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making (a little) money off interest

  • #1
  • First Post: Aug 18, 2006 8:15pm Aug 18, 2006 8:15pm
Hello everyone, I have spent a few months now studying hedging to earn interest every night risk free. Well what i have learned is, hedging is not risk free, Pairs that are "-98% correlated that you can use almost all your margin on" are very risky. And i just found out why. i opened a small position of GBP/USD, and USD/CHF on my live Oanda account. I was hoping to prove to myself that one would move one way x amount of pips, the other would move the other that same amount of pips. When they did not move in oposite directions (I believe at one point one was -153 and the other -30something) i did a look over of their long term graphs and realized, they are very correlated in direction, but not in the same number of pips. I realized that at first glance it looks like like one moved up 100 pips while the other dropped 100 pips. However, upon closer inspection, one of the pairs had increased 100 but the other decreased 200. since the graphs were not in proportion to actual pip movements, it threw me off at first glance.
So then, disappointed that i could not safely hedge most of my margin, i decided to hedge the GBP/USD and USD/CHF, but only use 30% of my margin. Also, I did not open my postions all at once, i acctually have about 10 small hedged postions, opened at different times. With my account of a little over 1600usd, using about $500 in this pair, i make about a dollar a day, every day, plus about .20 US interest rate. total=about 1.20 a day. Which is by no means anything to brag about. But, consider this, after 50 days of this i will have $60 more in my account, if i add 30% more of that, thats $18 more margin i used and a little more interest every day so the next 50 days will bring you more, and so on and so on (compound interest)
I know this isn't a get quick rich thing, especially with an account of $1600. But over the course of say, 5 years, that is 1825 days that you earn interest every day. Also the more you can fund your account with, the more interest you will make and the faster compound interest will take off. I also plan to save a little bit of money each month and fund my account from time to time to build it up.
This is my plan, I'm sticking to it, it takes nearly no time after it is set up, and is consistent. i would love to hear feedback, thanks!
PipMasterFlex
  • #2
  • Aug 18, 2006 9:54pm Aug 18, 2006 9:54pm
isufreak24: IMHO, this is a great idea for FX investment longterm since you are using low leverage, therefore low risk so you can afford the negative fluctuations of the market. The margin call would in theory be very far from your current position, but be sure to place yourself near an alltime high or low (depending on the intereset differential of the currency pair, eg. if it's EURUSD wait for a high 1.3100 then sell her and hold that position to eternity can collect collect collect interest daily.) Compound interest is the way to go
  • #3
  • Aug 19, 2006 12:32am Aug 19, 2006 12:32am
Try EURUSD and USDCHF instead.


Quoting isufreak24
Hello everyone, I have spent a few months now studying hedging to earn interest every night risk free. Well what i have learned is, hedging is not risk free, Pairs that are "-98% correlated that you can use almost all your margin on" are very risky. And i just found out why. i opened a small position of GBP/USD, and USD/CHF on my live Oanda account. I was hoping to prove to myself that one would move one way x amount of pips, the other would move the other that same amount of pips. When they did not move in oposite directions (I believe at one point one was -153 and the other -30something) i did a look over of their long term graphs and realized, they are very correlated in direction, but not in the same number of pips. I realized that at first glance it looks like like one moved up 100 pips while the other dropped 100 pips. However, upon closer inspection, one of the pairs had increased 100 but the other decreased 200. since the graphs were not in proportion to actual pip movements, it threw me off at first glance.
So then, disappointed that i could not safely hedge most of my margin, i decided to hedge the GBP/USD and USD/CHF, but only use 30% of my margin. Also, I did not open my postions all at once, i acctually have about 10 small hedged postions, opened at different times. With my account of a little over 1600usd, using about $500 in this pair, i make about a dollar a day, every day, plus about .20 US interest rate. total=about 1.20 a day. Which is by no means anything to brag about. But, consider this, after 50 days of this i will have $60 more in my account, if i add 30% more of that, thats $18 more margin i used and a little more interest every day so the next 50 days will bring you more, and so on and so on (compound interest)
I know this isn't a get quick rich thing, especially with an account of $1600. But over the course of say, 5 years, that is 1825 days that you earn interest every day. Also the more you can fund your account with, the more interest you will make and the faster compound interest will take off. I also plan to save a little bit of money each month and fund my account from time to time to build it up.
This is my plan, I'm sticking to it, it takes nearly no time after it is set up, and is consistent. i would love to hear feedback, thanks!
  • #4
  • Aug 19, 2006 1:07am Aug 19, 2006 1:07am
Quoting astarflier
Try EURUSD and USDCHF instead.
Isu,

