Can someone explain to me what these guys are trying to do please

i was checking out another forex forum ( dont be alarmed, babypips is the best.lol). but i was reading this thread about a system that requires two accounts and buying one currency in one and selling in another and there is some info about interest and stuff… i dont quite get it and trying to make sense of the 7 pages of posts is giving me a headache. so please. can you explain what these people are doing… in english.

thanks. http://www.forexfactory.com/forexforum/showthread.php?t=10753&page=1&pp=15

KISS… thats all you need to do to make money in this market.

Don’t juggle 2 if you can’t even toss one and catch it properly.

that didnt quite help me but ok. thanks

What they are trying to do is collect daily rollover interest while staying 100% hedged. Some brokers credit/debit rollover interest and some don’t.

For example, if broker “A” was paying 2% rollover interest on a currency pair that you went long, and broker “B” didn’t credit/debit rollover interest at all, then theoretically you can go long on a currency pair on broker “A” and collect interest, and go short on the same pair with broker “B” to hedge.

So, all you’re doing is collecting interest while the capital gains/losses from both accounts cancel each other out. Makes sense?

I haven’t tried it but it sounds great. It will probably require a lot of initial capital in order to avoid margin calls though, especially if you are highly leveraged. If anybody has any experience with this please share :slight_smile:

I came across a pretty descent hedge system…i used it for a while then chickened out. Allow me to explain…

The system in a nutshell is basically buying and selling 2 different currency pairs simultanelously. For example, buy GBP/JPY and hold it to collect interest (this pair has some pretty sweet interest if i remember correctly) and sell the same amount of CHF/JPY. You collect interest for holding long GBP/JPY and have to pay interest for holding short the CJF/JPY

The idea is that since these pairs are generally highly correlated, any gain/loss in the long position will be more or less offset by the short on the other pair. With the P/L approximatley offset, you just have to sit back and collect the sweet tasting interest. The GBP/JPY has a 5% differential while the CHF/JPY has about a 1% or so. I might have the exact differentials wrong but no matter…the point is that you receive much more interest going long GBP/JPY than you have to pay going short CHF/JPY. The net result is some nice interest.

Is it really that simply?!?!?

I initially thought so but upon careful analysis and testing, i realized that nothing is ever that simple. The issues:

  1. The 2 pairs do not share the same volatility. So even though they are highly correlated, one pair might move 100 pips while the other moves only 75 pips. This eventually creates a P/L differential that can work for or against you.

  2. Since the intention of the rules was to have one position offset the other, there were no stop losses accounted for in the original rules. Looking at the rules blindly would lead you to believe that. But back testing showed that there were times when the P/L diff. works against you, there could be some heavy losses to endure. There was one point where the loss was so heavy that it sort of scared me away from the system. Fortunately, that kind of heavy P/L differential does not occur that often but the best traders still have to account for the worst case scenario. As such, this sytem needs stops!

  3. The idea was to hold this position almost indefinitley. That would be feasible if positions completely offset. As discussed, this is clearly not the case so it is obvioulsy best to hold this position when GBP/JPY is going north. Otherwise, the higher volatility of this pair is eventually going to create a large P/L differential that interest payments cannot offset. This is most prominent during long down trends in the pair.

I think this system has incredible potential if it is tweaked a bit. I have not tweaked it but if you plan on testing this whole thing, make sure you test it across all market conditions. This massive uptrend in GBP/JPY would have made you a fortune using this approach. See what happens during a GBP/JPY downtrend though and see how you do.

im starting to understand this hedging.

so brokers dont want you to hedge which is why you cant buy and sell the same currency in the same account to just collect interest. so you need to sell a different currency pair to keep both trades open.

some people where talking about using two different accounts and even using futures account to trade currency and do this hedging thing.

i cant really make sense of this cause i no very little about the futures market. but would that make a difference?

There are brokers out there i think that will allow you to do it in the same account, but like i said, nothing is that easy. If you manage to find one that allows you to do it, they probably would not pay you the interest.

But what i don’t understand is why anyone would want to go long and short on the same pair. You receive interest on the long side only to have to pay it out on the short side (in the case of GBP/JPY).

