That's just it, and I'm assuming Elijah knows it, but he has never stated it fully. In fact, the method has never been expressed systematically, for which I think there is good reason.
My thoughts on the method:
1) The method's given title features the phrase "equity building", which refers primarily to the rolling collection of positive swap on long positions. However, a used margin percentage spilling over into double digit numbers is bordering on excess. This means any rational, experienced practitioner of this method will derive swap on a maximum of 10% (lower or higher at any given time depending on usage) of the position they command while they hold it. The realized "equity building" impact? Positive, but nominal. What keeps this from playing a larger role? More swap requires a larger position which requires greater margin usage which heightens the risk of a call on a drawdown which may be very shallow.
2) This method is really about buying bits and pieces as the pair declines, with the expectation of liquidating later at B/E or slightly higher. If there is a massive drawdown, negligible use of margin ensures a call does not occur. While waiting for the pair to resume an uptrend or waiting for it to bounce back, positive swap is earned. Again the benefit is small; but if the waiting period back to break-even is long, the swap can accumulate to a significant amount. The downside inherent in that strategy, however, is that trading capital is tied up earning pennies because eventually the pair will (well, is expected) to return to former higher levels. Too many too high (TMTH as rrram has referred to it) can result in a very long wait. A quick review of the last years GBP/JPY chart shows that longs picked last July are still thousands of pips from B/E. There is an implicit commitment to a 100% win percentage (or as close to as possible), which may entail waiting for years to zero out positions at no loss.
3) In a market that oscillates more so with no catastrophic decline, the opportunity exists to buy drops and exit for small profit - these are the "scalps". The position sizes opened for the buys are very small relative to the account balance, so the profits are minimal, but multiple lots are typically opened and closed at profit. These are where the profits (the overwhelming majority) derived from the method are generated.
The virtue of the method, correctly applied, is that one's analysis can be pathetically wrong but where margin is effectively managed, realized losses won't be incurred unless a truly catastrophic decline results in a margin call.
The crux of the method is not swap/rollover or the carry component: at least, not in the real world. In actuality, "scalping" many small lots for their small profits is where the money is to be made, whether in an uptrending market, or in a ranging market.
This is however, where it becomes tricky. Does it matter where you buy? In a ranging market, not as much - unless you buy in at an absolute top, you'll be able to buy and then sell at some point relatively soon for a profit. But in a more widely oscillating market or in a strongly trending market, it is very important. Relentlessly buying every 10, 20, 50 pips sounds easy enough, but over hundreds of pips, that a lot of drawdown and a lot of margin used. No matter, you say, it will return. But when?
To avoid potentially weeks/months - years? It's not impossible - sitting in a massive drawdown is key, even though you'll earn some swap. What does this mean? It means that buying cannot occur at random, but will require analysis so that you concentrate positions "low" (toward an objective market bottom) rather than just "lower" (buying lower buying lower buying lower buying lower buying lower with no real end in sight, margin permitting).
This is very important, and the most difficult part of the method to grasp because success here is almost purely discretionary. Buy a lot of orders up high and then go into a 1000 drop? Bad call on your part. Tough luck until the market brings you back to B/E 4 months later. Usually if you screw up, you'll be fine: this method does not require an astute analyst. What it does require is the willingness to wait out and weather massive drawdowns for as long as it takes for them to aright themselves. Stops are out of the question because they negate the purpose of using tiny lot sizes. The margin call is your only stop, and your margin should be managed to avoid that at all costs.
Could you use that capital elsewhere to make money, rather than simply dig yourself out of a loss? Would the money made elsewhere outstrip the rate of return derived from the swap you're accruing? Yes; and almost certainly yes.
So is the method viable? Yes, if managed appropriately, just like any other method. The essential difference here is that method adherence, other than not going short, is *solely* a matter of money management.
Is the method trading? Kind of. More like a dense series of tiny investment positions, bought at a alleged discount ("GBP/JPY will go UP UP UP") and sold at fair value.
That's a lot to read, but thought it was important to condense what's has evolved over the last 136 pages and to clarify or dispel some notions that may be unclear or incorrectly held. I guess it's ironic that I have not and do not trade the method.
Linear Mode
