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Would this work?

  • #1
  • First Post: Jul 15, 2006 7:04pm Jul 15, 2006 7:04pm
Hey everybody, i was scouring the internet and came across this on moneytec.com's forum. it sounds interesting and i may try it on OaNda's demo. just wondering what you think!



"As you may already know, the current federal interest rates are 4.50% for the
USA, 2.50% for EUR, and 1% for CHF. So every time you buy EUR/USD, you are
earning 2.50% APR on EUR, and losing 4.50% APR on USD, so the brokers charge you
that interest every night. On the other hand when you buy USD/CHF, you earn
4.50% APR on USD and losing 1% APR on CHF, so you are earning 3.50%. Some
brokers actually pay you that interest. is one of those brokers. So you
may already know that EUR/USD and USD/CHF are pretty much mirror images of one
another. As one goes up, the other goes down, with very minor deviations. So
if
you open both positions, as market moves, you earn pips on one, and lose pips on
the other, overall pretty much breaking even. You are losing 2.00% interest on
one pair, and earning 3.5% interest on the other. That's 1.5% APR profit.

Now imagine, with 's 50:1 leverage, it's like getting 1.5%*50=75% APR!
That's not even the most exciting part. The most exciting part is that you
should constantly see deviation between the pairs, some days it'll be negative,
and other days it'll be positive. You simply close both positions when the
deviation is positive, make 10, 20, 30 pips profit, and reopen the positions. I
did it twice this week for overall profit of around 40 pips. This week, I've
been experimenting with a $5,000 demo account, and I currently have a balance of
$5,535.66, which is $535.66 profit just this week. I'll see if I can turn
$5,000
to $10,000 on demo, and if I will, I'll go live with this strategy.

The way I've been calculating my positions to maximize this strategy on
with 50:1 leverage. I divide whatever amount I have on my account by 0.0588.
That gives me the lot number to buy on EUR/USD pair with still enough margin to
allow for deviation. So for $5,000, it's $85,034. Then I multiply 85,034 by
the
current USD/CHF rate, so in this case 85,034*1.2899, that equals to 109,685.
That way a pip on each pair equals to the same amount of money. And I open my
orders. "

sounds interesting.
PipMasterFlex
  • #2
  • Jul 15, 2006 7:11pm Jul 15, 2006 7:11pm
Quoting isufreak24
Hey everybody, i was scouring the internet and came across this on moneytec.com's forum. it sounds interesting and i may try it on OaNda's demo. just wondering what you think!



"As you may already know, the current federal interest rates are 4.50% for the
USA, 2.50% for EUR, and 1% for CHF. So every time you buy EUR/USD, you are
earning 2.50% APR on EUR, and losing 4.50% APR on USD, so the brokers charge you
that interest every night. On the other hand when you buy USD/CHF, you earn
4.50% APR on USD and losing 1% APR on CHF, so you are earning 3.50%. Some
brokers actually pay you that interest. is one of those brokers. So you
may already know that EUR/USD and USD/CHF are pretty much mirror images of one
another. As one goes up, the other goes down, with very minor deviations. So
if
you open both positions, as market moves, you earn pips on one, and lose pips on
the other, overall pretty much breaking even. You are losing 2.00% interest on
one pair, and earning 3.5% interest on the other. That's 1.5% APR profit.

Now imagine, with 's 50:1 leverage, it's like getting 1.5%*50=75% APR!
That's not even the most exciting part. The most exciting part is that you
should constantly see deviation between the pairs, some days it'll be negative,
and other days it'll be positive. You simply close both positions when the
deviation is positive, make 10, 20, 30 pips profit, and reopen the positions. I
did it twice this week for overall profit of around 40 pips. This week, I've
been experimenting with a $5,000 demo account, and I currently have a balance of
$5,535.66, which is $535.66 profit just this week. I'll see if I can turn
$5,000
to $10,000 on demo, and if I will, I'll go live with this strategy.

