I was just thinking about the slight price difference that there is when doing something like this for example:
If I have 1000 Euros and I want to buy Yens. I could take different approaches:
I could just go to the bank, and directly buy yens at the current exchange rate.
I could first buy dollars, and then with those dollars, buy the yens.
I could also complicate things even more, and could buy British pounds, then US dollars, and then Yens.
I’m sure the amount of Yens I get in the ends can be slightly different, and I don’t know if it would be possible to make a profit out of this maybe when the markets are very volatile or whatever.
Obviously, if we apply this to forex, we would have to pay the spreads everytime, but I just want to ask if this concept has a related trading style that is used by some people or is it just non-sense?
This doesnt work usually,because banks have (or atleast in my country) 1000+ pip spread, contrary to a 1-2 pip spread like at a forex broker.Since price hardly moves 1000 pip in a short time so it would be only a risk,besides people who want to profit
from this don’t look at any chart or use any kind of financial analysis,they just “hope” that the currency will move that much.
And at the end of the day they will lose money.A currency exchanger will offer a bit kinder 700-800 pip spread but they usually don’t exchange more than 10.000 units of currency/person.The only thing i can imagine where bank exchange can be useful,if you have your bank account in foreign currency and you have to pay taxes and convert that money to a local currency,or as trasimaco said if you want to go to a foreign country and buy their currency.If you want to make profit
from currency exchange you should definitely trade with a specialized institute for this,like an investment bank,broker,etc
I actually was thinking about a way of using this in forex trading with any common broker. Dunno, just wondering if something like this makes sense… Dunno… ive read about hedging positions using different currency pairs, so in this case it would be something like shorting eurusd and buying Usdjpy and take advantage of the difference.
I guess the value of a currency increases or decreases depending on all other currencies. So maybe this difference is inmediately reflected against one currency, but there is some lag time until this change is reflected against another one. Maybe there is some way of taking advantage from this situations.
Let’s say we want to find the bid/ask price for GBP/JPY. The first thing we would do is look at the bid/ask price for both GBP/USD and USD/JPY.
To calculate the bid price for GBP/JPY, you simply multiply the bid prices for GBP/USD and USD/JPY.
But second says:
By trading currency crosses, you give yourself more options for trading opportunities because these currencies are not bound to the U.S. dollar, thus possibly having different price movement behaviors. So while the majority of the markets will only trade on anti-U.S. dollar or pro-U.S. dollar sentiments, you can find new opportunities in currency crosses.
How it ain’t bond if we use the USD to calcullate the price of crosses???
Yes Look it like this you have 10 GBP and want to buy YEN first thing you do
YOU SELL GBP AND BUY USD
AND THEN YOU ALREADY HAVE USD,SO JUST SELL THAT AND BUY YEN
this means that the USD cancels out…
and you remain with SELL GBP and BUY YEN =GBP/JPY pair
the same goes if you want to buy GBP and sell YEN…since the middle currency cancels eachother out
The USD doesnt really matter here because the BUY GBP/USD SELL USD/JPY combined order executes instantly,
and because of it the price wont move until the order is triggered so basically the USD doesnt matter here
there are some features in metatrader which allow you to make synthetic pairs like this one,but its not recomended since
you can trade the GBP/JPY right away with less spread and 1 open position not 2 (which is double risk if trade goes bad)
Haha there is no holy grail in forex,so you can stop searching.Although there are some pretty good sistems which,if traded propertly and disciplined can lead inevitably to profits.
Hope I find it soon