Chemical engineer

Air and water pollution control., HTML programming, GNU Linux.

Saturday, 10 February 2018

Hedging strategy for long term Forex approach


Strategy type:
    Long term, between one week and one month period.
    USD/CAD (it could be applied to any other pair)
Leverage used:
Home currency:
Account size:
    10 000 USD

Conditions for the strategy:
    As a money management the strategy has to work using no more than 20% of the margin account(this looks low at some point but it will prevent from many frustrations from the beginning). With account size of 10 000USD and 50 leverage this means operational amount will be 500 000 USD. This strategy do not use stop losses. 

As per Oanda and Canada margin usage for this pair is 2.2% of the account so for every unit is calculated by:

10 000 units x USD/USD(1)*margin(2.2%) = 10 000x2.2% = 220USD which  is contrary to the normal 10 000/50 = 200 USD.

In order to keep the rule to use only 20% of our margin that means we can operate with up to 2 000 USD(un-leveraged) or 90 909 units out of 500 000.

How the strategy is supposed to work:

Imagine on February 01, 2015 we open long and short positions with 10 000 units each at this time the pair was 1.26. We also prepare long orders with 10 000 units on 1.27, 1.28, 1.29 and take it on 1.30. In addition we prepare shorts 10 000 on 1.25, 1.24, 1.23 and 1.22 and take profit on 1.21.

How is this unravel:

10 000 units long on 1.26
10 000 units short on 1.26

As we see from the history the pair was wondering around 1.26 for 4 months until April 14, 2015 then with sudden drop it reached 1.19. How much will be our profit in this case and our loss:

10 000 units short from 1.26 to 1.21 is 500 pips x 0.79(1 pip) = 395 USD
10 000 units short from 1.25 to 1.21 is 400 pips x 0.8 = 320 USD
10 000 units short from 1.24 to 1.21 is 300 pips x 0.806 = 241.8 USD
10 000 units short from 1.23 to 1.21 is 200 pips x 0.813 = 163.2 USD
10 000 units short from 1.22 to 1.21 is 100 pips x 0.819 = 81.9 USD

All together we will have 805 USD profit with 395 USD loss. Now I am assuming we will keep 395 long position paper loss and will take out only the profit which will result on May 14 to have 10805 USD account with one open position of -395 USD or margin use of 2.5% usage.

From this point we could start adding to the loosing position if we see opportunity or just wait to become profitable as this happened on July 21 where we’ve had:

10 000 units long from 1.26 to 1.30 is 400 pips x 0.79 = 316 USD
10 000 units long from 1.27 to 1.30 is 300 pips x 0.787 = 236.22 USD
10 000 units short from 1.28 to 1.30 is 200 pips x 0.7812 = 156.24 USD
10 000 units short from 1.29 to 1.30 is 100 pips x 0.775 = 77.5 USD

So far from the long position we accumulated 785 USD with the previous one 1 585 USD which consist of 10% of the initial investment. The money were made from February 01 to July 21 which is 171 days. In addition since Oanda charges for overnight prices:

For the short position from February 01 to May 14 I calculated 2472 hours which resulted in 100 USD fees. For the long position I calculated that 10000 units are held between February 01 and July 21 which is 4104 hours and resulted in -25.15 USD and for the rest between May 14 (when the trend turns) is 30 000 units which resulted in 1656 hours or 30.45USD

All together fees are 155 USD or total profit is 1585 - 155 = 1430 USD

We made 1430 USD out of 10 000 USD which is 14.30% in three months.

Margin usage during the period. During the period we have several open positions with all together 50 000 - 60 000 units.

60000 x 2.2% = 1200 USD 

Out of our 90 909 permissible units we are running only 60 000 or between 10 - 12 % of all the permissible margin of 20% .

Bad scenarios:

What could go bad with this scenario? For example if we have two short positions open and then the trend turns and goes upward to 1.30 in this case we will have two loosing positions which will be:

10 000 units short on 1.26 to 1.30 is 400 pips x 0.739 = - 317 USD
10 000 units short on 1.25 to 1.30 is 500 pips x 0.8 = - 400 USD

This will result in - 717 USD paper loss which could not be executed and can be sustained for long time since it represents only around 7% of your margin and you still have opportunity to exercise opportunities uptrend.

Worst case scenario:

Executing all the trades on one direction (long) without hitting the target 1.30 and returning on 1.26 then we will have around 900 USD paper loss which could be still handled. If we extend the bad scenarios we can assume that short positions on the same time are opened due to some reason and it goes to 1.22 and open all of the short positions and returns back to 1.26. This will result in nine open positions with estimated paper loss 1800 USD. How possible is this to happen?  

Saturday, 13 January 2018

Last week preditions and this week.

Last week USDCAD hit 1.257 which was enough for me to close but decided to leave it for now. Unfortunately it returned back to 1.246 in less than a day. Again prediction for next week is 1.26

Two other currencies provided significant gain in the second week of Jan. 2018 and now expectations are to drop significantly. Yes I am speaking about EUR and AUD. According to OANDAs heatmap

there is significant increase of the EUR against majors. The same with AUD.

Saturday, 6 January 2018

#FOREX Expectations USDCAD to return back.

Last week I opened several good Long positions on USDCAD pair which were hit by the ridiculous predictions for CAD and USD. The pair sink significantly from 1.28 to 1.23 in almost a day.

However, this week forecast is to return at least to 1.25. This could be seen from:

Its obvious that the long positions will prevail.

Another good currency is JPY which made significant drop last seven days and now is time for return against some of the weak currencies at the moment.

Saturday, 22 April 2017

ArcGIS fundamentals certificate.

Ok,... along with trading I decided to take fundamentals of ArcGIS... Well currently I am certified to work and have good base knowledge of this software.

Friday, 30 October 2015

New big changes in my life.

If everything is OK will post here. Keep your fingers crossed!!