The way I've been calculating my positions to maximize this strategy on
with 50:1 leverage. I divide whatever amount I have on my account by 0.0588.
That gives me the lot number to buy on EUR/USD pair with still enough margin to
allow for deviation. So for $5,000, it's $85,034. Then I multiply 85,034 by
the
current USD/CHF rate, so in this case 85,034*1.2899, that equals to 109,685.
That way a pip on each pair equals to the same amount of money. And I open my
orders. "

sounds interesting.
Yes it does sound interesting. The only problem I see is that it will only really work in ranging markets, if the market turns trending on you, you could lose quite a bit depending on what your stop is. I am not quite sure how you would work your stop with your approach. But in a ranging market it could work a little like the hedgehog strategy, but with the interest from the rollover rate added. It has possibilities, if you are careful.
  • #3
  • Jul 15, 2006 7:43pm Jul 15, 2006 7:43pm
Quoting moonchild
Yes it does sound interesting. The only problem I see is that it will only really work in ranging markets, if the market turns trending on you, you could lose quite a bit depending on what your stop is. I am not quite sure how you would work your stop with your approach. But in a ranging market it could work a little like the hedgehog strategy, but with the interest from the rollover rate added. It has possibilities, if you are careful.
I don't quite understand how a trending market would affect this strategy. Both pairs will trend together. The issue is if the the spread between the two pairs trends. But the system has a strategy for dealing with the deviation. Take a loss and move on. The question would be historically what sort of DD can we expect if we get a -ve spread between the currency pairs and how does this counter act the +ve spread between the currency pairs. If the the spread deviation is equal, we earn our interest, and get 75% PA.

This strat is a simple version of what ElectricSavant, was showing on FF a while ago.

While these ideas have merit, personally I don't like stratergies where all my money has to be in the broker's account to work.

SilverB
In trading you are only as smart as your dumbest mistake. - Ralph Vince
  • #4
  • Jul 15, 2006 8:07pm Jul 15, 2006 8:07pm

well, just studying a few graphs, if you don't trade too much of your margin, it doesnt appear that negative deviation is ever enough to wipe out your margin, you would just have to wait it out. correct me if i'm wrong.

PipMasterFlex
  • #5
  • Jul 15, 2006 8:35pm Jul 15, 2006 8:35pm
its almost a perfect plan. the problem is usd/chf and eur/usd have 96% correlation most the time. that means its off by 4%. you would be earning 1% so you might earn 5% or get -3%. You would also be out on the spread both ways when you buy the lots.
  • #6
  • Jul 15, 2006 10:13pm Jul 15, 2006 10:13pm
I think this can work. You would have to ride out a negative float sometimes while the balance grew and the equity did not, because of negative divergence. However, the times when you had positive divergence in correlation, you may be able to close the trades and reopen them and make up the losses... This would be interesting to forward test. Backtesting on this would be a complete waste of time.

Please keep us updated... Scott
  • #7
  • Jul 15, 2006 11:42pm Jul 15, 2006 11:42pm
Quoting isufreak24
Hey everybody, i was scouring the internet and came across this on moneytec.com's forum. it sounds interesting and i may try it on OaNda's demo. just wondering what you think!



"As you may already know, the current federal interest rates are 4.50% for the
USA, 2.50% for EUR, and 1% for CHF. So every time you buy EUR/USD, you are
earning 2.50% APR on EUR, and losing 4.50% APR on USD, so the brokers charge you
that interest every night. On the other hand when you buy USD/CHF, you earn
4.50% APR on USD and losing 1% APR on CHF, so you are earning 3.50%. Some
brokers actually pay you that interest. is one of those brokers. So you
may already know that EUR/USD and USD/CHF are pretty much mirror images of one
another. As one goes up, the other goes down, with very minor deviations. So
if
you open both positions, as market moves, you earn pips on one, and lose pips on
the other, overall pretty much breaking even. You are losing 2.00% interest on
one pair, and earning 3.5% interest on the other. That's 1.5% APR profit.

Now imagine, with 's 50:1 leverage, it's like getting 1.5%*50=75% APR!
That's not even the most exciting part. The most exciting part is that you
should constantly see deviation between the pairs, some days it'll be negative,
and other days it'll be positive. You simply close both positions when the
deviation is positive, make 10, 20, 30 pips profit, and reopen the positions. I
did it twice this week for overall profit of around 40 pips. This week, I've
been experimenting with a $5,000 demo account, and I currently have a balance of
$5,535.66, which is $535.66 profit just this week. I'll see if I can turn
$5,000
to $10,000 on demo, and if I will, I'll go live with this strategy.

The way I've been calculating my positions to maximize this strategy on
with 50:1 leverage. I divide whatever amount I have on my account by 0.0588.
That gives me the lot number to buy on EUR/USD pair with still enough margin to
allow for deviation. So for $5,000, it's $85,034. Then I multiply 85,034 by
the
current USD/CHF rate, so in this case 85,034*1.2899, that equals to 109,685.
That way a pip on each pair equals to the same amount of money. And I open my
orders. "

sounds interesting.

