Carry Trade : Simple

[GazFx]

There is not much talk about Carry Trade strategies, which is a bit sad given the potential that carry trading offers. So I thought I would share this journal with Earn Forex members to provide some insight and encouragement.

To get the ball rolling I will be looking for an opportunity in the USDCNH this week. That is, I am looking to go short to take advantage of the positive 120 point short swap rate in this pair.

Note that I use the weekly time frame to determine the long-term trend, and note also the clear downside breakout over the past two weeks.

In the daily chart above note how price action touched and bounced away from the upper moving average. I will wait for price action to break below the lower moving average before I will consider making a trade entry.

As mentioned above, there is currently a 120 points short swap rate on offer, or around $12 per day in interest earnings on a Standard lot. My objective is to enter and hold for as long as possible in order to maximise interest earnings, but I will also need to manage the trade along the way and be ready to exit if price action moves against my position.

Subscribe to this thread and follow my management style and progress should this trade eventuate.

 

[GazFx]

UPDATE: While I wait for activity in the USDCNH to materialise, I thought that I would share results to date in a few other pairs in which I am holding positions:

Remember, my main focus is earning rollover interest as shown under the "Swap" column. Interest earned is paid on a daily basis into my account, and can be withdrawn at anytime without the need to close-out a trade position. Interest earnings are low at present, but as account funds increase, along with trade position size, so will my interest earnings. The objective is to grow these earnings to the point where I am able to withdraw a weekly income without touching my capital.

In the meantime, of the four positions open, three are in profit, and two are in profit lock. Note the stop-loss prices for the USDMXN and USDZAR against the open order prices. I simply cannot lose on these two positions, which means I can sit back and allow interest earnings to flow in. With the USDRUB and USDTRY positions I am not yet in profit lock, so will need to monitor these until the opportunity arises for profit lock stop-loss placement. This is a primary strategy objective.

If prices continue to move in my favour, I will adjust stop-loss orders accordingly so as to lock-in additional capital gains, but not move them so close as to potentially trigger a stop-loss prematurely...it's the interest earnings I want, remember? Stay tuned!

 

[Enivid]

This strategy works for as long as the low-yield currency (USD in your case) depreciates. A rally in USD will quickly kill your trades. I am not saying that carry trade does not work (in fact, I use it too) - I just want to let traders know that it is not all roses. The risk is huge here while the potential gain is very slow.

 

[GazFx]

This strategy works for as long as the low-yield currency (USD in your case) depreciates. A rally in USD will quickly kill your trades. I am not saying that carry trade does not work (in fact, I use it too) - I just want to let traders know that it is not all roses. The risk is huge here while the potential gain is very slow.

Yes, of course, so good stop-loss management is a must. One point worth noting, Enivid, is use of the equity accumulated within an open position. For example, once profit-lock is achieved, a portion of the unrealised capital gain is used to re-invest (hence greater interest earnings) with the stop-loss plus a net profit absorbed by the accumulated capital gain. Interest earnings can be increased whilst zero risk is maintained for that particularly position.

 

[Enivid]

once profit-lock is achieved

It should be noted that achieving that is not a trivial task. It is akin to making a profitable trade in a pair.

 

[GazFx]

It should be noted that achieving that is not a trivial task. It is akin to making a profitable trade in a pair.

I do not suggest that this is a trivial task. Of course it is akin to making a profitable trade. Entry timing is just as critical with Carry Trade, as is capital protection. Nothing changes in this respect. The main difference here is the simplicity of the strategy once profit lock (or breakeven) is achieved. Firstly, the position becomes risk-free, and secondly, there is no "hand wringing" regarding the best time to exit. If your stop is hit, you're out. If price moves in your favour, you adjust the stop. Your mind is stress-free, and free to focus on other things!

 

[GazFx]

UPDATE: Still awaiting USDCNH action. Have added GBPTRY to my watch list for potential short. Latest on existing positions:

Added to USDMXN using equity from initial position. Equity can absorb stops on both positions and still yield a profit if hit. USDMXN is risk free, as is USDZAR position. Still waiting for opportunity to set stops for USDRUB and USDTRY. In the meantime I will close these two positions if my stops in USDMXN and/or USDZAR are hit, allowing equity here to absorb potential loss in USDRUB and USDTRY. Have earned $12.54 interest to date.

