Buying and selling the same currency

[NoWorries]

Quote from mortysill:

I don't know about EUR and CHF - interest differential looks a bit narrow. Look at GBP/JPY and EUR/JPY. The correlation is 95% positive. If you went long GBP/JPY, in January, you got +$22 per day and short EUR/JPY -$11. Net $10. EUR/GBP yielded about 50 cents.

Of course subparity crosses are generally less volatile so you don't get the standard deviations you get with GBP/JPY but you don't earn the same either.

Interestingly, in January, the GBP/JPY went on a charge relative to EUR/JPY so the interest earned became insignificant. I made 3.12% in one trade net (admittedly over-leveraged at 10:1). I covered - it was enough already.

Regards
Morty

Morty,
Your comparison is flawed, as I think you are comparing on a 1 lot basis. You cannot fully hedge a single GBP/JPY lot with a single EUR/JPY lot.

Suppose you bought 10 minilots GBP/JPY for 233.412 on January 1 at the open. That same day EUR/JPY opened at 157.209. To "hedge" the GBP/JPY position (with neutral exposure in JPY), you would sell 15 minilots EUR/JPY.

You would get 5.1% (bid) and pay 0.47% (ask) on the GBP/JPY position, also a net interest of 4.63%. (all interest rates are taken from Oanda's site)

You would pay 3.6% (ask) and get 0.1% (bid) on the EUR/JPY position, also a net interest of 3.5%.

Thus, for the entire position, your would get a net interest of 4.63-3.5 = 1.13%.



Compare this to a single GBP/EUR position (which gives you about the same exposure as the "hedge" above): You would get 4.95% (bid) and pay 3.6% (ask), resulting in a net interest of 1.35%.

The reason you make more money by _not_ hedging, is that you lose the interest spread (bid vs ask) two times, instead of one time.

Anytime you get the impression you get more interest paid by a "hedged" position (in your definition), versus the cross, the reason you make that money is because you have an exposure in the market, which can cost you dearly if the market moves in an unfavorable direction.

 

[mortysill]

Quote from NoWorries:

Morty,
Your comparison is flawed, as I think you are comparing on a 1 lot basis. You cannot fully hedge a single GBP/JPY lot with a single EUR/JPY lot.

Suppose you bought 10 minilots GBP/JPY for 233.412 on January 1 at the open. That same day EUR/JPY opened at 157.209. To "hedge" the GBP/JPY position (with neutral exposure in JPY), you would sell 15 minilots EUR/JPY.

You would get 5.1% (bid) and pay 0.47% (ask) on the GBP/JPY position, also a net interest of 4.63%. (all interest rates are taken from Oanda's site)

You would pay 3.6% (ask) and get 0.1% (bid) on the EUR/JPY position, also a net interest of 3.5%.

Thus, for the entire position, your would get a net interest of 4.63-3.5 = 1.13%.



Compare this to a single GBP/EUR position (which gives you about the same exposure as the "hedge" above): You would get 4.95% (bid) and pay 3.6% (ask), resulting in a net interest of 1.35%.

The reason you make more money by _not_ hedging, is that you lose the interest spread (bid vs ask) two times, instead of one time.

Anytime you get the impression you get more interest paid by a "hedged" position (in your definition), versus the cross, the reason you make that money is because you have an exposure in the market, which can cost you dearly if the market moves in an unfavorable direction.

Sorry I mis-understood you. I was describing a way of laying off some of the exposure with a hedge (in the way equity traders use the word). The interest being an extra boost to profits not the main reason for setting up the trade.

What is your experience with setting up these sort of fully hedged trades? If they stay more-or-less fully hedged with time, can you take highly leveraged positions?

Regards
Morty

 

[NoWorries]

Quote from mortysill:

Sorry I mis-understood you. I was describing a way of laying off some of the exposure with a hedge (in the way equity traders use the word). The interest being an extra boost to profits not the main reason for setting up the trade.

What is your experience with setting up these sort of fully hedged trades? If they stay more-or-less fully hedged with time, can you take highly leveraged positions?

Regards
Morty

I never attempt to buy and sell the same currency. I actually traded multiple systems in the same forex account, and when one of the systems tried to buy e.g. EUR/USD when there was already a short position in this pair, my short position would just become smaller (or turn into a long position if the buy order was large).

I'm convinced that there's not any benefit (other than perhaps administrative or psychological) to buy and sell the same currency in the same account.

