Hi guys - gals,
Long time lurker first time poster. I’ve recently been playing around with a few ideas (and a few demo accounts) on how to get a positive carry while maintaining some sort of hedge, and while I’m in the early stages I have been somewhat successful so i thought I would share with you guys a few of my ideas to get some feedback about what you think before I dive in with real money. These trades are simple AF, but I don’t think they’re backtestable (maybe they are? I always test with demo accounts rather than backtesting).
So the idea is simple - match up pairs that are as hedged as possible but also carry a positive swap overall. Here are a few of my ideas. One thing to note - the number I put next to each currency pair is NOT A LOT SIZE. It is a RATIO vs the other trades, using properly aligned margin requirements (in deposit currency) for each currency pair. To figure out the correct lot size, I use cTrader as it has a handy feature where by you can size your positions easily by checking the “margin requirement” field as you size your trades. Basic example: I want to go simultaneously long USD and short gold, and want to bet $50 each way. So I start adjusting the values of my lot sizes in each currency until they both say “margin required: $50”, then I hit “buy USDJPY” and “sell XAUUSD” one after the other. Simple right? So with that in mind, please check some of my more promising matched pairs:
First one I chose because it is a simple mashup of all the FX Majors, hedging them both ways, as well as hedging both the Yen and the Swiss Franc as the “safe havens”. My first hedge only used JPY as the short and it exposed a major flaw - you are simply long USD and short JPY overall. after I tweaked it to use both CHF and JPY the results are a lot more positive. Drawdown was less and equity actually ended up overall positive fairly quickly. The swap is also positive on 11 out of the 12 pairs:
With this you are fairly well spread out amongst all the currency pairs, and half hedged (but also half exposed) against-to an event like a CHF-JPY flash crash, but the other positions should protect you from too much drawdown in that event. So far I’ve not had my drawdown come to even 50% of the sum of all the trades, and right now as of this post the demo account I am using is up $4750 in equity in 12 hours with $4,000 per USD pair, and $2000 per JPY-CHF pair (total $32000 margin). Of course these numbers can be upscaled or downscaled, but the overall swap for this particular setup is +AUD$450 per day at the time of writing. Another thing I’m trying to decide is whether or not to sell the entire ring every time theres a good profit and open new positions, or just let it run so the positive carry will build up a buffer against a potential unforseen disaster…
A few other ideas I am toying with showing early signs of success are below:
Essentially you are both long and short gold, but the positive carry of shorting USD gold far outweighs the negative carry of buying EUR gold, and the pairs generally tend to be positively correlated, thus cancelling each other out (added bonus that when USD falls gold GENERALLY rises too). Best time to place this trade is after a big fall in XAUEUR, especially if it has decoupled from XAUUSD. Max sizing should be no more than 5% of overall account per position as drawdown can approach 100% of the margin used. Another variation of this which results in positive carry, but has less of a correlation (more risk, potentially faster rewards) is below:
An interesting oddity with my Forex broker occurs with the EURJPY pair. Currently the long swap is -0.13 pips and short is -0.02 (Even though EUR interest rate is higher than JPY). EURCHF has a long swap of 0.09. Possible semi-arbitrage opportunity, with overall positive swap and holding positions open until you get positive equity. Although you are technically short CHF and long JPY with this trade, you are somewhat protected from a major drawdown by the EUR hedge:
FX Major Ring:
These swaps are all positive, except for USDJPY obviously. The reason I shorted this was to hedge against a major USD meltdown in some way. The negative carry of shorting the USD is approximately 50% of the positive carry of the other positions. Max drawdown so far seems to be 150-200% of the total margin used, swinging to positive equity of about +50% of total margin used
FX Minor Ring:
This ring is basically a full positive carry swap, except for AUDNZD which seems to be negative long and short for my FX broker. This ring is heavily long AUD and heavily short EUR. I had an idea to change EURAUD to BUY which will result in a slight penalty in the swap, but better balances the AUD-EUR biases. I’ve not seen this one go into negative equity yet as the AUD has been strong, so I can’t comment on equity drawdown unfortunately.
Interestingly, when putting the FX Major Ring and FX Minor ring together, so far they have cancelled each other out in terms of equity (or close enough to it) while maintaining an over all positive carry.
I plan to leave these positions open for a month or two on my demo to see how the swap stacks up and whether or not the drawdown ever comes close to margin call.
One thing to keep in mind is to keep an eye on interest rates, as that could affect the position you should take in the Major and Minor rings.
Final reminder: the numbers above are NOT lot sizes. They are ratios of MARGIN REQUIREMENTS in your base currency as explained up top! You need to figure out the lot sizes using your own base currency
Let me know what you think, or whether you have ideas for improvement on my healing circle