Carry Trades and hedging | Forex Factory

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Carry Trades and hedging

  • #1
  • First Post: Edited 8:51am Oct 5, 2016 5:53am | Edited 8:51am
I welcome you to this thread where traders can discuss all carry trades technical and fundamental analyzes , methods for hedging the carry trades. Discuss which brokers giving the best conditions for carry trading ( swap / rollover )

Carry trading is not dead. There are some interesting instruments to trade. Lately USDRUB has been the king of carry trading with the Russian Central bank interest rate currently 10 % and the USD with 0.5 % . The difference is 9.5% . So an leveraged trade by 5X if the instrument goes flat during the year gives 47.5% increase for a year. We do not get the full difference. Some goes to the brokers. This pair has also been trending down this year so it has been an adventure for some carry traders.


Also for many excotic pairs the spread can widening like crazy and it is often not possible to trade with an traditional stoploss order ( It can easy be taken out at daily rollover when brokers widening the spread by several 100 pips ) Also often a good carry trade can go against us for long time and then it can be good to have hedging ideas with correlated pairs that also give positive carry ( It is possible, look USDRUB that has strong carry hedged with oil that often has positive swap for shorts )

There are several good exotic forex instruments for carry trading . As examples:
USDRUB ( Short )
USDMXN ( Short )
EURZAR ( Short )
USDZAR ( Short)
EURTRY ( Short )
GBPTRY ( Short )
USDTRY ( Short )
EURPLN ( Short )
USDCNH ( Short )

And also many possibilities that give positive carry like
EURUSD ( Short)
GBPAUD ( Short )
AUDUSD ( Long )
USDNZD ( Long )
GBPJPY ( Long )
USDJPY ( Long )
USDCHF ( Long )
XTIUSD ( Oil ) (Short)
EURAUD ( Short )
EURCAD ( Short )
GBPSEK ( Long )

The direction long / short means the direction to trade with the swap. Not that it is good to do at the moment just to be clear .

If you have decent broker that is not bucket shop you should have positive rollover for all the pairs listed .

It is not a thread meant to show the single carry trade. More the trading ideas. Anyway nice to show the trade process so we can all benefit from it.

It can seems like nothing . But actually the daily swap at rollover quickly add up as an pleasant contribution to our total equity.
Central bank rates:
AUD 1.5 %
CAD 0.5 %
CHF - 0.75%
CHN 6%
EUR 0%
GBP 0.25 %
JPY - 0.1 %
MXN 4.75%
NOK 0.5 %
NZD 2%
PLN 1.5%
RUB 10%
SEK - 0.5%
TRY 7.5 %
USD 0.5%

I will try to update the rates when there is changes.
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  • #2
  • Edited 7:50am Oct 5, 2016 7:23am | Edited 7:50am
Carry against the stream with the Trumphometer instrument USDMXN

This instrument lately trade on the expectation for the US presidential election. It gives some carry but I am quick out to take some profits and try to get in some positions as runners if / when Trumph is not elected. When I have position in profit I take out part of it and protect the rest. If underwater it runs with the stream until I see new opportunity. The plan is to get in at S/R or extremes and to take partly profit to lock in the single trade in BE ( Not as basket )

The Mexican central bank was in need to increase the rates last week because of the unwanted weakening of MXN.

Mexico has a big commodity industry.
A central bank that dont want the peso to weaken.
There is a probability that Trumph become elected as President
Peso is very weakly correlated to the USD index
Has strong negative correlation with GBPUSD and USDJPY over the last year
Has quite strong correlation with Gold over the last year

So if my expectation hits and I manage to get risk free runners in this can become nice one. Even if the USD strengthen it is not the main factor for the moves so rate hike does not have big influence on the trade.

I have been swimming against the stream and possible still are. But so far managed to get something out of it. Continue to work on this one.
Attached Image (click to enlarge)
Click to Enlarge Name: USDMXNH4.png Size: 26 KB
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  • #3
  • Oct 5, 2016 9:32am Oct 5, 2016 9:32am
Thanks for sharing your information. BTW which broker do you use for trading this idea? because several broker have limitation about carry trade.I mean not every broker allow trader to hold position for long time.
  • #4
  • Oct 5, 2016 9:47am Oct 5, 2016 9:47am
Quoting ronald_fsm
Thanks for sharing your information. BTW which broker do you use for trading this idea? because several broker have limitation about carry trade.I mean not every broker allow trader to hold position for long time.
Thank you.
I use Pepperstone and are happy with them. They also offer many interesting instruments.

A broker that put limitations on carry trading are most possible B booking your trades ( maybe all trades ) and the trades are never leaving their house ( Bucket shop ) You can mostly see what brokers are bucket shops by look the swap they offer and do the math.

