Archive for August, 2015

Investment Contingency

Sunday, August 9th, 2015

Now that I’m safe again, my attention turns from worst case scenario contingencies back to how things could work to get me to the next stage, that is getting my equity higher so I can borrow more, so that should that borrowing quickly become unprofitable, I am not putting my equity in danger should it backfire.

More equity means I can borrow more to put on the table, which means I can earn more.

It seems by making strategic trades, this is the safest way to expand my exposure for greater risk reward, rather than simply heaving into the market. Choose positions that are going to be prudent.

The aussie was being hammered, which meant we knew it would spike up on the retracement, it just took weeks for that retracement to appear. It was less prudent to assume the trend would continue. When you have room to invest more, you can buy positions on the opposite side of a spike, ready for the retracement, however far the spike may be going – even weeks. Buying on the dip of course is the strategy for the otherside.

Trades that build the hedge are less risky than trades that unbalance the hedge.

I just wanted to talk about trading contingencies as I am still in a patch of doubt considering how all my trading work could come undone if I’m not careful. It has been a long few weeks but I am back in the safe zone

You always need a contingency – I was working out how much money I would need to cover my ass in a worst case scenario. How much room would we have to make?

USD/AUD: +3k

This makes it obvious that my big problem is the collapse of the AUD, and my estimations are that I only need another $7k to cover my ass in a worst case scenario there.

My belief is they will run out of crises

What we are lucky for is that all the extreme movement is being accounted for now while I can still afford to cover my ass. If this was happening on a $500k account with only $40k equity I couldn’t rustle up $20k+ to insure we could stay alive for a couple more months. But $20k suddenly isn’t that much.

But honestly when you reach $500k will you be $400k in debt? This is what it seems.

But I am hoping in future the swings will settle into a smaller range it occupies for a number of months and spreading larger amounts over a smaller range will create more pronounced results as well as covering the same range and thus recycling positions rather than ever breaking a new range high that would see the bigger new positions stretched to ever higher lengths.

In fact the opposite is likely – when we finally have enough equity we can wind down hedges properly as we originally traded.

So in fact most new positions that are widening out are going be placed on top of reversals. This suggests new margin growth will be part of extending the hedge play, yet it will bring in better capital growth returns eventually, and equity is rising as it reverses over that territory.

We are working at a formula now of 6.66% of the full leverage becoming debt eventually. Which given that leverage is .2% does that suggest every dollar of margin creates $33 of debt?

Well the maths is $29 right now, but that could easily be $33 with a bad run. So when you add another $100 worth of margin you are signing up for a posssible $3000 more debt long term. 30 x you have to make that $1 back before it’s worth it. The thing is in various parts we are starting to get our 30 swings in.

so from that you could say that each $3000 of equity spare allows for another $100. But we know that could go wrong.

