I am just runnign forex notes here at the moment because I have had to accept the model I have been working off that I was so confident in, has not delivered.
I accept this is mainly because I took some massive deviations when presented with challenges, and I was haphazard with my hedging being that I was inexperienced and was still testing my ideas in a challenging live environment.
What have I learnt?
You have to be dispassionate about the market and how your system tackles the inherent uncertainty. You are foolish to not read the news, but you are equally foolish to believe it.
When the Euro dived off what I thought was the map, I was so afraid it would continue to dive that I hedged recklessly, despite knowing that generally the harder the spike, the harder the bounce – however in a spike, you never know where you are on that curve.
My belief that the euro would resume falling was informed by the certainty of the news, and yet, it rose to just about the edge of what I perceived it could realistically bounce too after reading doom and gloom.
I did not think that 3 months later I would have spent weeks and weeks above 1.10. That was not the outcome I was expecting. And yet even if I had played it differently, it only means I would have caught maybe a grand or two profit as it withdrew – marginally better off albeit, I’d still be where I am.
When I began increasing my margins, I bought a lot of australian, especially vs the pound and euro, and those positions got destroyed. Just the AUDGBP alone has cost me thousands – huge reckless position placed only 6 weeks ago are costing me $140 each, they are 4% away now, huge mistakes. These are the testaments to our mistakes now, again we believed the resistance would hold, but when it broke, it fell apart completely.
But what about the numbers? What have we learned here?
We’ve learned that as a margin spreads out and ranges push them further apart, the deficit really grows. We were pushing out new ranges, and seeing new possibilities for worst case debt projections.
Our initial projection was to have 600k on the board and never run more than $60k debt. Now it’s over twice that, but so much of it is hedged, so I assumed I could build up from that base of hedged debt.
But it wasn’t perfectly hedged. I binged on the US dollar when I was in trouble and desperately needed to hedge but then over the course of a couple of months the reversal began and the tide went out on me, and my USD pairs became wedged precariously at a point where they would not fall but hung dangerously on the edge.
Although it’s the falls in the NZD that I have counted in again and again, I think we have to see the AUDGBP disaster as the latest chapter of the process of having my range pushed out again, requiring again more margin to fill out to get the same result, and of course always carrying and extra few grand of debt than I could have expected, however, each time we push out the range, it becomes much less likely it will happen again. It will happen again, but it’s less likely to be sooner, and we may be better prepared to absorb it.
At some point we must get past $15k, at which point we will try to add $100 margin – $50k – with every $1k of equity we add so that we’re somewhere around $3500k
But every $50k probably carries the potential for $3k+ loss even when hedged properly, or $5k+ if the hedges slide to the edge. On my journey to $3500 margin, I could easily find myself flirting with $105k debt. Yet it would clearly take weeks, and this is the move to $2k. Could I make $15k before positions swing 5%? Since it would take weeks to build up an extra $500 margin, and weeks to collapse $10k of equity with decent hedges, we’d have to assume it was possible, and that equally, getting to $25k equity would allow for us to add yet another $500 margin.
at this point we’ve added another $50k to our boards on each side of each pair. $100k to the full spread.
4 out of 6 of them are already under $200k, 2 of them are under $150k, but that margin will still be spread out over a smaller area than the current one is. and placed with more care, and so a doubling, to $1400 – $3400 will happen, and then a tripling, $2100 – $5100 and that’s where we want to be by early next year.
It’s just so hard to project what it will be like until we get out in the clear again, and that’s when we’re solidly touching near $14k equity again.
Here is a breakdown of the pairs and where I see the strategy consolidating.
AUD/EUR: 80 vs 49 – we could push to 75k a piece, but we want to keep the euro side down, the carry is a shocker. So it’s more like 75/65
AUD/GBP: 102 vs 12 – same set up I would say as above, but favour the australian even harder – I don’t think it has as much room to run as the EUR pair.
AUD/USD: 90 vs 87 – so we’re holding the 90 balance hoping we can clear out the australian side and roll the $120k back so we can settle it closer to 79 rather tahn 76.5 where it balances now, but like the euro, it depends on what the aussies does once the US gets stuck in, for theres little chance of it going above and staying above 80 to last long term.
EUR/GBP: 115 vs 40- 100 balance. Having successfully dug out the hedge at this point we are looking to fall back and set things up, we can lean in and se we head out. Good model here.