A broker that passes your trades also make money from the carry trade because they are not giving us all the difference in the rates so they get profit out of the trade anyway how it end up for us as traders. They make a little bit every day.
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  • #5
  • Edited 4:35pm Oct 5, 2016 11:47am | Edited 4:35pm
Quote
Quoting manosk
As an update: My short position has been closed at 62.50 for a very healthy 3.06 ruble gain. The reason behind this as explained earlier is that first I saw oil stalling at current levels and secondly USD is gaining momentum. At this moment it is concentrated on major crosses but it might spill over to more exotic crosses so I prefer to be out. We will see how it plays in the next few days and we will actively be looking for opportunities to reenter.
...

Quoting manosk
{quote} Thank you Earleone for your good words I have been trading, and we have discussed in the past, MXN and ZAR but my general observation after years of trading is that to trade these "emerging" or exotic currencies one needs to have a good understanding of the political environment that provides the basis for the movements in these currencies. I emphasize political environment because economics play a very small role in these cases. These currencies clearly move according to the political stability/instability and therefore it...
Very wise words. I agree mostly. ( I use very low leverage , unleveraged for first bullets so I can take many hits against me without to much harm )

I feel that I dont know enough about the politic in many of the emerging markets like Turkey, Mexico and South Africa and this is very good to gets inputs from experienced trader as you. We should have an Sisse for every country .

For MXN I think Trumph is currently the absolutely biggest weight on the scale with nothing being close. So it is risky one with close to 50/50 like we had before Brexit.

In Turkey it seems like Erdogan are in control . Also the cooperation and relations with Russia is repaired. So I actually think we have an overshoot at the weakness of Turkish Lira question is how much the Moodys downgrade to junk is weighted among the whales. It has moved qte choppy after the coop attempt. Also the state of emergency was declared for 3 months from July 21th that can last for a year from the last news I read. Also difficult to find high correlated instruments for TRY.
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  • #6
  • Oct 5, 2016 11:37pm Oct 5, 2016 11:37pm
Quoting Earleone
{quote} Thank you. I use Pepperstone and are happy with them. They also offer many interesting instruments. A broker that put limitations on carry trading are most possible B booking your trades ( maybe all trades ) and the trades are never leaving their house ( Bucket shop ) You can mostly see what brokers are bucket shops by look the swap they offer and do the math. A broker that passes your trades also make money from the carry trade because they are not giving us all the difference in the rates so they get profit out of the trade anyway how...
thanks for your reply.
1. do you open only on pepperstone or you open with 2 broker ? i have heard strategy open buy position on broker A and sell position on broker B. one free swap account and one swap account. and collect swap from swap account .Is your strategy like that?
2. Do you use 1:500 leverage?
  • #7
  • Oct 6, 2016 1:11am Oct 6, 2016 1:11am
Quoting ronald_fsm
{quote} thanks for your reply. 1. do you open only on pepperstone or you open with 2 broker ? i have heard strategy open buy position on broker A and sell position on broker B. one free swap account and one swap account. and collect swap from swap account .Is your strategy like that? 2. Do you use 1:500 leverage?
To use 2 brokers as you describe is an excellent idea. But unfortunately I do not think you will find any broker with swap free account that will allow this if they are the loosing part. The muslim swap free accounts has also limitation for only a few days to hold the trade ( 3 I mostly seen and after that they charge for it by different methods) For small account you will possible go under the radar.

I do not use much leverage. For the single trade it is mostly unleveraged. But I trade some instruments so because of that it is nice to have some leverage. But more then 50 you will never need by this method . And then you will be trading very many instruments. If you only trade a couple of instruments you should limit to max leverage 1:10 IMO. leverage is account killer number 1 .
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  • #8
  • Oct 6, 2016 2:16am Oct 6, 2016 2:16am
Thanks again for your reply so you mean open single position for each pair .example: sell usdrub and let the position as long as possible to collect swap ? is that correct? thanks a lot .
  • #9
  • Edited 3:10am Oct 6, 2016 2:42am | Edited 3:10am
Quoting ronald_fsm
Thanks again for your reply so you mean open single position for each pair .example: sell usdrub and let the position as long as possible to collect swap ? is that correct? thanks a lot .
For Ruble yes it is trending in correct direction.
I will recommend to scale in to position. ( 1 position unleveraged or even less ) When in profit you add next and so on. Rubel been a dream so far this year.

I am looking for positions to get in again for USDRUB , atm it has had an knee jerk reaction and oil prices is high. I look for deep retracement for oil that correspond with retracement in USDRUB for entry. It can take days, weeks, months.