I'm glad you brought this up...There was a thread labeled "Would this work?" that I believe you started about a month ago. I did some back-testing, but and mentioned this very problem. The correlations, while mostly divergent, wasn't ALWAYS divergent...the testing I did lead to some serious equity draw-downs. With a large enough bank-roll (or small enough size), you could withstand the draw-downs...but I mentioned that amount of interest you would gain relative the bank-roll needed would cause the amount of interest you would earn to be very slim...meaning you'd maybe make 4% a year in interest. While this is relatively "safe" money...the APR is lower than most internet savings accounts...this is what I mentioned. Now, the tide could easily flip and you could make a decent profit from the gains in the positions...but you might as well buy the NZD/JPY and hold on to the single position because the hedge doesn't necessarily buy you any more risk than holding a single position.

Case in point, hedging in this manner isn't exactly safe money...you're still going to be prone to the fluctuations in the market...so if you're going to do a carry trade, you might as well do it on a single currency or buy currencies that have better interest pairings and less movement.

This isn't a bad way to trade, mind you...but you have to be extremely aware of what banks are doing with their interest rates in order to understand how to benefit from this type of trade. Fluctuations aside, remember that the amount of interest you gain will vary over time). Unfortunately for this trade, the Fed is ceasing rate hikes for the time being and the rest of the world will actually be raising their interest rates over the next year. This will make the amount of interest gained on the USD crosses to be decrease. It's just something to think about.

astar,

As far as the EUR/USD and USD/CHF are concerned...sure they are more closely inversely correlated...BUT, the interest lost on the EUR/USD versus the USD/CHF is to small...you wouldn't be gaining much.
  • #5
  • Aug 19, 2006 1:52am Aug 19, 2006 1:52am
Hey, MrMikal, remember me, just thought I would add my two cents here. With regard to forward testing a similar strategy related to the post, "Would this work?" I was able to turn a 10k demo account into 20k in a about a month. The results were excellent, but a closer look at the market over the past month and a half reveal a very unique set of circumstances that led to such a strong perfomance. I was hedging swissy and cable, taking long positions on both, leveraging 70% of the account. Cable seriously outperformed swissy during the past two months because the market was pricing in a rate pause by the Fed so cable gained as the dollar weakened, but swissy did not lose at a similar rate because traders were not willing to let go of their dollar longs in the swissy because of the value of the carry trade. One could argue that the dollar is overvalued in comparison to the franc, and that a correction is in order to re-establish the correlation as the carry unravels, but I digress... This completely wrecked the correlation between the pairs, but this time it worked in my favor and I was able to double the account in a short amount of time with very little risk. At any rate the strategy will work, just be patient and try to look out for situations where you can benefit, and situations that might have a negative effect on yor equity. You should have some opportunities where you can close both postions for a profit. And MrMikal, no hard feelings.
  • #6
  • Aug 19, 2006 2:21am Aug 19, 2006 2:21am
Quoting SisterCurare
Hey, MrMikal, remember me, just thought I would add my two cents here. With regard to forward testing a similar strategy related to the post, "Would this work?" I was able to turn a 10k demo account into 20k in a about a month. The results were excellent, but a closer look at the market over the past month and a half reveal a very unique set of circumstances that led to such a strong perfomance. I was hedging swissy and cable, taking long positions on both, leveraging 70% of the account. Cable seriously outperformed swissy during the past two months because the market was pricing in a rate pause by the Fed so cable gained as the dollar weakened, but swissy did not lose at a similar rate because traders were not willing to let go of their dollar longs in the swissy because of the value of the carry trade. One could argue that the dollar is overvalued in comparison to the franc, and that a correction is in order to re-establish the correlation as the carry unravels, but I digress... This completely wrecked the correlation between the pairs, but this time it worked in my favor and I was able to double the account in a short amount of time with very little risk. At any rate the strategy will work, just be patient and try to look out for situations where you can benefit, and situations that might have a negative effect on yor equity. You should have some opportunities where you can close both postions for a profit. And MrMikal, no hard feelings.
That's exactly my point...the circumstances regarding the dollar crosses were favorable at this juncture. Past testing has revealed that these fluctuations do exist. Therefore, you may do well, and you may do poorly. So the lessoned learned here is that the carry trade ISN'T what's making this a profitable system. The performance of the currencies are. We happen to be in the cycle that allowed one currency to outperform the other. However, history has taught us that this won't always be the case. Therefore, the use of this technique solely for the carry is pointless. Furthermore, it's obvious that you used some discretion when closing the trade...I don't agree with the assessment that the hedge was "very little risk" you leveraged 70% of your account...and had the negative correlations not worked out in your favor during this cycle (as they have shown to historically), we wouldn't be hearing from you. To double your account leveraging that much is not exactly low-risk.