EUR/USD 155 vs 237 – as described, the euro will be at $200k by 1.05 or 1.15, ready to defend, this is the art of hedging.
GBP/USD: 73 vs 147 – i believe when and if the USD comes back we will do well and this really is about keeping the balance we can do 110, we can do 120. we’re at 1.57 now, between 1.47 and 1.64.
We will now have $15k to add to each pair but where will that go down? I’m not confident on anything really right now, I least confident in AUD and NZD but they have the best carry by far and so it evens out. Euro still has the worst carry and much uncertainty. So I favour hedging first.
It comes down to the model.
If having a $2500 margin spread can get you into $80k+ worth of debt, then a $5k spread, you have to be ready for $150k debt, ready for another $60k debt to carry, so even at $2k a week, that’s 30 weeks before you can take that kind of risk BUT it suggests you run the whole spread, when in reality, those places where the euro is high and the aud is high and the usd is low, well, we’re not going back there. It’s more like $30k debt to carry, because we won’t be carry it all across the range.
Another setback. Each of these recent setbacks are just making the hope of clambering ahead to a better position further and further away.
The situation with a number of pairs is that if I continue to be pushed I will have to return to full hedge, which means effectively choosing which side it will swing, and now, having a hard hedge up against it.
More hedging means more money down. More money down means higher carry trade. Risk is bubbling up and I need to ask questions about where the real dangers present themselves to me.
40 AUD/EUR: 87vs 47 – I still don’t want to hedge this. It’s rotten carry. If we support the euro, add to gbp as well.
77 AUD/GBP: 109 vs 32 – On the edge and causing me big problems, I will have to build the hedge while hoping it backs off sooner rather than later.
71 AUD/USD:102 vs 31 – so now we’re on the edge, we have the hard decisions to make, but we know which direction its tipped to take so we must hedge to protect ourselves. Time for bigger numbers
77 EUR/GBP: 114 vs 37 – leave room for the euro jump, then stack it in for the dip buy.
68 EUR/USD 163 vs 231 – here you can see already we are forced to hedge to heed off uncertainty. When you reach a risky equity level, you must protect it.
In fact it becomes indicative – what if EUR jumps to 1.14+, I have to hedge in, jumping above $200k, then i get caught, and it starts heading down? I have to go to $300k on the US side, then it turns again, but the money is closer this time so it’s not so dangerous, but I’m sitting there with $500k on one pair – only $100k more. that’s $200 margin.
We still have to be careful and run a line from 1.11 because with the euro it is important we get out.
But the gap means it’s less of a risk and in itself counters the EUR/GBP they both have a 75k gap.
52 GBP/USD: 92 vs 144 – This is a critical pair because when the US begins rising, we want to see gains, we want to see our unhedged gaps tip back. this is one we’re waiting for, but it is also tipped to really drop long term, so there will be times where the US will go back to how we’ve seen it, huge hedging moves.
Now I can see that 3 of my 6 pairs are on the edge, no wonder I am feeling under so much pressure.
But also I’m seeing how in the last 2-3 weeks I’ve taken on the hedges or big positions that were poorly placed on AUD/USD. EUR/GBP, and the far side of GBP/USD, we are waiting for all those pairs to come back, and other than the last one, they just might not,
The pound rolling over the aussie has caused me a lot of pain, as it has jumped 6c without me really being able to hold onto any big gains the other way. I believed I had the depth to soak up a winding down of exposure on the british side, and I got stung badly.
WHAT WILL HAPPEN?
The euro will continue to drop, the USD will continue to rise in the longer term. At the moment the GBP is stronger and the Aussie the weaker, sometimes even weaker than the euro, but over the months, as we’ve seen, the euro will get weaker and fall into definite last, and then the australian will catch up and overhaul the
We don’t want euros. expensive and going down. We can’t really risk aussie now, but when the signs are there, go in. We can’t really risk GBP, we buy the dips but we’re held here in position. With USD, we can’t buy unless we see the move.
So when euro drops we make money on the usd, but the euro holds against the gbp, and the gbp goes down against the USD, and the Aud has already sold off against the USD, so it hold against the gbp, or even gains some, and teh aud gains against the euro.
But we can’t buy any of this because the USD isn’t rising, the gbp isn’t falling, the aud is still falling and the euro is definitely refusing to budge thats where the problems has been.