Well, you haven't found the Grail but you did get a ticket for the dinner.

The attached is a n XL sheet which I put together a while ago to examine just what you are talking about.

It uses CMS Rollover Interest Rates to compare "Pairs" for hedging purposes with the Highest Return Interest Paid.

I have incorporated this sheet into my trading for some time now. It's not the complete package but it is a part of it. You should be aware that although you will Gain Interest, it Can be superceded by Pips Lossed.

All Cells but Two are Locked and Protected {safety feature only, NO Password required to Unprotect}

Just Enter the Index Number of the Pair you want to trade in the appropriate Black Cell at the top of the page & Viola...

In the array below it,
Your Pair will be Black with White Text.
Hedge Sells will be Red with Yellow Text.
Hedge Buys will be Blue with White Text.
Now all you have to do is read the Compounded Interest you would earn on Rollover.

NOTE* There are 2 separate arrays. One for Buying the Main Pair an One for Selling the Main Pair.
Attached Image
  • #8
  • Jul 16, 2006 1:51am Jul 16, 2006 1:51am
I think you really do have something here. I am going to try GBP/USD and USD/CHF. They also have a very high negative correlation, but a more attractive rate differential.
  • #9
  • Jul 16, 2006 2:38am Jul 16, 2006 2:38am
Why not just use the same pair (but opposite trade) on another account, one that does not charge/pay interest? That would be a perfect hedge.

Dane
  • #10
  • Jul 16, 2006 3:00am Jul 16, 2006 3:00am
Quoting great*dane
Why not just use the same pair (but opposite trade) on another account, one that does not charge/pay interest? That would be a perfect hedge.

Dane
I have heard most brokers who do not charge interest are usually "bucket shops" or tiny brokers in Africa, India, etc and you risk putting your $ in them. There are legit ones but if you don't make enough trades you'll probably have your account closed because they are onto this just as we are. But if you can find one that works, please let us know. I've heard FXDD pay like nearly $40 for GBP/JPY LONG and most brokers charge around $23 on the SHORT so there's a possibility to make $17/day per 100k lot but there would be withdrawal fees, large spread costs on this pair and drawdown issues (due to large swings in this pair) to consider that eats profits. I think you would need at least $5000 in two seperate accounts to make it do-able which is a lot of $ to tie up for most people.
  • #11
  • Jul 16, 2006 3:02am Jul 16, 2006 3:02am
Quoting great*dane
Why not just use the same pair (but opposite trade) on another account, one that does not charge/pay interest? That would be a perfect hedge.
They would have the same interest rate, one negative, one positive and cancel eachother out. The point of this isn't really to hedge. The point is to maximize interest so you're basically getting paid to leverage.
  • #12
  • Jul 16, 2006 3:04am Jul 16, 2006 3:04am
Quoting grickherder
They would have the same interest rate, one negative, one positive and cancel eachother out. The point of this isn't really to hedge. The point is to maximize interest so you're basically getting paid to leverage.
See above on FXDD, that would be an exception to that rule.
  • #13
  • Jul 16, 2006 3:05am Jul 16, 2006 3:05am
Quoting Bemac
Well, you haven't found the Grail but you did get a ticket for the dinner.

The attached is a n XL sheet which I put together a while ago to examine just what you are talking about.

It uses CMS Rollover Interest Rates to compare "Pairs" for hedging purposes with the Highest Return Interest Paid..............
NOTE* There are 2 separate arrays. One for Buying the Main Pair an One for Selling the Main Pair.
This sort of stuff really freaks me out 'cos I'm thinking if I can't think like these guys will I EVER make a success (even a modest success) at this Forex thing.
My ongoing admiration for you guys knows no bounds.
Pete
  • #14
  • Jul 16, 2006 4:36am Jul 16, 2006 4:36am
From my own personal experience, the easiest way to identify an entry and exit to this holding strategy would be a 55 EMA weighted on the open plotted on a weekly chart. Pull the chart up and look at it, trust me, you'll catch what I'm on about rather quickly.
  • #15
  • Jul 16, 2006 10:48am Jul 16, 2006 10:48am
I found this to be an interesting revelation, however a few things to think about and if any of you have answers to these questions, please share:

How are correlations based? From what I understand, you would find out the % change in either direction to determine what the correlation really is. So at the end of period X, if the GBP/USD gained 1% and the USD/CHF lost 1%, you'd have a correlation of -1. Now, assuming this is true, buying a 100K lot of the GBP/USD is not the equivalent of buying a 100K lot of the USD/CHF. So, in order to "hedge" you would have to buy almost twice as much USD/CHF than GBP/USD.