I actually had a 30% gain on one of my live accounts leveraging only 5% of my account in the last 3 weeks trading only the GBP/USD. While not nearly as "impressive" as doubling the account in 30 days, I think over time, a 30% gain on only 5% will go further than a 100% gain on 70%.

However, if you feel that leveraging 70% of your account for trading is an acceptible practice, by all means...go for it, hare-y folks...I'll be right here slow-going it.

:-)

Sis...kudos for doubling your demo account, though...bravo.
  • #7
  • Aug 19, 2006 9:14am Aug 19, 2006 9:14am
mikal i too have wondered about holding an interest paying pair, and just profitting off of that interest. I didn't post it in my thread because it was long enough already but i do also hold a very small position, about 2%, of Aud/jpy, and cad/jpy. I will try to research this and figure out how much you could safely hold, even in years of downtrends. I wonder if even, 8-10% margin of only interest paying pairs would pay out more than my 30% hedging plan.
PipMasterFlex
  • #8
  • Aug 19, 2006 9:34am Aug 19, 2006 9:34am
If you get a broker that doesnt charge/pay interest and one that does, then you can set yourself up with gbp/jpy. It pays about $20 a day on a standard lot. Note that they pay/charge everyday, 365 days a year, no weekends no holidays, thats 365*20 or $7300 a year.

Two things you need to watch for:
1) One account will accumulate money the other will loose it. Moving your money from one account to another can take awhile, seems those brokers hate to pay out, so plan at least 3 weeks in advance. This means you will want to keep your free capital over 90% of your account. I would suggest 20k per standard minimum, or 2k per mini, or $200 per micro. Note that this is both ways, 20k per account, so you really need $400 to play not counting issue #2. The reason this is most important is breaking your trades will result in loosing money, here in US gbp/jpy spread is 8pips+, it will take 8 days to make that up, and if you do it more then once a week you will go broke.
2) You need to place additional trades on both accounts, especially the interest free account. Brokers only make money if you buy and sell, holding for interest makes them no money and they will boot you. Get a good system going on both your accounts (akumi squeeze FTW!), only trade in the direction of the interest, only trade on the account that is making money ect ect. Use the standing balance beyond your systems trades as your interest hedge, like having 36% interest banking account on your margin.

$400 to 1 micro lot might seem like a lot but imagine you have $200k. you could get $73k a year with no fuss. If you compound it you could easily pull 100k, so 50% a year.
  • #9
  • Aug 19, 2006 9:44am Aug 19, 2006 9:44am
Quoting witchazel
If you get a broker that doesnt charge/pay interest and one that does, then you can set yourself up with gbp/jpy. It pays about $20 a day on a standard lot. Note that they pay/charge everyday, 365 days a year, no weekends no holidays, thats 365*20 or $7300 a year.

