Currency Triangulation

[PipsiCola]

First off, I want to state, for the record, that I have NOT tested, nor examined this idea in any detail whatsoever. It simply popped into my head, and I had to send it out to be examined before I forgot what it was.

I was examining the possibility of holding three opposing positions at once... for example:
Buy AUDJPY,
Sell AUDUSD,
Sell USDJPY.

My original thought was, if I held all three positions in equal amounts, would the daily interest rate cancel out across them?

Of course, the answer way 'yes'; doing this is foolish in terms of Carry Trading, since the interest you gain from any of the pairs would be cancelled out by what you have to pay on the others.

But then I got to thinking... would the same be true of the price? If I gained a pip in AUDJPY, would I lose a pip in either of the other two to balance it out?

I don't have any figures to back this one up, but I believe, in theory, the answer is also 'yes'; your net gain would be zero across the board (less, actually, since you have to cough up the spread).

Now, I'm going to switch gears, and outline a standard physics problem (trust me, this relates); suppose you and a friend are floating in space (why not?), with no reference points to tell how fast you're going, or in which direction. You can tell that your friend is moving towards or away from you, and how fast, but that's all. How would you be able to tell how fast you are going?

The answer is, you wouldn't; your only reference is your friend, and so relative to him, you know which way things are moving.

This is how I think of currency pairs; everything is in relation to the other currency, not to anything concrete. If you could tell that, say, USD is falling (absolutely), and that JPY was stable (absolutely), you would know to sell USDJPY and gain some pips. But of course, you can't know changes absolutely, because there is no common reference to compare them to.

So how about we make one?

Drifting back into space... suppose another friend came along. Now, you can tell changes in relation to either friend, and they can tell changes in relation to each other. Now things become a little more telling, and give you some probabilities to follow:

1) if both friends are moving away from you, in all likelihood, you are the one who is moving away, and the other two are stable.
2) If both friends are moving toward you, in all likelihood, you are the one who is moving toward them, and the other two are stable.
3) If friend A is moving toward you, and friend B is moving away, likelihood is that you are relatively stable, and its the other two that are moving.
4) If friend B is moving toward you, and friend A is moving away, you are stable, and the other two are moving, but in the opposite direction as in the previous point.

Of course, this isn't foolproof; there's no way to tell that the third friend is any more or less stable than the other two; but it gives you probabilities that you can use to bias your decisions.

Back to currency... let's apply these ideas:

1) If AUDUSD goes up and USDJPY goes down, AUDJPY doesn't change much at all, and we can assume that USD is falling absolutely... might be a good time to get in on other trades where USD is a factor?
2) If AUDUSD goes up and USDJPY goes up, AUDJPY should be rising, and USD is relatively stable.
3) If AUDUSD goes down and USDJPY goes down, AUDJPY should be falling, and USD is relatively stable.
4) If AUDUSD goes down and USDJPY goes up, AUDJPY doesn't change much at all, and we can assume that USD is rising absolutely... another chance to look at other USD currencies?

I don't know whether this is a system, per se... or more of way to think about currency changes. What's more, the whole notion may be completely out to lunch since I'm so new at this stuff, and havn't got any test-results to back this up.

I guess what I'm saying, in theory, is that if you see a trend in two of the pairs, you should be able to come up with a reasonable prediction of what the cross will do.

Any thoughts on whether I've just stumbled upon a moment of idiocy, brilliancy, or something someone else has already come up with?

[rhodytrader]

The short answer to your question is that yes, you can use a triangulation to see if the movement of a particular pair is the result of a broader movement in one of the currencies in question, or just something specific to that particular relationship. Sorry. You haven't stumbled upon anything new. It's based on what is known as Triangular Arbitrage.

[PipsiCola]

Yeah, I figured as much after I put it out there... seemed too simple for someone not to have thought of it.

All the same, I thought it up without having to read about it first, so I feel like I'm making progress. Woohoo!

[daydreamer65]

Hi Pipsicola I must admit that this idea has plagued me for a while too.

[akc19911]

from my view, I 've been trying to find a way to "Hedge" my currency pairs. I got burned a couple of times, and i want to make sure that I will have a chance to reduce my losses, and give me fighting chance to know what directions the currency pair is headed. What do I mean by this? well...

for example, recently I bought gbp/jpy. at the high level.at the time, i wanted to let it sit there and ride it out, and I thought the interest rate collected will help offset the position as it goes down. I'd figure if I hold it for one year, I'd be ok. HOWEVER, the market really gone down, from 240 to 221. YIKES!!!. i got BURNED!!. I was hurting, and lost some money. .

now, I've been researching the same currency pair, and I'd figure.. What if I "Hedged" it with a another currency pair(buy one, and sell the other pair)? I'd figure, at least for the moment, even though I THINK its going on one direction, I'd be protecting myself because I'd be selling the other pair at the same time. yes, I wont be making too much money, but at least if it gone down the other direction, I'd be giving myself a fighting chance to readjust myself, and sort of eliminate the emotional aspect of trading.