I’m sure i’m missing something though…

you make a good point that had me stumped when i first came across this system. the only way this hedging thing would work is if you found a broker that doesnt pay or charge interest. so you have one that is paying the interest while the other account just moves with the market to offset any losses you get with the interest paying account.

this whole thing seems straight forward enough but its alot more complicated in reality. there are 7 pages worth of posts in the link i gave above where people are running through simulations and different senarios that i really cant make sense of with my limited background in this kind of activity.i like things to be simple and straight forward. this hedging system aint for me or even most traders. you need a huge account size to do this thing. and then you got to work out spread differences and costs, and the risk of margin calls, and having to stop out early and…

The key thing that you mentioned in your previous post is the risk of margin calls. When you are engaged in hedging in the same account, there is less of a risk of margin calls because there is some offsetting position. But when you start using 2 different brokers, there is nothing to offset losses in each of the individual accounts. So, it is likely you would have to continually fund one account or the other.

But this GBP/JPY & CHF/JPY hedging strategy is actually quite simple and has the potential to great things for an account if you can tweak it in the areas i mentioned.

can you really get away with hedging in the same account? i thought brokers would shut you down for this.

also, how would you find a broker that pays and doesnt pay interest?

thanks for the imput pipbull.

You really are missing something.
the point is opening two different accounts in two different brokers.
some brokers pay&charge interest differentials, and some don’t.
with the broker that DOES pay it, go long on AUDJPY, for example (6.25% against 0.25%).
go short on THE SAME PAIR with the broker who doesn’t charge interest differentials.
assuming you opened both positions on the same price, what you pay is only the spread twice. the swap paid back by the broker who pays it, is very sweet indeed. in fact, you should cover spread expenses after two days or so(depends on the spread of course).

really does sound interesting.

problem is, as mentioned in the forum, that the broker who doesn’t charge interest, will lose money because of you. if you short AUDJPY, for example, HE’s the one paying the interest.
this entire strategy is based on getting your profits from the broker, regardless to the currency. he’s the one who’s paying you. and he wouldn’t like it.

the only solution I see, is using that stategy as a side strategy, just to increase incomes, and make other trades as well, so it doesn’t look suspicious.

regards.

I see. I guess it would be crucial for you to find 2 brokers, one who pays and the other who does not charge.

But if the broker that is paying you interest is on the other side of your trade, and your trade is losing, then why should he care if he is paying you interest? The P/L can quickly outweigh whatever you make in interest. I think you might be missing that fact.

The broker paying you interest really doesn’t care about the other broker you are with and doesn’t care if the other account is offsetting the losses/gains made in his account. He just knows that most people entering this domain will likely engage in many more losing trades than winning ones and so if he has to sacrifice a little interest in order to be on the other end of your losing trades then so what?

When it becomes truly suspicious to the broker is when you hedge one pair against another highly correlated pair in the SAME account. This is because if positions are truly offset then it means he is not making any money off you at all, but just paying the interest. Do this successfully for a while and the broker might feel like intervening.

Dear pipbull,

I think you got something entirely wrong on your basics…
when you lose money, in FX, you don’t lose it to the broker. it’s not like a casino, in which the broker is the dealer, and you have opposite interests…
when you lose money in forex, you lose it to [U]those who made the right trades[/U] and just a little of it to the broker, as spread.
when you EARN money, you don’t earn your broker’s money. you earn the money from people who took wrong trading decisions.
all in all, it’s a giant market, and it feels as if when you lose\win money, it comes from “the market” and goes to “the market”. not the broker.

the broker’s only earnings come from spread. and THAT’S IT.
those who don’t charge\give interest, might win or lose money as well, but I suppose they’re usually even.

this is why, when you take advantage of the broker’s terms (of no interest) and you make only one trade per year (you go in short only once, and that’s why you pay the spread only once), the broker might realize what you’re doing and shut you down.

regards.

Hi Parsush,

You may be right on my faulty basics, but i’m not convinced yet. I do not dispute the fact that this is a zero-sum game, whereby every winning trade is coupled with a losing one from someone else. What i always thought to be though, was that your broker is not going to necessarily pair our dinky MICRO lot trades with some other player. They’ll match up the bigger professional traders with other bigger players but not necessarily our tiny trades. They can’t be bothered with that. Instead i always thought it was much more interesting to the broker to pinpoint the amateur players because they know the odds are higher of them being wrong than the pros, and then take the other side. How else do you think a broker stop hunts? He takes the opposite side of all the amateurs who were not smart enough to avoid the most common stop-out levels.

All this being said, i am fully willing to admit that i’m wrong. This is just what i beleived to be the case. And it is also why we are all here…to learn from each other. So, if anyone else would like to step in and clarify this for me, i would be grateful.

