Positive Carry

[trendie]

In context of currencies, what is positive carry, and can it be part of an edge?

Is there an equivalent for stocks, and indices?

(am back on gridding! )

thanks

EDIT: oh, and how do you which direction is the carry positive?
ie, if I were trading GBPUSD, do I make interest on the short, or the long?

 

[Hakuna Matata]

You earn interest on the ccy that you are long. You pay interest on the ccy that you are short.

Positive carry means that the interest you are earning on the long ccy more than covers the interest you are paying on the short ccy.

"As part of an edge" - Like anything, it's something you can speculate on (see Basis Trading). All other things being equal, whatever you make from the carry will be lost in the change in spot when you come to close (unless you trade the basis).

It's just like any asset with an income or cost of carry - stocks, bonds, commodities, real estate etc...


What is Griddint BTW?

 

[trendie]

Thanks for the overview, HM.

Griddin' is where you place trades every XX pips, and take profit, and reset the trade.

for example if you have a 100pip grid, you place trades every 100 pips.
As the TP is taken, you replace the closed trade with another trade.
Some people grid in one direction only, placing catastrophic SLs.
Some trade both directions.

General opinion is that they don't work. (the winning side grows linearly, the losing side grows at a greater rate)
Relies to a great degree in reversion to mean.

I have taken it upon myself to find a way to make them work!

 

[Hakuna Matata]

you've lost me... trade every 100 pips? which way? Is the order resting when you get there? And then reverse when it get's there?

an example would be great

 

[trendie]

you've lost me... trade every 100 pips? which way? Is the order resting when you get there? And then reverse when it get's there?

an example would be great

Here's the thread I started a while back.
Some good back and forth about grids, examples, opinions, etc.

http://www.trade2win.com/boards/risk-money-management/104252-grid-trading-does-work.html

 

[Hakuna Matata]

err, so after reading that thread, why would you want to do it?

It's just a martingale system with simultaneous long and short positions :/

 

[trendie]

err, so after reading that thread, why would you want to do it?

It's just a martingale system with simultaneous long and short positions :/

I enjoy puzzles.

Even if its a rubbish system, as you have described above, I want to see if, in principle, it can be done. ( I appreciate spreads, comms, overnight charges are draining factors)

 

[Hakuna Matata]

I enjoy puzzles.

Even if its a rubbish system, as you have described above, I want to see if, in principle, it can be done. ( I appreciate spreads, comms, overnight charges are draining factors)

A puzzle?

Puzzles have answers. For their to be an answer, you forst need to know what teh question is.

What question are you answering here?

 

[trendie]

A puzzle?

Puzzles have answers. For their to be an answer, you forst need to know what teh question is.

What question are you answering here?

Rolling back from the grid stuff, the initial question is whether positive carry can be used as a component in trading.
Whether holding onto a possibly losing position is worth the long haul.
Whether it can be seen as equivalent of dividends from stocks.

Stuff like that.
Interested to know if in longer term timeframes, it can be a factor in the bottom line.

 

[barryb]

Rolling back from the grid stuff, the initial question is whether positive carry can be used as a component in trading.
Whether holding onto a possibly losing position is worth the long haul.
Whether it can be seen as equivalent of dividends from stocks.

Stuff like that.
Interested to know if in longer term timeframes, it can be a factor in the bottom line.

The carry trade is what hedge funds have been using to "trade" the forex markets for decades, so yes it's a huge edge for some players. It's not impossible for the smaller guy to make use of either, although you need an environment better suited than ZIRP.

 

[Hakuna Matata]

It can also work in the retail space too - what do think all those Mrs Watanabe's were doing it for?

It's not just as simple as shorting a low yield and getting long a high yielding one though, because all expected income is factored in to the price - that's why the futures/fowards are different to spot.

 

[Martinghoul]

Carry is beautiful. I love me some of that nice juicy carry.

 

[Jason Rogers]

Rolling back from the grid stuff, the initial question is whether positive carry can be used as a component in trading.
Whether holding onto a possibly losing position is worth the long haul.
Whether it can be seen as equivalent of dividends from stocks.

Stuff like that.
Interested to know if in longer term timeframes, it can be a factor in the bottom line.

Hi Trendie,

Carry trading has traditionally been a popular long term strategy for hedge funds in the currency markets. This strategy has not been discussed as frequently over the past few years, because the global economic slowdown led major central banks to slash interest rates in hopes of stimulating the economy. Lower interest rates across the board make it harder to find interest rate differentials wide enough between the currency you are long and the currency you are short to make carry trading worthwhile.

Generally speaking, the carry you can earn on a daily basis is not enough to offset your losses if the exchange rate is moving against your trade. That means you wouldn't want to enter a trade solely to earn the carry. You need a reasonable expectation that the exchange rate will also move in favor of your trade, or that it will at least stay relatively unchanged.

One area of the forex market where carry trading is still a viable strategy is in the exotic currency pairs such as CHF/SEK where some wider interest rate differentials still exist. In a post I made last November I mentioned a potential long term carry trade in shorting CHF/SEK to target 6.9000 lows from last August. At the time a 100k short position earned about $2 in rollover interest per day, which on 10:1 leverage is about 7.3% per year.

Past performance is not necessarily indicative of future results.​

The short trade reached its target price in January of this year, so in addition to earning the rollover interest everyday, a short trade placed last November would also have profited from the drop in the CHF/SEK exchange rate.

Jason

 

[Martinghoul]

Carry has been alive and well over the past few years. And yes, short CHF vs pretty much anything else has been a magical carry trade. I have been short CHFSEK and CHFNOK for smth like 3 years now and it's a gift that keeps on giving (added some CHFNOK recently, in fact).

The important thing to realize is sort of what Jason has alluded to in his post. The problem with carry is that, in one way or another, you get paid the carry in exchange for taking on some potentially extreme mark-to-market risk. Therefore, like with all trades, one should be very careful and think carefully about the risks of every single individual trade.

 

[scose-no-doubt]

Borrow in one, buy another and you net +'ve from the IR differential is carry innit.

 

[Jason Rogers]

Article on MarketWatch today about the gloomy outlook for the carry trade: Why FX carry trades aren't performing - The Tell - MarketWatch