Two things you need to watch for:
1) One account will accumulate money the other will loose it. Moving your money from one account to another can take awhile, seems those brokers hate to pay out, so plan at least 3 weeks in advance. This means you will want to keep your free capital over 90% of your account. I would suggest 20k per standard minimum, or 2k per mini, or $200 per micro. Note that this is both ways, 20k per account, so you really need $400 to play not counting issue #2. The reason this is most important is breaking your trades will result in loosing money, here in US gbp/jpy spread is 8pips+, it will take 8 days to make that up, and if you do it more then once a week you will go broke.
2) You need to place additional trades on both accounts, especially the interest free account. Brokers only make money if you buy and sell, holding for interest makes them no money and they will boot you. Get a good system going on both your accounts (akumi squeeze FTW!), only trade in the direction of the interest, only trade on the account that is making money ect ect. Use the standing balance beyond your systems trades as your interest hedge, like having 36% interest banking account on your margin.

$400 to 1 micro lot might seem like a lot but imagine you have $200k. you could get $73k a year with no fuss. If you compound it you could easily pull 100k, so 50% a year.
I have heard of this a lot, but the question always comes up, is there any reputable broker that does not charge interest?
PipMasterFlex
  • #10
  • Aug 19, 2006 9:48am Aug 19, 2006 9:48am
Quoting isufreak24
I have heard of this a lot, but the question always comes up, is there any reputable broker that does not charge interest?
Most have it , you just need to ask, just email them. Ask for a Islamic Shariah account (neither a borrower or lender shall you be ). They charge you addition fees for each trade though, most are $5 per standard lot so you end up with an addition 0.5pip spread.
  • #11
  • Aug 19, 2006 10:54am Aug 19, 2006 10:54am
I've done some research about this.
The conclusion that i've came with is that is better to wait for a really good moment to enter long on gbp / jpy and play for the interest. This pair is going up for the last 7 years. Take a look at the monthly chart.
Attached Image
Try hard, think fast, die young
  • #12
  • Aug 19, 2006 11:18am Aug 19, 2006 11:18am
Quoting witchazel
If you get a broker that doesnt charge/pay interest and one that does, then you can set yourself up with gbp/jpy. It pays about $20 a day on a standard lot. Note that they pay/charge everyday, 365 days a year, no weekends no holidays, thats 365*20 or $7300 a year.

Two things you need to watch for:
1) One account will accumulate money the other will loose it. Moving your money from one account to another can take awhile, seems those brokers hate to pay out, so plan at least 3 weeks in advance. This means you will want to keep your free capital over 90% of your account. I would suggest 20k per standard minimum, or 2k per mini, or $200 per micro. Note that this is both ways, 20k per account, so you really need $400 to play not counting issue #2. The reason this is most important is breaking your trades will result in loosing money, here in US gbp/jpy spread is 8pips+, it will take 8 days to make that up, and if you do it more then once a week you will go broke.
2) You need to place additional trades on both accounts, especially the interest free account. Brokers only make money if you buy and sell, holding for interest makes them no money and they will boot you. Get a good system going on both your accounts (akumi squeeze FTW!), only trade in the direction of the interest, only trade on the account that is making money ect ect. Use the standing balance beyond your systems trades as your interest hedge, like having 36% interest banking account on your margin.

$400 to 1 micro lot might seem like a lot but imagine you have $200k. you could get $73k a year with no fuss. If you compound it you could easily pull 100k, so 50% a year.
?? What's the point in doing the carry trade at all in this scenario?

First of all, you should know that you don't know whether or not you're getting in at the same price for the trade. Secondly, you don't get the interest until you liquidate your positions. Thirdly, if you're saying you have to trade to keep the accounts active, then you STILL need to have a profitable system and actually work on the account. This isn't a risk free venture either. Lastly, you have to constantly move money around. Depending how fast the currency is moving, that could be A LOT of money...which you can't take unless you're constantly buying and selling the currency, in which case you're paying the spread for every withdrawal. Don't forget the spread for the GBP/JPY could be as high as 10 pips or more.

