Currency Secrets

Synthetic positions allow forex traders to take advantage of currency pairs when the direct currency cross is NOT offered.

As an example, if you were trading on Oanda you’d notice that the NZD/JPY pair isn’t offered.

Why worry about the NZD/JPY? I hear you ask.

Oh, nothing much, just that Oanda pays long NZD positions 7% per year, and charges 0.32% on short JPY positions - and according to my calculations that’s a nice difference: just buy NZD and short JPY, only problem is NZD/JPY isn’t offered in Oanda.

So what do we do?

Here’s how…

(All interest rate charges and payments are taken from Oanda’s Interest Rate section)

Let’s first of all look a more popular carry trade example: GBP/JPY to illustrate what I’m talking about by the huge difference in interest rates between the NZD & JPY and taking advantage of this.

The GBPJPY cross is quite a popular currency as Oanda pays LONG GBP positions 4.35% per annum, and charges 0.32% per annum on Yen positions. If we were to go long the GBPJPY (which in effect is buying/investing Pounds and selling/borrowing Yen) then we’d receive interest on a daily basis, as the interest received is greater than the interest paid. To illustrate this through an example…

If the GBP/JPY’s asking price was 215.08, and we went long 100,000 Pounds, we have now gone short 21,508,000 Yen (100,000 x 215.08). If we held these positions for a year and the interest rates of these countries were to stay the same we’d receive and be charged the following…

100,000 x 4.35% = GBP 4,350
-21,508,000 x 0.32% = (YEN 68,825.60)

If we convert the YEN back to GBP by assuming that the currency hadn’t moved in a year we’d be paying…

(68,825.60) / 215.08 = (GBP 320)

Our net interest received would then be… 4,350 - 320 = GBP 4,030

If we convert this to the currency of our account, being USD, (and we assume the GBP/USD is at 1.8000 in a year’s time) we would receive US$7,254.

Still with me?

It’s quite a simple process calculating interest rates, but as it is with riding a bicycle it takes going over a few times.

So now that we know how to do this on a direct cross, what happens when we want to do some carry trading on a synthetic pair such as the NZD/JPY?

Well, just as with our GBP/JPY example the net result needs to be: LONG the NZD, and SHORT the JPY. So whatever steps we take we need this as the end result.

One way of achieving this is by going LONG the NZD/USD (we’ll use the asking price of 0.6175), and then LONG the USD/JPY (we’ll use the asking price 115.88).

Here’s the math (and as we want to compare the difference to the GBP/JPY cross we will keep the quantity of YEN the same, being 21,508,000… and with that we’ll start with the USD/JPY trade)…

If we are going to SELL 21,508,000 YEN at 115.88 this means we are in effect going LONG US$185,606 (21,508,000 / 115.88).

As we only want to be LONG NZD we need to neutralise the LONG USD position by offsetting it against a SHORT USD of equal size, therefore we will…

SELL US$185,606 on the NZD/USD pair, which means that we will be LONG NZ$300,576 (185,606 / 0.6175).

So here’s how the sums look…

-21,508,000 YEN
+185,606 USD
-185,606 USD
+300,576 NZD

Which in effect means that we are short 21,508,000 YEN and LONG 300,576 NZD (the USD’s cancel each other out) - we have achieved our intended result!

But what would be the NET carry result in a year’s time (assuming interest rates stay the same)?

-21,508,000 x 0.32% = (YEN 68,825.60)
+185,606 x 4.825% = USD 8,955.50
-185,606 x 5.375% = (USD 9,976.30)
+300,576 x 7.0% = NZD 21,040.30

We would now need to convert the USD and JPY amounts to NZD (we’ll again assume the currency prices haven’t moved for a year!)…

(YEN 68,825.60) => -68,825.60 / (115.88 x 0.6175) = (NZD 961.80)
USD 8,955.50 => 8,955 / 0.6175 = NZD 14,502.00
(USD 9,976) => -9,976 / 0.6175 = (NZD 16,155.50)

Which would now leave us with a net result of…

(NZD 961.80)
NZD 14,502
(NZD 16,155.50)
NZD 21,040.30
NZD 18,425.00

Or, converting that back to our USD balance… 18,425 x 0.6175 = USD 11,377.45 (nearly a 60% increase above our direct currency cross of the GBP/JPY!).

Okay, so what are the disadvantages of synthetic positions?

Probably the most prominent is the fact that you don’t have a direct chart to look at and see where support, resistance, or whatever indicators you enjoy plotting are. If you have a charting package and forex data you could probably work around this restriction by creating code and plotting such a chart - as I’ve done here for NZDJPY in WLD code.

Or, if you don’t have WLD, you could use a free charting service such as Trading Charts and simply enter the synthetic currency into the box underneath the table - i.e. NZDJPY. You can then play with the resulting bar chart according to Trading Charts’ selections.

By looking at a chart you are able to gauge how much you’ll need in reserve to hold the positions for margin requirements.

So, hopefully with this short article on synthetic positions it has helped widen your scope on what is tradable in the forex market, and opened up new opportunities for you. With interest rates on the rise in certain countries carry trading like this should further your interest over the coming months and years - I especially like it because you don’t need to do too much!

I get a lot of spam and junk email in my inbox every day so I usually don’t pay attention to new forex sites that spring up over the place, however, a couple of my subscribers have added comments on this site about a popular forex broker review and free forex signal service at Forex Bastards.

So, this weekend I decided to go and check it out. I signed up for Forex Bastards’ free forex signal service and read some of their popular review pages on forex brokers, forex education, and forex alerts.

