ElectricSavant,
Thank you for the generous contributions. I am extremely intrigued.
You seem to want to keep the thread on-topic for teaching beginners with this concept. So! As someone who knows absolutely nothing about FX, allow me to ask some completely newbie questions that might serve to benefit other complete newbies who want to follow along.
Right, I've just signed up with OANDA FXGame, not knowing any other better. They seem to fit the criteria you outlined in terms of interest payments and singe unit capacity...but I may be missing something as it's all new to me.
I've read the info on the OANDA site detailing the basics of what FX trading is all about and how it works etc. Got it. More pertinently I've read the info on continuous interest payments/charges etc. Got it.
I've played around with their platform and made some trades. All looks pretty straight forward. Charting leaves a little to be desired. Got a handle on margin, NAV etc. Lost some PIPs lol....but I guess the trading part of it isn't really that important for Cash & Carry (Standard).
Now for some clarifications/re-iterations:
1) The concept is: by holding certain currency pairs in the right direction, either long or short, you can get paid interest for that pair e.g. by going long NZD/USD you would earn 133.75%APR
2) In theory, if the currency pair did not move at all, you could just hold that pair and earn the interest indefinitely (assuming interest rates didn't change also). Holding the pair means never closing the trade.
3) The reality is that currency pairs do move up and down and this will result in unrealised/paper profit and loss (UPL) whilst you are earning the interest.
4) So the key is to be able to withstand the fluctuations of UPL, avoiding margin call etc. whilst earning this interest.
5) One way of achieving this is to utilise multiple currency pairs in order to smooth out the overall fluctuations in UPL at the expense of earning possibly lower interest. Utilising multiple currency pairs in this way is the hedge.
Hopefully I've got that all right. Correct me if I'm off anywhere.
Now for some queries.
You said:
I was unable to confirm/deny this from the text on the OANDA website....but are you really saying that you get paid interest on the fully leveraged amount? I'm almost wetting myself if this is correct but it seems to make sense.
Extreme Example:
$10,000 account. 50:1 leverage. Therefore, $500,000 leveraged amount.
Long AUD/JPY @ 251.75% APR for full leveraged amount (I know you wouldn't but...)
= $1,758,750.00 from $10,000 account in one year.
This would be under the false assumption that AUD/JPY didn't fluctuate at all. Can this be right? I know you wouldn't use the full amount and presumably this is where the base exposure factor comes in. In addition, hedging with multiple currency pairs brings down the APR to your target of 32% APR? (or is that from the exposure factor or both?) etc. but is the principle and calculation I've outlined here in this extreme example correct?
If it is, then I'm unclear on why you state 32% APR/ROI since the APR will be applying to the leveraged amount but the ROI should be a function of your unleveraged amount. Therefore ROI is much higher. Just need a small clarification on that point.
Furthermore, would it be possible to re-invest the interest earnings back into the account so as to compound gains further to an even more ridiculous level or am I getting carried away?
Ok, moving on to slightly more down to earth aspects of the strategy, in no particular order:
1) Further to an earlier poster's comments on correlation/non-correlation. Would it be possible to find suitably anti-correlated pairs from a statistical point of view so that you could optimise or rather minimise the UPL fluctuations to a point of negligibility OR is this basically what the combination of pairs the spreadsheet contains does? Are the pairs and the ratios/weightings on the spreadsheet the result of this type of analysis already i.e. can we assume that a roughly optimal combination has already been chosen.
2) Total newbie question: why is it important to be USD and EUR neutral in this strategy?
3) I see that OANDA have an API ($600/month) and it seems quite straightforward to have this strategy automated (for medium term periods). Are there any fundamental reasons why this couldn't be done?
4) Is this a scalable strategy? i.e. if lots of people start doing it or if people start using large amounts of money, will it still work? Does the dealer/market maker lose out? It doesn't seem like they do, so who does? Is this a "loophole" that might get closed? I can't see how or why but it's all new to me.
5) On your spreadsheet, is the main purpose of the first sheet, to maintain a running total of NAV so that the second sheet can use that NAV and apply the base exposure factor to it? What other purpose does it serve?
6) Ok, little confused by some instructions on the spreadsheet:
Okay, the Base Exposure Column is calculated based on the current NAV and the user defined Base Exposure Factor. Got it. So if the Base Exposure Column shows a value that is lower than the number of units you ACTUALLY have in NZD/USD - how do you make the adjustment so that it comes into line without selling???? And why do you have to wait until the next day at reporting time? I'm sure it's obvious but the answer eludes me at this time.
7) More recently:
I suspect this is the same point as above. Right now, I'm not sure what you actually mean by saying there is never decreasing.
8) You said:
If your Uncle Point is 30%, does that mean, when you've accumulated 30% profits/ROI that you have eliminated risk? Is that because from that point on you only use the money from profit for the strategy? Or am I missing something obvious once again.
I think I'll leave it at that for the moment as I'm sure things will become clearer once I actually try out the system. Do you or anyone know if with the FXGame they also simlulate the interest charges/payments?
Thanks again for your generous contributions.