The GBPTRY may be in the process of reversing and offering a short Carry Trade. I will use the daily/H4 time frames to time any potential entry opportunity:

 

[GazFx]

UPDATE: Sell-Stop triggered in USDCNH. USDZAR position stopped out. Latest on existing positions:

Total interest earnings of $18.55 to date. My USDZAR trade is an example of setting the stop-loss a little too close to the price action, resulting in premature close out. Prices have since turned around and continue downwards. Only $3.37 interest earned, but a $148 capital gain. Perhaps a re-entry opportunity will present itself later this week!

Sell-Stop triggered in USDCNH as planned. Sadly, just as the entry is made, my broker has dropped the short swap rate to zero...not happy! Will wait and see what happens as the day unfolds.

 

[GazFx]

UPDATE: Stop-Loss triggered on USDTRY for $151.08 capital loss. MXNJPY Buy-Stop entered. USDCNH still zero sell swap interest.

Total interest of $25.96 to date. My USDTRY trade is an example of a protective stop-loss being triggered, sadly resulting in a $151.08 capital loss, but happily protecting my account from decline. Capital is up $6.81 on closed positions since 2 June 2017, or 6.81% in 6 days (414% annualised). Equity gains in my USDMXN positions provide a good buffer against negative price action in the USDMXN, USDCNH, and USDRUB should this occur.

The USDMXN seems to be shaping nicely as a long-term Carry Trade. Here's a summary from Trading Economics:

"The Mexican economy expanded 0.7 percent on quarter in the first three months of 2017, higher than 0.6 percent in the preliminary estimate and the same as in the previous period. Agriculture and industry expanded more than expected, final figures showed. Yet, the Mexican economy’s fundamentals look stronger than anticipated after an initial shock triggered by the US presidential election sent investment and consumer sentiment to record-low levels in January, worsening the growth outlook. However, investment has been hurt by uncertainty surrounding US and Mexico relations and industrial output remains subdued. GDP Growth Rate in Mexico averaged 0.65 percent from 1993 until 2017, reaching an all time high of 2.80 percent in the fourth quarter of 1996 and a record low of -6.20 percent in the first quarter of 1995.

There seems to be a real possibility of building a sizeable position over the long-haul that offers both interest earnings and capital appreciation opportunities. This has prompted me to open a Buy-Stop in the MXNJPY pair, and I will be looking to add to my USDMXN position as opportunities present. See weekly MXNJPY chart below:

 

[GazFx]

Correction: Capital is up $6.81 on closed positions since 2 June 2017, or .681% in 6 days (41.4% annualised). Fat fingers syndrome, sorry!

 

[GazFx]

UPDATE: Closed out USDRUB to await better entry point. MXNJPY position opened. USDMXN positions holding up well.

Total interest of $28.38 to date. Small $15.73 capital loss on USDRUB close out, but necessary as expectation is for a temporary above upper moving average on the weekly chart before downtrend continues (see chart). Will wait for price to break below support before re-entering.

Overall, I am pretty happy with results this week. Despite two capital losses, equity is up around 40% and interest earnings are beginning to accrue. The main disappointment is USDCNH swap returns (or lack of), and the very modest swap on the MXNJPY position. Pity brokers don't pass-on more of the interest rate differential, but that's life!

 

[GazFx]

UPDATE: Weekly close 10 June 2017.

Total interest of $30.80 to date...3.08% return on deposit / 140.52% annualised. Account equity $1,489.36...48.9% return on deposit / 2,231% annualised. Again, the focus is on interest earnings, and as demonstrated by my closed positions above, I am willing to sacrifice some equity gains in order to get correctly positioned. Hence, whilst equity growth looks impressive it is likely to fluctuate as trading and positioning progresses.

My USDMXN position is the star performer to date. Equity accumulated here has provided a good buffer against negative outcomes whilst locking-in capital gains, and as such, I am currently trading 100% risk free...open equity well exceeds stop losses. See the USDMXN-H4 below for example:

 

[GazFx]

This week my focus turns to GBPTRY as a potential carry trade candidate. As shown in the weekly chart below, a potential reversal in the price trend may be forming, representing an opportunity to take advantage of the short swap rate currently at 103.94 points.

The underlying fundamentals appear to support a short swap carry trade. Here's what Trading Economics says:

"The Gross Domestic Product in Turkey expanded 3.80 percent quarter-on-quarter in the last three months of 2016, recovering from a 2.1 percent contraction in the previous period. GDP Growth Rate in Turkey averaged 1.10 percent from 1998 until 2016, reaching an all time high of 5.60 percent in the first quarter of 2002 and a record low of -5.40 percent in the first quarter of 2009. Turkey is classified as an emerging market economy. The country is one of the world's biggest producers of agricultural products; textiles; motor vehicles, ships and other transportation equipment; construction materials; consumer electronics and home appliances."

