Hedge Portfolios in FX Market

Trading Systems Free Forex Trading Systems
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Background on Me:

I came across Baby Pips a year or two ago and eventually signed up in order to comment and add suggestions etc… I neve got around to doing so becuase I got caught up in other things.

I have been an active traders since 2001 and I have done well. My initial investment was $300 and I lost that the first week. I thought I was done but a month or two later after doing more research and reading countless articles online I invested another $300. Now with a few hundreded (~900) added here and there over the last couple years I have amassed $12,575 from trading. Now I would like to help some of you newer traders make steady income, and offer for the seasoned traders an addition to your trading portfolio.

Most traders new and seasoned trade the news, trade signals, trade feelings etc…and they all have one thing in common: these are speculative positions.

There is nothing wrong with them as you can stand to make some extreme returns when your positions are right, but that shouldn’t be your only strategy.

The method I would like to introduce is a hedging method - I do not beleive this strategy has been posted with the Holy Grail before. (I may be wrong but I didnt see it anywhere)

While everything I am going to introduce is based on the simple method of picking pairs which are negatively correlated and holding them for swap gains, I have added some common sense additions and some fairly complex additions to the idea in order to make it generate larger returns and yield less daily variation in the portfolio.

I will be posting some of the particulars, but as I do sell the signals and a programs which yield these results, I cannot be too specific on how some of the items are calculated…If you’re inteligent enough, you should be able to take the theories I give you and apply them on your own in a beneficial manner.

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The first step in creating this portfolio is to choose the base pair.

For example one of my hedging portfolios uses the EUR/USD as the base pair and picks other pairs with which it hedges price movement for a net positive swap earnings.

Lets Pick the EUR/USD

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Yes the hedging strategies you are going to suggest have [U]already been [/U]posted in detail on this forum, complete with methods on how to handle them.

This is nothing new to us veteran traders.
We are aware of most of the strategies that are popular.
Sorry to disappoint you.

I personally do not believe the hedging method of reciprocal price actions is a safe one.

You say you sell the signals and a program.
I just hope you are not going to violate the terms of posting on this forum.

That is, spamming is not allowed. :frowning: :mad:

But if you just post some ideas, then that is OK! :slight_smile:

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Yes I know, that is why no link was posted…

Most hedging programs just take 2 positions at one time with the hopes that overtime the two will net out the price action and generate swap income…

That is not safe at all…

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Step 2:

We know the EUR/USD gives positive swap for a long position…

Find other pairs (pretty much all are fair game) which are negatively correlated and generate a positive swap for the long position as well.

Ex: USDJPY, USDCHF (at IBFX)

and Find other paris which are positively correlated and generate positive swap when shorted.

Ex: EURGBP

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Step 3:

In this example we will use the EURUSD, USDCHF and USDJPY…

Determine what portion of the hedge you want to be fromthe USDCHF and USDJPY (like 50% in USDCHF and 50% in USDJPY to counter the position taken in the EURUSD)

This can be looked at as a risk preference becuase while the USDCHF is more reliable in its almost perfect negative correlation, it yields a lower swap then the USDJPY

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Step 4:

Calculate the Correlations between the Base Pair and the hedging pairs.

We are going to estimate the position as if we took just a position in the base pair and a position in one hedge pair. This will allow us to calculate the correct quantity for the hedging pair. Ex: Like 1 lot EUR USD and 1.1 lots USDCHF (purely hypothetical) and 1 lot EURUSD 2.2 lots USDJPY (again purely hypothetical.

Do not forget to factor in the $/pip rate in these calculations – if two currency pairs are perfectly negatively correlated but one has a constant $10/pip rate and the other $14/pip then holding an equal position in the two pairs will not acurately hedge the market.

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Step 5:

Apply your allocations to the hedge calculations.

50% USDCHF @ 1.1 lots
and
50% USDJPY @ 2.2 lots

So you get

EURUSD 1.00 lots
USDCHF .55 lots
USDJPY 1.10 lots

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Now to answer the issue of this strategy as not being “a safe on”…

If you take the entire position on one day you might enter when one of the pairs is significantly mispriced…when it corrects your pretty much up the creek…unless you have enough margin to ride it out until the interest swaps override the mispricing - maybe a few months…

If you take historical correlations only, you may miss a change in those correlations, you may miss a current deviation from those historical figures and you may wind up in the situation above…

If you only factor in current, lets say the last 30 days, correlations, you may be surprised when the EURUSD / USDCHF goes from a -.56 to a -.99 correlation and you wind up in the above described situation…

So what needs to be done is a gradual investment over time and a weighting of a long term, mid-term, and short-term time frame.

This allows your overall portfolio to not be too disrupted by short term corrections etc, and allows your portfolio of positions to change with the market correlations, but only slightly.

You invest pieces overtime just like you make deposits into a 401(k) with every paycheck and not all at once (even multi-million dollar investments are spaced over a few months when put into a new account)

In the end this type of strategy is similar to an MLP investment…

-you earn income consistently on your position,
-you dont need to worry about daily price action
-and you can generate pretty big gains based on fundamental market principles rather than speculation

This strategy is not meant to replace speculation, but when you dont do so hot one month, you can set back and look and see that this portfolio of positions just made you 1-10% this month.

If you have any questions just post them

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In your example, you’ve only created a hybrid EURCHF/EURJPY Long position. You’ll earn more carryover profits just by taking out a long Position in those pairs, rather than messing with hedging. The risk should be very close to a long position too, with any differences coming from your lack of efficient hedging of the USD.

I remember working on something like this in my 1st month of trading, looking to get those juicy juicy carryover’s. My conclusion was that the carryover profits are real, but there’s proportional risk to get them, and no hedging strategy is going to allow me to sit on my ass and get rich.

If your system works, I bet it’s because the Net position you’ve created (without knowing it I guess) was doing well. Good job

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This example was purely that, an example…

In most of my hedged positions I use at least 6 different pairs…

As for the position doing well, please…these positions are monitored and tracked
the average daily deviation of any portion of the net position is less than a percent- the maximum single point variation do to price movements yielded a gain of 7% (the position gradually moved here and then returned to its net zero position)

This is not a get rich quick method, its a subsidy to speculative positions

Im not going to defend this method anymore to any self proclaimed gurus or know-it-alls becuase I have made money, and off of the interest rollovers not from unseen price deviations…

if anybody wants to learn how to do this post, otherwise dont try to attack the method becuase you havent been able to get your version to work