I just don't see the point of doing a carry trade unless you know that a currency will be rising...which means you have to do your analysis AND you have to realize that currencies will be cyclical, which means you can't hold on forever. Plus you never get the advantage of compounding interest since you don't realize the premium until you sell anyway. So you're either constantly buying (which means you're paying the spread...which reduces the value of the carry trade) or you're holding on for what could potentially be a negative return if you don't buy at the right time.

You're much better off just finding a profitable system OR trading the carry trade around analysis you have done...what it comes down to is that this isn't an EASY money program, folks, you're actually going to have to work at this. Collecting interest on a trade may seem easy...but you have to be in a good trade for this to work.
  • #13
  • Aug 19, 2006 11:38am Aug 19, 2006 11:38am
if you buy towards interest at one broker they pay/charges and then you sell on a broker that doesnt at the same time then you lose 2x the spread, that is all.

obviously this shouldn't be your main strat for making money, although i dont see why it couldn't be if you were low on time. Most people never have more then 5-10% of their money in play at one time, the other 90% is just setting there. i keep mine interest hedged.

This pays 36% apr interest on your balance a year. Most *good* systems barely beat that. At the same token this does take anything way from your system no matter how good it is because you are just vesting your margin.

Quote
First of all, you should know that you don't know whether or not you're getting in at the same price for the trade.
if you buy at the same time you are going to be with in 10pips

Quote
Secondly, you don't get the interest until you liquidate your positions.
if you use 100% of your margin, no you cant keep investing. using only 10% you can keep going along ways. you noticed that i said you make $7,300 off on $20,000. you are only going to 1/2 up in a year.

Quote
Thirdly, if you're saying you have to trade to keep the accounts active, then you STILL need to have a profitable system and actually work on the account.
I keep trading normal with other pairs on this. Of course you only really need to do a trade with a micro lot a couple times a month, heck some brokers allow $0.01 lots.

Quote
Lastly, you have to constantly move money around.
I see that you think spending 2 hours a month to switch money between 2 accounts for a 36% apr is way too much work, but when you get your account to 50k it might turn a bit more interesting

Quote
You're much better off just finding a profitable system OR trading the carry trade around analysis you have done...what it comes down to is that this isn't an EASY money program, folks, you're actually going to have to work at this. Collecting interest on a trade may seem easy...but you have to be in a good trade for this to work.
the risk on this venture is at max 20pips for each account (40pips) per time you need to buy /sell. you never need to leave the position if you are diligent about moving your money. there are not many system where the profits depend on you and not on price action.

for me, this is what i do with my margin money. The most simplistic money management says to only risk 1% per trade, never have more then 10% in the market. I prefer to have my other 90% doing something. Also, if you buy and sell the *same* pair you are in a perfect hedge, its not about trading its about patience.
  • #14
  • Aug 19, 2006 11:53am Aug 19, 2006 11:53am
Witch,

I see where you're going, and I guess my calculations on the GBP/JPY were different. Right now, I have the pair paying about $20 a day on $100K. I'm not saying the interest is bad by any stretch of the imagination...but what I am saying is that despite the advantages of being able to play the carry trade, you STILL have to trade a system in order to keep it going...even in this case. What you stated, "a hedge for your other system" is a great idea...but your system has to prevent the interest from taking the equity down to far.

As far as the moving money around comment...it really depends...you could be working every day to get your money from one account to another if the GBP/JPY is falling fast and you're slightly over-leveraged and you need to avoid a margin call. Point being you still have to monitor your accounts closely...remember when the original post came out, we were looking for an easy, leave-it-alone trade that we could do in order to collect interest...that shit ain't happening...and that's really what I'm saying...no matter what we want to trade, we're still going to have be vigilant.
  • #15
  • Aug 19, 2006 12:02pm Aug 19, 2006 12:02pm
that is true, i have trouble not sitting in front of the screen all day even on swing trades lol.

the key is a very high ratio of money to lots. if you have $20,000 for 1 standard the market needs to move 2000pips to get you in trouble (not say it wont, every day i say, "i never seen that one before").