Thanks

alright, I have to apologize, both for my english (not a native) and for not being clear.
sorry :slight_smile:
when i said that when you lose money, you lose it to those who made the right trade, it’s not like you’re being coupled with another trader inside your broker’s list.
it’s more like… umm… alright I’ll rephrase:

imagine my house sets on fire. I manage to turn it off before it’s too late, however some damage was done to it. my house just lost 20% of its value.
where did the money go? it went, generally, to all the other houses in my neighberhood who were not set on fire (or affected in a negative way by the fire). now there’s one house less attractive to compete them. so they’re value rises at 0.01% each.
my house’s value didn’t go into another person’s house specificly, but into all of them together (so it’s not coupled, but devided to all).

it’s the same with forex. when you long USDJPY you actually buy Dollars and sell Yens. that I’m sure you know of.
however if the dollar falls, what happens is that the dollars you bought are now cheaper, and the yens you sold are more expensive. when you close the trade, (meaning you actually sell the Dollars back and buy the Yens back) the price differences go against you and this is where you lose the money.
just like with my house, who was on fire, when your currency dropped, the other currencies (houses) haven’t. so basicly, all the Yen holders in the world (or any other currency who didn’t fall along with the dollar) are those profiting the sum you (and others who traded the same) lost (just like all the houses that are not mine gained a little bit of value).

sh*t I hope this isn’t difficult to understand… :eek: hmm… really took time writing it and now I don’t wanna delete it and start over again so I’ll post it anyway :o

if you have any questions, do ask… that’s what we’re here for.
askin’ n’ answerin’.

regards.

Parsush,

First let me start off by saying i appreciate your persistence in trying to make me understand. Thanks

I’m not sure i really understood your analogy but i do understand the basic fundamentals of your USD/JPY example.

I do realize that you are not literally coupled with another trader inside some broker’s list, but when you get down to it this is a zero sum game. For every winner there is a loser so in essence there is some form of coupling. Maybe it’s not the right word to use but in the end you are either taking someone else’s money or they are taking yours. I think we can agree on that. Despite what you may think, that other person is going to be the broker sometimes. They DO make their money in more ways that just collecting the spread.

Put yourself in the broker’s place. They are entering into a business where they know ahead of time that 90% of people who attempt to trade will fail. As a broker, would that not be a tempting idea to capitalize on? Pretend someone handed you a losing trading strategy. For some reason, you knew beyond a shadow of a doubt that this was a losing plan. Assume ethics went out the window for a moment, why wouldn’t you be tempted to take the other side of that guy’s trades every time? This is not a far stretch from the broker’s reality. Of course they want you to believe they make money on the spread only because many traders like you and me would feel that to be a conflict of interest for the broker to be on the other end of a client’s trade. But that is reality.

Check out forexfactory and other forums and you’ll see how many people refer to this practice.

hmm… didn’t know that. thanks for the info, I’ll look it up.
so what you’re basicly saying is that if we try that hedge thing, the non-charging broker wouldn’t mind his interest loses because he’ll go the other way and make his money on our losing trades?
I’m not really sure how this thing works, but since that hedging strategy doesn’t depend on anything (technical\fundamental) at all, basicly it’s like tossing a coin. 50%-50% shot. the broker couldn’t “mark” you and do the opposite. meaning he wouldn’t go the other way because you might as well be right with your decision…

I must add something though.
after re-reading your post, I came across something I don’t fully agree with.
when a trade is losing, it’s not necessarily a winning trade for the other position… many things can cause (whipsaws, SL:TP ratio, steady price, reversals) BOTH trades to lose…
the fact that 90% of traders lose doesn’t say that if you took their oppositte
position you would have won.
thier TPs, for example, might have just been too high, or SLs too low…

I agree that our tiny lots wouldn’t mind much for the broker, but 10 lots trade for 1 year of interest loses, whereas it’s the only position opened in that account, might be noticed and marked “suspicious”.
this, of course, is just a speculation…

well, im a little worried about the fact that the no swap broker can close your account down if they suspect that you may be hedging and costing them money.

well couldnt you wait till the maket that you are buying to collect interest is in a down trend and then buy at that point so that the interest paying account goes down while you collect interest. and then you can do the opposite in the no swap account and have the balance increase? will the no swap broker have a hissy fit over doing this? is what im saying even making sense?

Oanda does not allow hedging. Who else doesn’t?