Trading Currency Swaps

Greetings,

Would be very interested to hear your thoughts and experiences of currency swap trading.

I was thinking about trading the Wednesday Long Swap Rate for USDCHF, by holding the position for just a few seconds before the turn of the night and taking the positive (Swap x 3) - Commission - Spread; assuming there is little price movement.

Say holding the position for 10 seconds in all.

How can we comment on a 10 second window ?

also are you trading forex or Binary ?

Forex. I am looking at the Swap rate for holding Long USDCHF which is 4.27 per point. On Wednesday with my broker this is actually 4.27 x 3 which is higher than the commission and the average spread. The risk is where the pair moves against you. But the idea is to hold the position only for long enough to qualify for the overnight swap rate

Correction - you have to hold the position for a least 2 mins from 23:59 to 00:01

I might be an opportunity to scalp with the Edge that is already built into the Swap rate for Wednesday. Assuming u do a short term trade. I don’t know if anyone here does this for long term trades.

If you take a positive interest rate everyday on your open position for a 3 month period, then you might be able to set a very large SL & TP to accumulate that interest payment. If the market moves against you, you could use an option to cover the risk, where theloss represented in the gap between the open price and strike price is equal to or less than the interest that would have accrued in the period on the Swap.

So the options would be

  1. cash in on your trade when the market moves favourably
  2. get out a very small loss if the market ends up in the strike price to market open price gap - the interest from the Swaps would cover the bulk of those losses.
  3. take a small profit if the market moves against you, from the combination of the interest and in the money option

USDMXN Has a 232 swap on the short. 696 on Wednesdays. The spread ranges from 4 - 20 pips on quick look

Greetings again. I definitely would appreciate the input of someone who has tried this or something similar before. So far the idea looks okay in principle but I haven’t looked at the Call option side of it properly as of yet, and I am sure that working out the maths will take a lot of time and pain killers.

The currency pair that I am looking at is USDMXN. The Swap rate for 1 point on a short trade is +232 at the moment.

So I am working with a GBP denominated demo account with 100k. I have entered a short position with:

lots = 13.61
entry = 19.28630
stop loss = 20.82145 (-80k Loss)
and no take profit

The daily Swap interest on this trade is £121 - assuming 84 interest days in 3 months the possible interest income in 3 months is £10,164

I want to buy a 3 month call option for the pair, so that the strike price for the call option would be equal to a loss of £10,164 or below on the original trade.

I want to buy a large enough contract on the call option so that being in the money assuming the market goes up, is equal to double the negative PnL for the original trade.

The basic idea being that the SL is set so that the probability of hitting it in 3 months is less than 1% assuming the 3 month true ranges for the pair are normally distributed.

  • if the market goes up above the strike rate, I make a profit based on the call option
  • if the market is above the open price for the original trade but below the strike price for the call option; I wait out the trade for 3 months and recoup the loss on the original trade from the swap interest
  • if the market goes down, i cash in on the original trade minus the option cost

This is what I had in mind for a prospective short term ‘overnight’ trade with USDTRY on a Wednesday. The Swap rate for a Short position on USDTRY is currently 90 per point.

Red horizontal line is the SL
Gold horizontal line is the Breakeven point
Green horizontal line is the TP

Looking at the comment on the top from left to right:

Risk: Risk on the trade within the Open Price to SL distance
PnL: PnL on the trade within the Open Price to TP distance
BE: Breakeven point for the trade - which will come later
LotSize: lot size
SL: SL value and in (pips)
TP: TP value and in (pips)
Spread: Live Spread and (Spread when trade opened)
Total Margin: Margin for the position + money required to absorb the risk
Ratio: PnL/Risk ratio - R:R
Commission: Commission for the prospective trade, based on lot size and round turn £5
Swap: Overnight Swap interest for Wednesday trade given 90 a point on USDTRY, lot size and point value
Diff: Difference between Swap interest and Commisson
Win Prob: Probability of winning the trade based on random market and the relative SL & TP distances
Expected Value: EV for the trade using the win probs, commission, swap, risk and PnL

This trade is setup as if it were to enter just before 21:59 on a Wednesday where the Swap rate on all pairs is paid or charged at 3 times the normal value to account for the weekend. Once you “Enter Trade” at the right time the positions open with the SL and TP in place.

In this case the win prob is slightly higher than 50% because the PnL/Risk Ratio is slight less that 1 corresponding to the difference of £931.07 and £1000 respectively. Normally when you enter a trade, even at 1:1 R:R the ratios are automatically against you (negative edge) once you take into account 1) the commission 2) the spread. The relative importance of those diminish as the distances of the TP and SL increase, so there is a built in bias.

In this case because the Swap interest is so high, it offsets the Commission to build a profit of circa £200 into the trade from the get go, reversing the normal situation. As a result the trade once opened, would have to move against me to the gold horizontal (BE) line to reach break even.

In that case the Expected Value is positive from the start without any input from me. So I could either hold the position and wait for the trade to play out to the SL or TP, or I could close the position immediately at 22:01. I assume that there would be some spread movement around the time of the Swap for exactly those reasons, but I think that if the SL and TP distances are high enough the spread would very quickly tighten where the midpoint of the Ask and Bid would have normal market characteristics that is, would move in sync with regular trade flow for that pair.

If the trade is left the play out, the results would be:

Win = 931.07 (PnL) - 20.90 (Commission) + 219.41 (Swap) = 1129.58

Lose = -1000 (Risk) - 20.90 (Commission) + 219.41 (Swap) = -801.49

So I would need a win rate of (801.49)/(1129.58 + 801.49) = 0.4150 or 41.5% to break even

The win rate implied by the relative distances of the open price to the SL and TP is 51.81%

So there appears to be edge. Seems a bit simple, I guess i’ll try and back test it to see what comes up