You are definately going to have to spend the time, at least 10min a day and sometime all day trying to transfer money.
  • #16
  • Edited 1:23pm Aug 19, 2006 1:09pm | Edited 1:23pm
I just wanted to mention that I used absolutely no descretion in opening or closing the trades. I did not have to monitor the charts, I simply checked the balance in the account at around 5pm EST. If the float was positive, I closed the position and then re-opened them immediately regardless of price. If the float was negative I would simply leave the position open and wait for the float to turn positive again. As far as leveraging 70% of the account at 100:1 you are right, that is insane, but this was a test to see if it could be done, and it can. I have noticed since the cable bull run has ended a positive float is happpening less frequently, but I am still collecting interest. I would also like to add I just recently received a margin call and lost 3k, but who in their right mind would leverage 70% of their account at 100:1 live? I certainly would not. This was a test. It will be interesting to see how things work out going forward as market conditions revert to "normal".

Oh, and just so you know MrMikal, I earned over 1k in interest alone since July 18, on 10k. I think that might be just a little bit more than the 4% annually you were talking about.
  • #17
  • Edited 3:59pm Aug 19, 2006 3:39pm | Edited 3:59pm
Sis,

You're right.
  • #18
  • Aug 19, 2006 3:58pm Aug 19, 2006 3:58pm
Quoting witchazel
that is true, i have trouble not sitting in front of the screen all day even on swing trades lol.

the key is a very high ratio of money to lots. if you have $20,000 for 1 standard the market needs to move 2000pips to get you in trouble (not say it wont, every day i say, "i never seen that one before").

You are definately going to have to spend the time, at least 10min a day and sometime all day trying to transfer money.
Witch...we're on the same page. You need to have a high ratio of money to lots in order to withstand a dramatic drawdown.
  • #19
  • Aug 21, 2006 6:16am Aug 21, 2006 6:16am
Can you tell me SisterCurare how you apply your hedging strategy to earn on interest? I am very interested in it and would be grateful for any help.

Best regards

Coobin
  • #20
  • Aug 21, 2006 11:48am Aug 21, 2006 11:48am
Quoting isufreak24
Hello everyone, I have spent a few months now studying hedging to earn interest every night risk free. Well what i have learned is, hedging is not risk free, Pairs that are "-98% correlated that you can use almost all your margin on" are very risky. And i just found out why. i opened a small position of GBP/USD, and USD/CHF on my live Oanda account. I was hoping to prove to myself that one would move one way x amount of pips, the other would move the other that same amount of pips. When they did not move in oposite directions (I believe at one point one was -153 and the other -30something) i did a look over of their long term graphs and realized, they are very correlated in direction, but not in the same number of pips. I realized that at first glance it looks like like one moved up 100 pips while the other dropped 100 pips. However, upon closer inspection, one of the pairs had increased 100 but the other decreased 200. since the graphs were not in proportion to actual pip movements, it threw me off at first glance.
So then, disappointed that i could not safely hedge most of my margin, i decided to hedge the GBP/USD and USD/CHF, but only use 30% of my margin. Also, I did not open my postions all at once, i acctually have about 10 small hedged postions, opened at different times. With my account of a little over 1600usd, using about $500 in this pair, i make about a dollar a day, every day, plus about .20 US interest rate. total=about 1.20 a day. Which is by no means anything to brag about. But, consider this, after 50 days of this i will have $60 more in my account, if i add 30% more of that, thats $18 more margin i used and a little more interest every day so the next 50 days will bring you more, and so on and so on (compound interest)
I know this isn't a get quick rich thing, especially with an account of $1600. But over the course of say, 5 years, that is 1825 days that you earn interest every day. Also the more you can fund your account with, the more interest you will make and the faster compound interest will take off. I also plan to save a little bit of money each month and fund my account from time to time to build it up.
This is my plan, I'm sticking to it, it takes nearly no time after it is set up, and is consistent. i would love to hear feedback, thanks!
duh, what where you thinking??? what do you think gbp/chf chart shows and why do we need it at all?.. regards
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