I think we have a safe plan, advancing $100 margin with each $1000 equity, but that until we get to $20k equity and that is based on < $100k hedge spreads. Once we reach $30k equity we will be playing $4600 margin and $150k hedge spreads, I hope that would see us profit $2k-6k on most trades with an average of say $3k. So I could add the money in 3 months and simply jump there but I think we want to see more. Most of our pairs havent even reached $150k except for EURUSD And GBPUSD gave it a tickle. Breaking down the megahedges is what this is all about. Taking the pain, and then the ultimate windback. We can wait for the risks worth taking because that is when we will call on our back up, if that fails. That money is to build hedgfes, but only where it's likely they will pay out - not on the euro, though we can lift the paranoia on the euro soon. AUDGBP is a starter but not GBPEUR yet, we must wait. USDAUD also must be cautious as we must be sure this retracement has ended, whereas long term the GBPUSD is the least certain pair - though balanced, we can't weigh in yet. AUDGBP is the only candidate for adding to the margin in order to build the hedge and even then only as a secondary defence to a counter hedge! I think we must continue strategically as we have, feeling for swing highs, and putting in these road blocks like I've described so that we get a good squirt of profit and it all helps chip away - yes, the swing can lead us to turn around and carry $100+ debt but that's great considering these guys will knockout $10 $20 hits regularly in exchange, and the $1000 position on the far side of the game is already costing me $200+ and it hasn't ever profited me nothing. I can ride a $100 stone in my shoe for a week or more. The point is as we're laying on new margin we're saying the EURUSD is at 1.09, is it going back to 1.29, or even .89? No. no time soon in the next 12 months. is GBPAUD going back to 1.86 from 2.09 or even above $2.20? I very much doubt it. The big moves we've experienced may not happen to us on the edge again for some time. A diving action over week such as these may happen the opposite direction this time - a sinking GBP, a rising AUD releasing equity rather than chewing it up, and placing us deeper in the middle where we are so distant from the biggest danger 73 EUR/USD 160 vs 233 - delving into the parity dive, holding both levels as equally as we can going down. 55 AUD/EUR: 95 vs 40 - careful of the sheer drop here - I looking out for which pairs could in the future be ones to go off the deep end. 43 AUD/GBP: 109 vs 66 - hard times call for bigger hedges and that is where we have gone, recognising we are ready to go all the way out to 150, but we must keep the hedges in check and in line with the price movement. 43 GBP/USD: 94 vs 137 - Lower on both sides! Nice work. With EUR/AUD which is the fight for the bottom, this represents the fight for the top, and is therefore also uncertain, although USD strength 31 AUD/USD:105 vs 74 - We are hedged further in again. The big hedge is not just protection, it's standing opportune here for the australian to go as low as 71 before seeing a correction. The lucky thing about the AUD sides is we still have more room there to work with on the other side. But when the .735 level breaks we have to ramp right up to perhaps 80k so we need some $10k positions in there. 10 EUR/GBP: 101 vs 111 - this surge we actually played pretty well, we are tipping this can't run more than a few more cents but we have been wrong, wait for the reversal, still room on the other side. You can see the larger hedge positions and smaller hedge gaps indicate how unprepared I was with $75k gaps - not only was a caught short and put against the wall, but I also missed the opportunity to ride big hedges to a mighty result. Now I believe even $100k gaps can be too dangerous for now. I was thinking about my investments. WIth the turkish, I figured you could make $600 p/week off $100k, but with a normal investment, you'd need to have $500k+ to make $600 p/week. That's the base case, $1200, but what if you went riskier and went $200k into a turkish investment and then $400 setting me up for the basic figure of $1500 p/week. My trading covers my asset funding. What am I doing with that $800 extra, whether it exists or not, what is the aspiration? I can't see myself buying third and fourth properties within 2 years at the very soonest, and we would be hoping to be holding $400k in my trading investments by then. That should be enoughto be earning $3k-$7k.At this point it doesn't really matter how much I acquire, it's really what I can prove I earn. I'll get the money I need to buy what I like. You can buy a car, but after that it doesn't really matter, it costs money in lots of little ways to travel. After that, I don't really know. I have a regular safe income, and I have my work to a lesser extent, but both of these are removed when I sell my business and buy houses. What I see is that until you sell the business and buy houses, you are accumulating what you earn from the business and the returns on safe investments to back up the plans that may not be covered if the various personal investments and trading I do cannot provide a significant pool to dip from. When I buy 2 houses I will no longer get a regular payment from a secure investment, but I will no longer pay rent. In that case I will - given 18 months - have split my investment income into my regular trading and the more reliable and less risky turkish trades. The turkish replaces my secure investments. And I don't pay rent when I'm in the country. So I go from $1400 + work + trading - $800 = $1100 + trading $1000 + trading - $500 = $500 + trading $600 + trading - $300 = $300 + trading + capital gain ($500) + rental I will have enough money to support myself. When I don't have any safe investment returns because I bought a villa and an apartment, I can still take a payment of $600 from my turkish investments, paying for my food, gas and bills primarily off my broker issued credit card. I can still work obviously, and then of course there is my trading, for which there really is no specific