 

[virgin]

NoWorries,


I am more than convinced, it's a FACT

 

[mortysill]

Quote from NoWorries:

I never attempt to buy and sell the same currency. I actually traded multiple systems in the same forex account, and when one of the systems tried to buy e.g. EUR/USD when there was already a short position in this pair, my short position would just become smaller (or turn into a long position if the buy order was large).

I'm convinced that there's not any benefit (other than perhaps administrative or psychological) to buy and sell the same currency in the same account.

Thanks. I agree.

The highly correlated pairs interest me. You gave an example of a yen neutral hedge with GBP/JPY and EUR/JPY. Do these set-ups work i.e. do they remain neutral over time? Or does a gradual exposure to the market occur.

Regards
Morty

 

[Jackjones]

I agree that you can hedge existing positions by taking an opposite position in a correlated pair (LT) but to long/short the one pair at the same time is pointless...no exposure and twice the spread.

Only other reason might be that you couldn't cut a loss and decided it might be a way to prove yourself right?

 

[Chood]

I figured at least one ET pro would have aced my question by now, but alas, no. Answer is #2.

A fx retail account holder is flat in both scenarios, i.e., he is indifferent financially to price action in the current in question. In the first instance he pays to be indifferent (transaction costs); in the second, he is indifferent because he has no trade on at all. Transaction costs are the only difference -- financially speaking of course. Psychological effects are another matter.

Quote from Chood:

Without really meaning to, I may have stumbled onto an intriguing question, with an assist from Virgin. It’s this:

Which produces better effects on or for the retail forex trader,

1) Going long and going short in the same currency, at the same time no less, by masterfully utilizing for that purpose an array of sub-accounts, fictitious or “front” names, cut-outs, and similar devices, OR

2) Going over Niagra Falls in a barrel

?

 

[late apex]

Quote from NoWorries:

I'm convinced that there's not any benefit (other than perhaps administrative or psychological) to buy and sell the same currency in the same account.

Quote from virgin:

I am more than convinced, it's a FACT

Quote from Jackjones:

I agree that you can hedge existing positions by taking an opposite position in a correlated pair (LT) but to long/short the one pair at the same time is pointless...no exposure and twice the spread.

Only other reason might be that you couldn't cut a loss and decided it might be a way to prove yourself right?

Quote from Chood:

I figured at least one ET pro would have aced my question by now, but alas, no. Answer is #2.

A fx retail account holder is flat in both scenarios, i.e., he is indifferent financially to price action in the current in question. In the first instance he pays to be indifferent (transaction costs); in the second, he is indifferent because he has no trade on at all. Transaction costs are the only difference -- financially speaking of course. Psychological effects are another matter.

Each of those supremely confident statements is false, in full or in part.

There are at least 4 distinct, valid reasons to be simultaneously long and short the same currency pair. I have employed 3 of the 4. Some hedge funds and CTAs do it routinely, and that's just among the few I am familiar with. Suffice it to say that neither psychological factors nor interest-rate plays have anything to do with the rationale for it.

Given that similar ET threads in the past have inevitably degenerated into not much more than name-calling flame wars, no one should be surprised that the only voices heard here seem to be in unison, one-sided. The people on the other side know better than to invest -- with zero upside and unlimited downside -- any time and emotional energy in arguing online their compelling, proven approach.

Happy holiday.

 

[Chood]

Quote from late apex:

. . . There are at least 4 distinct, valid reasons to be simultaneously long and short the same currency pair. . .

I promise to be well behaved in reply to one "valid reason" stated in less than 25 words. I may even be persuaded.

P.S. Thanks for not pointing out the fallacy of my example. Buying or renting the barrel is a transaction cost.

 

[mmccormac]

Quote from late apex:

Each of those supremely confident statements is false, in full or in part.

There are at least 4 distinct, valid reasons to be simultaneously long and short the same currency pair. I have employed 3 of the 4. Some hedge funds and CTAs do it routinely, and that's just among the few I am familiar with. Suffice it to say that neither psychological factors nor interest-rate plays have anything to do with the rationale for it.

Given that similar ET threads in the past have inevitably degenerated into not much more than name-calling flame wars, no one should be surprised that the only voices heard here seem to be in unison, one-sided. The people on the other side know better than to invest -- with zero upside and unlimited downside -- any time and emotional energy in arguing online their compelling, proven approach.

Happy holiday.

Bingo.


Something to take note of is that more than 90% of traders loose money. You will also notice when there is something that is mentioned that could make you money (if applied correctly) 90% or more will oppose it. I'm not going to explain but there are vailid and profitable reasons to hedge as late apex says.

Good luck to all.