Having perused the site I liked the similar views held by the owner of Forex Bastards, Felix Homogratus (not his real name), on Oanda - that being: Oanda is the best forex broker out there (but not perfect). Another interesting thing I found about Felix’s site was the economic announcement portals he uses to obtain the latest released figures. If you’re someone who isn’t using Bloomberg or Reuters to obtain your economic figures and you need these numbers with your forex trading strategy (and you can afford the hefty monthly fee) then you’ll want to subscribe to Felix’s signals and read what he has to say. Lastly, I had a good laugh at his “Forex Scams” page where he listed popular forex brokers such as AC-Markets, Refco, and FXCM on this page!

Probably the most interesting thing about Forex Bastards was Felix’s braodcast email that he sent out on the weekend on an interview he had with Richard Olsen, CEO of Oanda. I’m probably not at liberty to copy the entire email here, but what struck me was the fact that with Felix’s news announcement strategy (where he takes a direction as soon as figures are released on popular news announcements and then proceeds to exit that position within ONE minute of it being opened) was that Oanda were willing to take a loss with the positions he was taking (due to the fast moving market)!!

As Felix has had some success with this news announcement strategy he was looking to increase his position sizing to see if he could make more money with it, but after realising the cost to Oanda of his strategy he concluded after the interview that he would maintain his current position sizing and continue to withdraw his profits on a weekly basis.

In a way it reminded me of the days when forex brokers guaranteed stops and traders, such as myself, were able to make good money trading volatile announcements such as the Non-Farm Payrolls by strangling either side of the currency - unfortunately this strategy was nullified when forex brokers no longer guaranteed stops and we all experienced slippage of between 30-50 pips!

I similarly think that Felix’s news strategy will not last long at Oanda, as I haven’t heard of too many brokers willing to take a loss on behalf of their clients. Things that make it even worse for Felix are the fact that he has a large subscriber base where he details his strategy before the event and no doubt some of them use his strategies on Oanda too - all it will take is one person with a big enough bank to nullify this opportunity for everyone else.

For those using Felix’s strategies: take advantage while the opportunity exists, but don’t think it will last forever (although for your sakes I really hope it does).

Keeping in theme with the previous posting on CMC, we’ll include another popular broker that I haven’t had the time to research or test, hopefully those who have used GFT Forex before can help share some of their experiences to others about this forex broker.

Several years ago when GFT Forex was relatively new on the block, I read on the MoneyTec forums about one guy who claimed he made a large amount of money which GFT Forex weren’t honouring.

I never knew what happened to that case, but it made me steer clear of GFT, although I did sign up for a demo account and trial their platform.

Regardless, several things of note that I liked about GFT were:

• Their Dealbook platform was quite good (things may have changed since I last tested it - for better or worse)
• 400:1 leverage available

If anyone would like to share their experiences on GFT Forex please add your comments below.

Fast Forex Profits is a new ebook written by Jeff Wilde.

Several things that I enjoyed about this book were its structure, its brevity, and the willingness by Jeff to help his clients.

Jeff doesn’t fill the ebook with forex fluff (you know, the stuff that can easily be found freely on the internet and as you’re reading it you’re wondering why you paid $50 for something you didn’t already know!) - it isn’t found in this ebook, Jeff gets straight to his method and explains it.

Another good thing I liked about Jeff’s product was that he illustrated his system by using video. While I would have preferred a LIVE recording of a trade using his method, his historic video captures were ample enough to ground out any problems the user had in understanding his method.

Unfortunately that’s all that can be said about the things *I* enjoyed about the book.

As to the method… well… it isn’t as sound as I had hoped.

After placing Jeff’s method into Wealth-Lab and testing it on popular currencies such as the EUR/USD and the GBP/USD (which he recommends), and on the 1 hour time frame (which he recommended although he did say that his method worked on any time frame) his method just wasn’t profitable.

Of course, this testing is based on dataHQ’s FXCM data, which could have differing data to Jeff’s.

One last thing that I’d like to note is that Jeff may indeed use this method AND make money - it just doesn’t show historically. The reason I say that he can still make money is that he may apply other filters that he may not be aware of. I know when I taught a friend about flag formations he’d point to all the formations that technically were flags (according to my definition), but upon my seeing these formations I *knew* they weren’t - and the only way I could describe it to my friend was that they just didn’t *feel* right.

And this is why if you’re new to the market I highly encourage you to look at as many charts as you can. Familiarise yourself with what happens before a big move and after a big move. By doing this you are subconsciously locking away a library more powerful than a Cray computer, so that when you start trading the right-hand side of the chart you’ll “see” what is likely to occur next.

Anyway, I thank Jeff for allowing him to see his unique MACD trading method, however, I feel as though users may not be happy with their results.

If anyone has purchased Jeff’s product add your experience below.

CMC Markets opened up a new branch to their CFD platform many years ago by introducing the ability for their clients to trade the forex market.

Some of the benefits of CMC Forex include:

• Small spreads (as compared to larger forex firms such as FXCM)
• No need to trade in specific lot sizes
• 100:1 leverage
• One click trading
• No commissions
• If-Done and OCO orders

Some of their disadvantages include:

• $2,000 opening balance
• Minimum trade size US$10,000

If you have used CMC Forex in the past before let us know about your experiences by adding a comment below. By sharing your experiences we can be a small yet powerful force in finding out which forex brokers a better than others (as I can only do so much whereas if we have everyone adding detailed comments we can all help each other).