For other instruments like USDMXN the carry is against the trend ( I am swimming against the stream there by plan ) And it involve hedging, protection of BE for the single positions , Advanced money management and low leverage.
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  • #10
  • Edited 7:29am Oct 9, 2016 7:19am | Edited 7:29am
This one was going very quick . I set a TP target in case of spike. It happened here.

gbptry gives great swap and are trending from the GBP side of the trade. Actually TRY ( Turkish lira ) is trending the opposite way against eur and us but are the stronger one here in this instrument after the Brexit mess.
I will actively look for positions again up in the strike zone / trend line.

It has a great daily carry.
Attached Image (click to enlarge)
Click to Enlarge Name: GBPTRYDaily.png Size: 35 KB
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  • #11
  • Oct 20, 2016 3:54am Oct 20, 2016 3:54am
USDMXN

Trumpometer shows it looks bad for Trump. Trending nicely.

I have been putting in 2 Resistance levels where I will look to fade in to additional positions. A little bit oversold atm so retracement will not be unexpected.
Attached Image (click to enlarge)
Click to Enlarge Name: USDMXNDaily.png Size: 30 KB
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  • #12
  • Oct 25, 2016 5:03am Oct 25, 2016 5:03am
A little bit about hedging:

1. Find correlated instrument to hedge with that technical also should be lining up to be a good trade from technical side of the trade. ( The hedge should in a good hedge be able to be a good trade on its own. Also mostly no need to go in to the hedge at same moment as main position is opened, wait for the good entry.
2. Look hedge that gives positive night rate for longer term trade hedges.
3 Take out hedges at extremes in profit and go back to 1 for main instrument to find new hedge.
4. When main position goes to target take the profit on the main instrument, do an analyse on the hedge. Is it on its way to reversal? Can it now become main instrument and go back to 1 with what was a hedge as now being your main instrument ( It start in red ) . If not close it out with the loss it is the insurance cost for main trade and it has been giving some carry.
5. Sometimes the correlation goes out of sync. If main instrument and hedge both goes in good profit because correlation goes out of sync consider to close out both or one of them. ( If opposite some thinking and decisions are needed , can I take the pain? What is happening and why? Will it last, any game changer? How does it look tecnical? How does it look fundamental? )

I mostly hedge 25 % to 50 % of main instrument. And I do not always hedge.

To find the correct size in % to hedge I mostly backtest the positions over a longer period to see how much DD max has been over the last 1 - 2 years. If you try to do an good example can be USDRUB against Oil . Backtester in MT4 takes night rate in to consideration so swap is in to the test)
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  • #13
  • Oct 27, 2016 8:42am Oct 27, 2016 8:42am
GBPTRY

Great carry. Is trending. I got in with position before the spike in beginning of october but it was taken out ( in great profit ) . Now I see opportunity to go in again.
Attached Image(s) (click to enlarge)
Click to Enlarge Name: GBPTRYDaily.png Size: 33 KB
Click to Enlarge Name: GBPTRYWeekly.png Size: 30 KB
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  • #14
  • Oct 27, 2016 8:44am Oct 27, 2016 8:44am
Subbed, would love to discuss this further.
  • #15
  • Oct 27, 2016 9:09am Oct 27, 2016 9:09am
Quoting Pharm0r
Subbed, would love to discuss this further.
Great to have your experience with us here @Pharm0r
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  • #16
  • Oct 27, 2016 9:31am Oct 27, 2016 9:31am
USDMXN

It is going better for Trump Trumpometer is retracing.

2 Resistance levels in attached charts that is interesting.
Attached Image (click to enlarge)
Click to Enlarge Name: USDMXNDaily.png Size: 28 KB
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  • #17
  • Oct 27, 2016 6:01pm Oct 27, 2016 6:01pm
Here is a video where Robert Hodrick, Professor of International Finance at Columbia Business School is presenting The Carry Trade

Inserted Video
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  • #18
  • Oct 27, 2016 11:34pm Oct 27, 2016 11:34pm
How to calculate the Hedge Ratio

This video explain how to calculate the Hedge Ratio ( Calculate the lot size needed to hedge a long or short in any instrument )

Inserted Video
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  • #19
  • Oct 28, 2016 3:03am Oct 28, 2016 3:03am
Good stuff Earleone
"Bulls make money, bears make money, pigs get slaughtered"
  • #20
  • Oct 28, 2016 3:05am Oct 28, 2016 3:05am
Quoting Earleone
GBPTRY Great carry. Is trending. I got in with position before the spike in beginning of october but it was taken out ( in great profit ) . Now I see opportunity to go in again. {image} {image}
In all honesty I would be very careful to trade any crosses against GBP, where you are short GBP. It has already been beaten to the ground so you could have a very violent reaction. Stay with trades against USD. This offers good risk/reward ratios
"Bulls make money, bears make money, pigs get slaughtered"
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