the games begin and don't forget to stock up on guns, food, ammo.

Fed jawboning has the carry trades coming off. My NAV is now down 40%! Came close to a margin call. No free lunch kids.

hi Guys,

here is an interesting article:
http://www.bloomberg.com/news/2013-0...rry-trade.html