The Turkish economy appears set for further growth in terns of GDP, monthly wages, and employment growth. Hence, there is potential for inflation to rise further, prompting higher official interest rates. The regional political scene is the great unknown and will need to be monitored accordingly. Stay tuned!

 

[GazFx]

UPDATE: Opened position in GBPTRY. Still no swap interest on USDCNH.

Total interest of $37.13 to date...3.71% return on deposit, or 112.9% annualised. USDCNH stop loss set at 6.83643 or around $30 loss if triggered...would prefer a close out opportunity should price fall below entry, or hold if swap interest paid. GBPTRY entry triggered by downside breakout on the weekly chart:

 

[GazFx]

UPDATE: All steady!

Total interest of $43.45 to date. Charts below show open positions:

 

[GazFx]

UPDATE: Added to USDMXN position. Adjusted stop loss settings.

Total interest of $66.05 to date...6.6% return on deposit or 172% annualised.

 

[GazFx]

UPDATE: Volatility takes half my capital gain!

"Hence, whilst equity growth looks impressive it is likely to fluctuate as trading and positioning progresses." my quote from last Saturday's post!​

Total interest of $73.54 to date...7.3% return on deposit or 177% annualised.

Equity fell $388 since this time yesterday. This is possibly due to the US interest rate hike, although this had already been well and truly priced into the market, so it could be merely uninformed speculation. In any event, this is precisely the reason why stop loss settings need to be close enough to the price action to protect open profits, but not so close as to trigger prematurely. I believe this is also the exact situation that Enivid refered to earlier in this thread (US dollar rally). My account has survived, and open trade equity is back-up to $502 as I type.

What's my worst case scenario? Add together the value of each stop-loss (GBPJPY -$259.97 / MXNJPY -$2.27 / USDCNH -$29.81 / USDMXN +$327.65 pos 1 / USDMXN +$96.94 pos 2 / USDMXN -$181.90) and the result is -$49.36 if my stop-losses are hit. Add to this the +$73.54 in positive swap fees received, and the result is +$24.18 net gain. I've earned 2.4% on my $1,000 deposit in 15-days, which is 58.8% annualised. This is my current worst case scenario.

In my part of the world (Australia) we have 3-month term deposits paying around 2.5%-2.6% per annum, so a gain of 58.8% will take more than 20-years to achieve. The real advantage of carry trading that I want to emphasise is its interest earnings potential compared to traditional methods. And whilst there is certainly an initial risk when entering a position for the first time, strategic use of money management, and in particular stop loss settings, can enable you to completely eliminate risk. Right now it makes no difference to me which way prices move because I am guaranteed a net return on my capital. If prices drift sideways I am completely happy because I am collecting positive swap fees everyday. If prices move in my favour...even happier!

 

[GazFx]

UPDATE: Weekly close 17 June 2017. Closed out USDCNH. Adjusted stop-loss settings. Recouped capital gain.

Total interest of $81.16 to date...8.11% return on deposit / 185% annualised. Account equity $1,828.39...82.8% return on deposit / 1,888% annualised.
Closed out USDCNH at $25.12 loss as broker short swap has switched to negative. Capital gains have been almost fully recouped from the previous trading session...happy!

 

[GazFx]

UPDATE: MXNJPY in profit lock. GBPTRY volatility.

Total interest of $88.77 to date...8.77% return on deposit...168% annualised. The only real concern is GBPTRY volatility and the potential for this to trigger the stop-loss. See H4 chart below:

 

[GazFx]

UPDATE: USDMXN and MXNJPY hit stop-loss. Opened AUDSEK position.

Total interest of $101.39 to date...10.13% return on deposit...184% annualised. USDMXN has closed out for net interest of $44.87 plus $359.13 capital gain. There is a good opportunity to re-enter short should price break through support (see chart below). The MXNJPY position also closed out for net interest of $0.80 plus $10.05 capital gain, which is a less than spectacular result, but still a positive gain. An opportunity presented itself to enter a long position in the AUDSEK pair during yesterday's trading session, and as shown in the Open Trades report, it has potential to deliver good swap returns (see chart below).