Saturday, May 17, 2014

Week in Review: 12th May 2014 to 18th May 2014

Got out at breakeven this week. Lost a trade and then won a trade that cancelled the loss. 

TRADES

GBPCAD

My live call on the GBPCAD didn't work. I went long on the formation of this large pinbar, but price didn't move up that much after I entered. Got stopped out on the third day of the trade.


USDCHF

Saw a low volatility candle on Thursday morning and went long on the break of the candle's high. I didn't know how high it would go so I stuck with my Hermes trading system's rules and took profit at 0.5R. 


Price also came within 0.2 pips of triggering my short on the same day. Thankfully it didn't, as I would've lost that trade. 

MY VERY FIRST CARRY TRADE

(warning: maths heavy)

This is probably the most important trade for this week. I opened my first long-term position trade on the USDHKD. The USDHKD has been hovering very close to 7.75000, which is a support level traditionally defended by the Hong Kong central bank (the HKD is pegged to the USD, and the lower band of this peg is 7.7500). You can find more info on the USDHKD peg here or here.

The anatomy of my trade is below (click to enlarge).


My reward is about 2.25R. Since I set my stop loss below 7.75000, there's very little chance of it being taken out. From what I read, the HK central bank is more than willing to continue the peg.

As icing on the cake, long positions on the USDHKD receive positive carry, so this qualifies as a medium to long-term carry trade. My broker currently offers a positive overnight swap of HK$2.10 per HK$100,000 (or 1 lot). 


Making HK$2.10 per day doesn't seem alot. Over a year, that's HK$766.5, or a meagre 0.76% return on HK$100,000. That's a pathetic return, wouldn't you say?

If you add leverage into the equation, it changes. I'll give my own trade as an example. 

In this case, I bought 7 lots, (HK$700,000), using leverage with a part of my account as margin. I placed my stop loss so my equity at risk is only $450. With 7 lots, I'd receive HK$2.10 * 7 = HK$14.70 per day, which would convert to around $1.90 per day. 

Over a year ($1.90 * 365), I'd earn $692 in interest just from risking $450. That's a return in excess of 150%. It would take about 236 days before I earn enough interest to cover the $450 risk, after which the carry trade becomes nearly risk-free.

SYSTEM DEVELOPMENT

Some very good news in this area. I did some analysis on my double-top / double-bottom data and filtered trades by weekday. For some reason, signals on Monday performed really well. I did more backtesting and have gone through about seven currency pairs. Sample size is 642.

This is the equity curve using $10,000 initial balance, 2% risk per trade, reward-to-risk 3:1.


This is looking very good, although the drawdown in the last few years is of some concern. Will post further updates if I find anything interesting. 

3 comments:

  1. i am amazed !!!

    ReplyDelete
  2. Hello Kevin.
    I like all ideas about trading ( very similar to mine) but I have not seen you mentioned famous book called Day Trading with Short Term Price Patterns and Opening Range Breakout by Toby Crabel. He described very well lots of ideas about Contraction ( low volatility) and tested them in book.

    ReplyDelete
    Replies
    1. Hey, thanks for the tip on the book. I tried looking it up on ebay and other bookstores, but that book seems really rare. Ebay is selling a copy at $4,000! Secondhand copies are selling for $500 on Amazon. That's ridiculously expensive. But it's good to see that other traders have noticed this pattern. :)

      Delete

Note: Only a member of this blog may post a comment.