Here how I been doing this via practice account.

I would buy gbp/jpy, and I would sell eur/jpy. these two currency pairs move exactly the same way. I noticed when they move, gbp/jpy moves 1.5x faster than the eur/jpy. so what I do is I would purchase 5(mini lot) of gbp/jpy, and I would sell 8 lots eur/jpy. because of the commision of course you start out with like 60 dollar in the red., but if you leave it there, somehow, one of these pairs gotta start moving up , and the other move down. The point is...I gave myself a fighting chance to determine direction. If it gone down, that means, at the right time, I would buy back the eur/jpy to collect profit from the downturn, and when it rebounds, I can either rehedge by selling eur/jpy, or sell gbp/jpy for whatever profit I have gained from the two.

I caught myself buying one direction, and yes, holding the position. but when i do find it that I am down 100 to 200 pips, its already twoo late, leaving me vulnerable , and loss of confidence, in finding the right trade.
This strategy provides me a chance to become less emotional, but remain objective to my plan. If it gone down, I'd still be confidence to make the right decision without emotional pain.

of course its still work in progress, but i guess you can sort of compare this strategy similar to a "straddle", a term commonly used at the options market .


fyi- if you want to know more about "Currency correlation" go to these sites.

Forex Market Hours - Correlation

Using Currency Correlations To Your Advantage

if the link does not work, go to yahoo.com, and type "Currency Correlation" and read about some of this stuff.



good luck


alan

[daydreamer65]

Hi akc19911, superb information.

Thanks for that, I have been working on a system
along the same sort of lines, but when I go into loss
with the one pair I have stopped it, then let the other
pair take me to profit.

In ranging markets (like a whipsaw?) this system can also be used
by letting both pairs run, then hopefully taking the profit from
the "winning trade" & letting the losing trade turn into a winning trade.

The jury is still out.

NB Looking at the math involved in the "currency correlation" I
always new it was going to be something like that. :rofl:
I have reproduced it below.

[akc19911]

daydreamer,

how the way I figure it, people in the profession also must also hedge their accounts,otherwise, its very easy to lose your money. I am more into protecting myself for the long term, and if I can make consistent profit without worrying about watching charts all the time, I'd I can see how trading the forex can be easy, and with lessor stress on my head.

I try to keep in mind that the phrase I hear all the time. "buy on weakness, and sell on strength". with this method, i can see how this phrase applies.

as 10:00 pst, I purchased 5 lots of gbp/jpy, and shorted 8 lots of eur/jpy. I really thought eur/jpy will go down at leat 100 pips, but to my suprise, gbp/jpy actually gone up. so, I am still ok, but I am still waiting for direction. right now, instead of being down 200+ dollar, I am actually down 85 dollar.(12:29 pst) which is not that bad.

anyways, I know hedging works to prevent major downturn, that I know for sure. will it make me some money? If I am there at the right time, an d at the right place, I am sure I will.

alan

[pro87]

Originally Posted by akc19911

daydreamer,

how the way I figure it, people in the profession also must also hedge their accounts,otherwise, its very easy to lose your money. I am more into protecting myself for the long term, and if I can make consistent profit without worrying about watching charts all the time, I'd I can see how trading the forex can be easy, and with lessor stress on my head.

I try to keep in mind that the phrase I hear all the time. "buy on weakness, and sell on strength". with this method, i can see how this phrase applies.

as 10:00 pst, I purchased 5 lots of gbp/jpy, and shorted 8 lots of eur/jpy. I really thought eur/jpy will go down at leat 100 pips, but to my suprise, gbp/jpy actually gone up. so, I am still ok, but I am still waiting for direction. right now, instead of being down 200+ dollar, I am actually down 85 dollar.(12:29 pst) which is not that bad.

anyways, I know hedging works to prevent major downturn, that I know for sure. will it make me some money? If I am there at the right time, an d at the right place, I am sure I will.

alan

Hello friend you have to have your trading plan not just like that to wait for lucky trading.You have to know what you are doing and why?If i were you i wont do this again ... because this is bad for your wallet just find strategy that work and make your trading plan and you will have success i`m sure!

[daydreamer65]

This a.m. I went long EUR/JPY 5 lots,
short AUD/JPY 5 lots, stop loss on both 15 pips.

EUR/JPY stop/loss very quickly for -12 pips

AUD/JPY take profit this P.M. +48 pips.

Jury still out.