Momoney.
Thank you for the generous contributions. I am extremely intrigued.
You seem to want to keep the thread on-topic for teaching beginners with this concept. So! As someone who knows absolutely nothing about FX, allow me to ask some completely newbie questions that might serve to benefit other complete newbies who want to follow along.
Right, I've just signed up with OANDA FXGame, not knowing any other better. They seem to fit the criteria you outlined in terms of interest payments and singe unit capacity...but I may be missing something as it's all new to me.
I've read the info on the OANDA site detailing the basics of what FX trading is all about and how it works etc. Got it. More pertinently I've read the info on continuous interest payments/charges etc. Got it.
I've played around with their platform and made some trades. All looks pretty straight forward. Charting leaves a little to be desired. Got a handle on margin, NAV etc. Lost some PIPs lol....but I guess the trading part of it isn't really that important for Cash & Carry (Standard).
Now for some clarifications/re-iterations:
1) The concept is: by holding certain currency pairs in the right direction, either long or short, you can get paid interest for that pair e.g. by going long NZD/USD you would earn 133.75%APR
2) In theory, if the currency pair did not move at all, you could just hold that pair and earn the interest indefinitely (assuming interest rates didn't change also). Holding the pair means never closing the trade.
3) The reality is that currency pairs do move up and down and this will result in unrealised/paper profit and loss (UPL) whilst you are earning the interest.
4) So the key is to be able to withstand the fluctuations of UPL, avoiding margin call etc. whilst earning this interest.
5) One way of achieving this is to utilise multiple currency pairs in order to smooth out the overall fluctuations in UPL at the expense of earning possibly lower interest. Utilising multiple currency pairs in this way is the hedge.
Hopefully I've got that all right. Correct me if I'm off anywhere.
Now for some queries.
You said:
I was unable to confirm/deny this from the text on the OANDA website....but are you really saying that you get paid interest on the fully leveraged amount? I'm almost wetting myself if this is correct but it seems to make sense.
Extreme Example:
$10,000 account. 50:1 leverage. Therefore, $500,000 leveraged amount.
Long AUD/JPY @ 251.75% APR for full leveraged amount (I know you wouldn't but...)
= $1,758,750.00 from $10,000 account in one year.
This would be under the false assumption that AUD/JPY didn't fluctuate at all. Can this be right? I know you wouldn't use the full amount and presumably this is where the base exposure factor comes in. In addition, hedging with multiple currency pairs brings down the APR to your target of 32% APR? (or is that from the exposure factor or both?) etc. but is the principle and calculation I've outlined here in this extreme example correct?
If it is, then I'm unclear on why you state 32% APR/ROI since the APR will be applying to the leveraged amount but the ROI should be a function of your unleveraged amount. Therefore ROI is much higher. Just need a small clarification on that point.
Furthermore, would it be possible to re-invest the interest earnings back into the account so as to compound gains further to an even more ridiculous level or am I getting carried away?
Ok, moving on to slightly more down to earth aspects of the strategy, in no particular order:
1) Further to an earlier poster's comments on correlation/non-correlation. Would it be possible to find suitably anti-correlated pairs from a statistical point of view so that you could optimise or rather minimise the UPL fluctuations to a point of negligibility OR is this basically what the combination of pairs the spreadsheet contains does? Are the pairs and the ratios/weightings on the spreadsheet the result of this type of analysis already i.e. can we assume that a roughly optimal combination has already been chosen.
2) Total newbie question: why is it important to be USD and EUR neutral in this strategy?
3) I see that OANDA have an API ($600/month) and it seems quite straightforward to have this strategy automated (for medium term periods). Are there any fundamental reasons why this couldn't be done?
4) Is this a scalable strategy? i.e. if lots of people start doing it or if people start using large amounts of money, will it still work? Does the dealer/market maker lose out? It doesn't seem like they do, so who does? Is this a "loophole" that might get closed? I can't see how or why but it's all new to me.
5) On your spreadsheet, is the main purpose of the first sheet, to maintain a running total of NAV so that the second sheet can use that NAV and apply the base exposure factor to it? What other purpose does it serve?
6) Ok, little confused by some instructions on the spreadsheet:
Okay, the Base Exposure Column is calculated based on the current NAV and the user defined Base Exposure Factor. Got it. So if the Base Exposure Column shows a value that is lower than the number of units you ACTUALLY have in NZD/USD - how do you make the adjustment so that it comes into line without selling???? And why do you have to wait until the next day at reporting time? I'm sure it's obvious but the answer eludes me at this time.
7) More recently:
I suspect this is the same point as above. Right now, I'm not sure what you actually mean by saying there is never decreasing.
8) You said:
If your Uncle Point is 30%, does that mean, when you've accumulated 30% profits/ROI that you have eliminated risk? Is that because from that point on you only use the money from profit for the strategy? Or am I missing something obvious once again.
I think I'll leave it at that for the moment as I'm sure things will become clearer once I actually try out the system. Do you or anyone know if with the FXGame they also simlulate the interest charges/payments?
Thanks again for your generous contributions.
Momoney.
