forex101 said:I'm not sure you have a good grip on what it is all about...
You trade the Eur/USD vs the USD/CHF they are almost exact mirrors of each other. Big moves don't theoretically effect you because when the Eur/USD goes one way almost immediately the USD/CHF goes the other way. they have deviated by something like .96% or .04% over the last few years. So the money is made through the interest you are earning when you own the paris. The 400:1 leverage makes that interest quite significant. Of course if the pairs deviate in your favor you can capture the gains and start again compounding the new amount at that same high interest rate. It is a steady way to earn good money. The system sets limit orders so that you are buying and selling small amounts to balance out your position. It has worked for me so far.
You can try it for as long as you want in a demo account to test it out for yourself http://freedomrocks.com/23223
a_gnome said:Why don't you just trade the very liquid EURCHF cross rate? If you are long (I think) this pair then you gain the difference between the EUR and the CHF interest rates on the leveraged amount. Why bother with the two major rates? Or am I missing something?
It's great if you hold the EUR/CHF long and earn the interest but the fact is, you cannot predict when it is going up or down. As you cannot benefit from a Long position in a down market and the interest earned wouldn't be very valueable if your account keeps dropping.
So Freedomrocks uses the EUR/USD to Hedge against the USD/CHF. With a very close correlation it's the closest thing to hedging a single currency pair.
It's a Correlation trading method that Freedom Rocks uses. Probably on a Larger Scale the big financial institutions use similar types of Correlation techniques for hedging.
The FreedomRocks system simply allows the average person to get into the markets with a hedging strategy that doesn't require them to spend hours upon hours at their computers reading charts and signals looking for the next big break.
There is more to it then that and unless you have all the facts about any type of trading system, it's really difficult to make a blanket statement about it. It's like me saying "Candlestick formations are crap and don't tell you anything". I wouldn't say that of course because I have only had the luxury of using them only a few times throughout my trading.
Anyway, that's my 2 cents.
a_gnome said:Thanks for the reply Rick.
Firstly let me say that all I am wanting to do is to understand properly what is going on. Please don't take any of this personally.
a_gnome said:I'm afraid that what you are saying about hedging doesn't make sense. Let me illustrate using the example in the Freedom Rocks promotional video (which I have now watched). It says go long 50 lots EURUSD and long 50 lots USDCHF. You then aim to take 1 lot profit 100 pips above yoru entry price if it moves in your favour or to buy another lot if it moves 100 pips against you (with a view to selling it out again once it moves back to your entry price).
Now long 50 EURUSD and long 50 USDCHF is equivalent to long 50 EURCHF. (EDIT: this is actually only true if the sizes traded are for the same USD amounts but it is pretty close otherwise). The reason why you are "hedged" is because the EURCHF rate doesn't move very much (have a look at a chart) compared to the USD major rates and you are completely hedged against the USD (for example you will find that at major news releases for example your position won't change since the EURCHF rate doesn't budge). You do have an outright EURCHF position though and the associated risk if it should move against you.
a_gnome said:There see to be two components to the strategy:
1. the carry interest - you earn the same amount by holding the EURCHF position as you do if you leg in with the USD components.
2. the grid trading - this basically assumes that the market does not trend very much (which is true for EURCHF) so you are probably selling and buying at 1 standard deviation intervals from your entry price. You could put the initial position on in EURCHF and trade the 1 lot grid trades in the USD legs just as easily or you could do the grid trading part just in the EURCHF instead.
a_gnome said:I can see how this strategy would work and for the EURCHF pair you are probably not going to get into any serious trouble unless it starts moving in a straight line in one direction. In such an instance you will end up on the wrong side of the move and losing. What is the strategy in the grid trading component if the market keeps going against you? The usual policy is to keep buying or selling at the next grid line (sometimes doubling up) until it moves back in your favour or until you go broke. If you are using high gearing then the going broke part will happen for a smaller straight-line move than with smaller gearing.
a_gnome said:In conclusion I can see the underlying basis of the method now though I wonder how many of the FreedomRocks users actually understand the risks that they are taking on and how and when it can go wrong.
smarties said:No worries. I'm enjoying this conversation. It challenges me to better understand the markets. I appreciate your point of view.
smarties said:I understand what you are saying in the paragraph above. I looked at a chart. (Included below). It seems to me that the EUR/CHF trends similar to the EUR/USD. The USD/CHF has an opposite trend. The range since 1997 on the EUR/CHF is around 2000 pips which is considerably less of a range compared to the appx 5,000 pips of the EUR/USD and the 8,000 appx of the USD/CHF. So I can understand what you mean by the fact that the EUR/CHF rate doesn't move much. Although the trend still goes in a similar fasion as the EUR/USD.
smarties said:In FreedomRocks. if I am long EUR/USD and Long USD/CHF, they are closely correlated in opposite directions. So if the market is going down for EUR/USD then on average the USD/CHF is going up. And if the EUR/USD keeps going down in a straight line, you are buying EUR/USD lets say 1 lot at a time for easy numbers. Well because of the close correlation, the USD/CHF is going up in a straight line on average and you are Selling 1 lot at a time capturing profits on the USD/CHF.
That's where the hedge comes in and why there is an advantage of holding both currency pairs.
smarties said:In your scenario, if I am Long EUR/CHF and the market continues to drop, then I will continue to drain my account.
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