The above would affect the interest as well, since it's based on the currency conversion. So think of it this way...a 100K lot would lose its interest almost twice as fast as the USD/CHF would gain.

Now, obviously this can be adjusted by purchasing more USD/CHF, however, I don't know if I'm correct in my assumption or not.

Anyone want to add to this?
  • #16
  • Edited 1:06pm Jul 16, 2006 11:02am | Edited 1:06pm
Quoting mrmikal
I found this to be an interesting revelation, however a few things to think about and if any of you have answers to these questions, please share:

How are correlations based? From what I understand, you would find out the % change in either direction to determine what the correlation really is. So at the end of period X, if the GBP/USD gained 1% and the USD/CHF lost 1%, you'd have a correlation of -1. Now, assuming this is true, buying a 100K lot of the GBP/USD is not the equivalent of buying a 100K lot of the USD/CHF. So, in order to "hedge" you would have to buy almost twice as much USD/CHF than GBP/USD.

The above would affect the interest as well, since it's based on the currency conversion. So think of it this way...a 100K lot would lose its interest almost twice as fast as the USD/CHF would gain.

Now, obviously this can be adjusted by purchasing more USD/CHF, however, I don't know if I'm correct in my assumption or not.

Anyone want to add to this?
An astute observation. You are quite correct, the pip cost for USD/CHF is less than GBP/USD though you wouldn't have to quite buy twice as much, closer to 1.2 times. Although as I saw it, I would gain interest 1.2 times as quickly as I lost it. Dailyfx.com lists currency correlations for periods of 1, 3, and 6 months as well as for a year. You can see which pairs have the strongest positive and negative correlations over these periods. At any rate I plan to test this theory in the coming week with $5000 as well...demo account of course.

Also dailyfx.com lists their final rollover schedules for the past three months. A precursory glance at the data would indicate there is merit to this system.
  • #17
  • Jul 16, 2006 4:40pm Jul 16, 2006 4:40pm
Why not buy only gbp/jpy, you will have the best interest
If you are going for the long run, it can go much highier, it's a double winner
Attached Image
Try hard, think fast, die young
  • #18
  • Jul 16, 2006 5:10pm Jul 16, 2006 5:10pm
If I am understanding you correctly, you are concerned about the difference in the growth of the hedged pairs. In the first post I think he makes an adjustment to both pairs to make the pip value the same... If I have missed your point, could you please explain a little more? thanks scott


Quoting mrmikal
I found this to be an interesting revelation, however a few things to think about and if any of you have answers to these questions, please share:

How are correlations based? From what I understand, you would find out the % change in either direction to determine what the correlation really is. So at the end of period X, if the GBP/USD gained 1% and the USD/CHF lost 1%, you'd have a correlation of -1. Now, assuming this is true, buying a 100K lot of the GBP/USD is not the equivalent of buying a 100K lot of the USD/CHF. So, in order to "hedge" you would have to buy almost twice as much USD/CHF than GBP/USD.

The above would affect the interest as well, since it's based on the currency conversion. So think of it this way...a 100K lot would lose its interest almost twice as fast as the USD/CHF would gain.

Now, obviously this can be adjusted by purchasing more USD/CHF, however, I don't know if I'm correct in my assumption or not.

Anyone want to add to this?
  • #19
  • Jul 16, 2006 6:36pm Jul 16, 2006 6:36pm
Quoting Hollis
From my own personal experience, the easiest way to identify an entry and exit to this holding strategy would be a 55 EMA weighted on the open plotted on a weekly chart. Pull the chart up and look at it, trust me, you'll catch what I'm on about rather quickly.
I did this out of curiosity because this is my major currency for trading , but I couldn't see what you are talking about...Thanks...
  • #20
  • Jul 16, 2006 8:29pm Jul 16, 2006 8:29pm
Quoting smjones
If I am understanding you correctly, you are concerned about the difference in the growth of the hedged pairs. In the first post I think he makes an adjustment to both pairs to make the pip value the same... If I have missed your point, could you please explain a little more? thanks scott
I didn't read that part of the post...however equaling the pip value doesn't actually get you the correct hedge, does it? If that's the case, we're assuming that the pip movement is in synch, which I don't think is accurate. I think the value change is what is correlated.

I'm going to create a little indicator in wealth lab to see what the actual daily correlation is to see if I can't better understand how to do this.
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