Source from another trading forum:
Risk-Free Money with Grid Trading Forex
Original idea:
Q
First of all kudos for roger for making us think outside the box.......i devolped the super high interest trading through his system and creativity.....so lets get started......
1-open an account with marketiva, why? because they have accounts that do not charge interest or swap fees......i can start seeing the wheels turn.....or......open an account with F x c m and tell them you want to open a interest free account, you might have to tell them your muslim
2-open an account with your regular broker, that charges regular interest........
3-now, with your regular account open a long position with the gbp/jpy pair or any other interest positive so you collect interest everyday and triple interest on wednesdays....
4-with your interest free account place a hedge/opposite trade on the gbp/jpy........
5- be careful not to over leverage yourself, so you have enough time to switch money around if your margin gets a little high on one of the accounts......
6-enjoy making free money!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
UQ
Response:
Q
Before you venture into this method, even though the numbers seems attractive, there are several things you need to consider:
1) Used margin = money used for position collateral at an interest-paying broker like O.a.n.d.a, or even I.n.t.e.r.b.a.n.k.F.X or any other broker with same positive rate of overnight rollover interest rate. Say $200, like the website says, with a 1-2% of overnight rate paid to us.
2) Hedge margin = money used for hedging at a non-interest broker like F.X.C.M & M.a.r.k.e.t.i.v.a. This is used to keep your money from disappearing when the market goes against your position.
3) Buffer margin = remaining money used to hold interest-paying position from getting stopped out when the market goes way far against us, more than th used margin would allow.
4) Interest rate on leverage. From ElectricSavant's spreadsheet, best is to long AUDJPY at 1:50 which equals to 250% per annum of collateral margin without being compounded back. Yes, 250% wow!!!
The scenario:
- in order to profit from the interest, you need the interest-paying position to be active at ALL TIME, even though the trade goes against us in pip.
- the best condition is when the hedge account blows up in the end (yes, zeroed!), as we have the market going our way along with the interest rate, all in the same account. this way we save the hassle of wiring the money back
- the worst condition is when market goes to the hedged direction, especially before we get the chance to pile up on interest. That account gets fatter on pip differential, while the interest account drowns quickly (slowed by interest). In this scenario, we need to pump more money before it gets stopped out and stops the interest from flowing. Remember, pip move go faster than interest.
- Let's do some math. If, for example, our interest position is long EURUSD and EURUSD dived 2000 pips like in 2005 (1.38 to 1.18), our $200 collateral in interest account would've gotten a margin call - unless we have more money than the collateral still available. How much? Well suppose on 1:50 leverage, 1 pip = $1, $200 can only sustain a 150-pip negative swing. U need to stock up for the 1850-pip remaining.
$200 on 1:50 lev = $10K position (roughly) at $1/pip = -150 pips before a 25% remaining margin call. If we were to sustain a 2000 pip drop this year (or may study from annual movement range statistics), we need to supply $2500 more in the interest account.
OK. Now pay attention.
$200 for interest collateral (O.a.n.d.a/ I.n.t.e.r.b.a.n.k.F.X /etc.)
$200 for non-interest hedge account (F.X.C.M/M.a.r.k.e.t.i.v.a/etc.)
$2600 for interest account margin buffer (or for non-interest account, incase market goes the other way)
$40 x 2 account withdrawal fee = $80 (fixed cost), may be more if we need to juggle margin by transferring between account but provide less margin buffer - dont forget time needed for wiring money! It needs to get there in time before position gets liquidated by broker.
$200+$200+$2500+$80 = $3000
250% of $200 = $500
$500/$3000 * 100% = 16% roughly ... where did that 250% pa go?
- another scenario, where we reinvest everyday to increase the interest riding position like in the website. Well, you'll need to hedge the same amount to your non-interest position as well. So, you may appear to have more money, but unfortunately, u need to provide the same amount to hedge it with.
I'm not saying that it doesn't work. It does, and it should. But it's really not as attractive as you think and you need to juggle the margin manually. Perhaps better for conservative fund management growth rate or banking in the fixed income sector (25% or less annually), but not attractive for small capitals who looks for 50% or more per quarter.
However, the good side: you cant lose. Just think of the broker as another banking facility.
UQ
). I would never use funds because of the extra costs you have to pay, and more money is needed to fulfill your cash needs. You can easily opt for government bonds and just buy and hold them and make a basket of different maturities. Although to keep the price risk low I wouldn't take real long terms. But if it generates enough cash it might be worth it. Keep enough cash money for flexibility/opportunities. Spread among Real estate, Stock, Fixed Income, Cash.