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.
FX-Men Zombie Assassin
Master Contributor and Member
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
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.
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).
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.