This is my first post with a question that has been struggeling my mind for a while :). I hope someone can help me stop thinking about it.
My question is regarding correlation of the pairs. If so many pairs correlate with each other, how can they all keep up with their support-/resistance-/trendlines? If they all did there would be huge arbitrage? Is it like the MAJORS are the ones that respect their support-/resistance-/trendlines, and the CROSSES is just compensating for the MAJORS movements? If it was clear that this is how it works, then I would have no problems understanding how the MAJORS could respect their support-/resistance-/trendlines.
But it seems people trades EUR/GBP in just the same way as EU/GU. I mean, in my mind it’s not possible that both EUR/USD, GBP/USD and EUR/GBP respects their lines at the same time. And with “not respect the lines” I am NOT talking about a breakout (with pullback on line etc.)… I am talking about it acting like there is NO LINES AT ALL.
I would really appreceite to heat what you are thinking about this… so that I can get peace in my mind
THANK YOU VERY MUCH IN ADVANCE!
Jens. there is HUGE aritrage. i mean huge. but you’re likely not going to be able to do any of it yourself.
Think supercomputer…high frequency trading, ready to buy one currency and sell the other as soon as one gets out of line by more than a pip or so.
Because if eur/usd goes up 10 pips, and gbp/usd goes down 10 pips, then eur/gbp MUST go up 20 pips.
If this action does not occur (say, gbp/usd is only up 18 pips), some computer arb machine directly connected to the interbank exchange service will immediatly buy eur/gbp and sell it 2 pips higher, or sell eur/usd for 1 pip, or buy gbp/usd for 1 pip.
Think about it…if eur/usd was up 10, and gbp/usd was down 10, but eur/gbp was only up 15…that’s a 5 pip difference… 5 pips of an aboslute risk free profit one could lock in by buying the euro and selling the pound.
so, it almost never gets even 5 pips out of line. 2 pips, and these 24 hour arb based trading algorithems with direct access to the interbank (with tiny spread…were talking no spread to 1.5 pips tops) instantly buy the cheap one and sell the expensive one.
Wherever there is risk free profit, even for a pip or 2, there will be a computer there to take it, in this situation.
Jay
P.S. you can still take advantage to this…to a degree. Say you have a similar long setup in both gbp/usd and eur/usd occuring at the same time. Well, you can look at eur/gbp…and if it’s coming to major support level…then buy eur/usd.
if it’s coming to a major resistance level…then buy gbp/usd
First I want to say thank you very much for your inputs. Very apreceited. It gave me a bit clearer view, but I still have some questions.
As I quoted above you say that if eur/usd goes up 10 pips, and gbp/usd goes down 10 pips, then eur/gbp MUST go up 20 pips. And if not done by itself “super computers” will buy it up and “correct it”. Either way it will be corrected, right?
Then it still comes to the problem. Let’s say EUR/USD has started an uptrend with a beautiful rising trendline, and GPB/USD has done the opposite with a beautiful falling trendline. In the same time EUR/GBP has followed by rising to compensate for the differences betwenn EU and GU. However, now comes the problem: EUR/GBP has now reached a point where it’s a BIG resistans level. At the same time the rising trendline and EUR/USD is VERY clear and everybody expect it to respect the line and countinue, the same goes for the falling GPB/USD trendline as well. I don’t know if this can happen in reality, however, this is now happening in my example :-). The big questions is what will happen next:
[U][B]Will the trendlines of the MAJORS get priority (because the are MAJORS, have more liqudity and more traders are trading them)?[/B][/U] Result = EUR/USD rising trendline is respected, GBP/USD falling trendline is respected, AND EUR/GBP resistance level will BE IGNORED.
[U][B]Will the support-/resistance-/trendlines with the BEST LOOK (strongest confirmed line) get priority, regardless of being a MAJOR or NOT?[/B][/U] Result = In this case the story doesn’t tell which pair has the BEST LOOK, but let’s says it’s EUR/GBP. The EUR/GBP respect it’s resistance level and instead “EU” and “GU” has to ignore their trendlines.
[U][B]Or it’s a mix of everything?[/B][/U] Result = EU and GU is TWO pairs that have TOGEHTER a better LOOK than EUR/GBP. The market values/rates the rising trendline of EU, and the falling trendline of GU, as more important TOGETHER than the look of the EUR/GBP is alone (even if has the best look alone). Which means EUR/GBP resistance level will BE IGNORED.
Please chose one of the above choices that you think are “correct one”. And please, this is WITHOUT taking any fundamental stuff, that could influence, into the picture.
As you may understand my whole text boils down to one question:
Can the support-/resistance-/trendlines, on cross pairs (like EUR/GBP) be as important/valid as the ones on the MAJORS, or should one consider the support-/resistance-/trendlines, on the MAJORS, to [U]generally[/U] be the most important ones? And that the cross pairs, [U]generally[/U], compensates for the moves on the majors, and not the other way around…?
Also, another question is:
Is it because of this correlation that sometimes a pair HAS to move outside a respected trendline, and NOT make a BREAK OUT, but just couniunte the trendline just a bit below/above the other one?
I know this is very much text that I have written. And maybe my question is dumb or so, but it really feels that it’s very important for my brain to have somekind of clear answer :-).
Looking forward to hear your thoughts.
Have a nide day everyone!
Jen, quick answer… number 3 is correct. Remember…nothing EVER has to do ANYTHING in the market. i don’t care how big a seeming “resistance/support/trendline” level or whatever is. everything is broken eventually.
Everything we do in the market is based on some sort of notion that we expect X to occur, Y percentage of the time.
Since nothing is absolute, it’s possible everythign breaks down at one time, one of the 3 pairs changes course…etc.
In the end, it’s all about supply and demand. If there is suddenly a massive institutional buy order for $300 million eur/gbp, I don’t care how strong the resistance or what eur/usd or gbp/usd are doing…eur/gbp will push up strong, eur/usd will likely carry up a bit as well (notice how i say “likely” ) and gbp/usd may stay flat or even fall (depends on how much eur/usd pushes up)
If this happens to reverse all pre3vious trends and break all trendlines while violating massive S/R levels…well, then so be it.
I just realize that I forgot to thank you for your last reply. Your replies was VERY apreceited and I feel My question answered. Have à Nicke day and good luck with trading. Regards Jens
