Friday, March 23, 2007

March 23 Trade summary




The only good setup this morning was the reversal on YM/ES after the pop from the news this morning. I missed that move, and then decided to try to get a reversal setup on JPY based on what I was seeing in ZN and the EURO. The trade took forever for just a small scalp and I didn't feel like waiting all day for the trade to work out because today looks like it's going to be a chop fest and I have other stuff to do today.

Overall this week was a little tougher to trade because of the effect the FOMC announcement had on the markets. I did ok for the time I traded and I'm starting to learn a little about bonds and forex to progress my trading.

Yaser Anwar made a recent post on how he trades Futures, Equities, and Forex- I like his style of trading, and I have a similiar approach. I believe that looking at other markets such as the Forex market and the futures for stock indices and bonds will make you see the market as a whole and you will start to see patterns develop on how all these markets interact with one another. For instance the pattern that we have seen for some time now is the inverse relationship between the Yen and the US stock indices, which is due to the affect of the Yen carry trade.
Also, the bond market and the Yen have shown a close correlation between one another as well.

I found a small article that explains the basics of the carry trade:
Yen carry trade - implies borrowing Japanese yen at low interest rates (0.5%) to finance purchases of high-yielding assets. The investor earns the interest rate spread or "carry" as long as interest rates in Japan do not rise (increases borrowing cost) and exchange rates are stable (exchange rate risk if the yen appreciates).

To briefly explain the process, Japanese yen is borrowed at very low interest rates. The yen are sold to buy a stronger currency. The new currency can be used to purchase a high-yielding asset. At the time of unwinding the trade, the asset is sold to obtain the principal and interest in the underlying currency, which in turn is sold to buy yen and repay the yen denominated loan.

Such a trade can be hedged at about a 100bp (1%), so if an investor borrows from Japan (@ 0.5%) and invests in US treasuries at 4.5%, he clearly earns 300bp (3%). The yen carry trade has been like a continuous money generating opportunity for big investors. Trillions of dollars are estimated to be in this trade, which has indeed been profitable for investors.(Yen Carry trade article, courtesy Poonam Bhana)

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