Three Pairs Hedging

Trading Discussion
1

Hello FX Experts !

I was going thought hedging topics and came across a topic on Three-Pairs-Hedging. According to the original poster, here is what he says:

Here I show you how I hedge “circel pairs” = GBPUSD > USDCHF > GBPCHF"
“Circel pairs” means each currency “GBP” “USD” and “CHF” appears twice in these three pairs.
GBPUSD = Buy
USDCHF = Buy
GBPCHF = Sell

or

GBPUSD = Sell
USDCHF = Sell
GBPCHF = Buy

I used no indicator at all, but it took sometimes a while to get in profit.
I used same lotsize on all three pairs and TP of 100$

One might say, hey, why did you not trade just GBPUSD and GBPCHF?
Because, it causes such a big DD which can blow an account in very short time, so please do not try this at home :wink:

Here some more examples for three pairs hedging:

BUY BUY SELL
or SELL SELL BUY

EUR/CHF CHF/JPY EUR/JPY

GBP/CHF CHF/JPY GBP/JPY

USD/CHF CHF/JPY USD/JPY

EUR/GBP GBP/CHF EUR/CHF

EUR/USD USD/CHF EUR/CHF

EUR/GBP GBP/JPY EUR/JPY

EUR/GBP GBP/USD EUR/USD

EUR/USD USD/JPY EUR/JPY

GBP/USD USD/CHF GBP/CHF

GBP/USD USD/JPY GBP/JPY

There are still some more opportunities, but then the spreads are very high!

I entered the same trade as he said:

GBPUSD = Buy
USDCHF = Buy
GBPCHF = Sell

For me, in the exposure tab of the platform, it says that GBP’s exposure is NIL and it is basically Short USD and Long CHF.

Can anyone please give me some idea whether the trade is worth pursuing.

Thanks for your kind help.

2

I would suggest that you learn single instrument trading (1 pair in fx) vs creating complex hedging strategies ( pairs trading). I have no idea why you are in a trade you dont understand. First of all your 3 way trading basically just created a very expensive synthetic short of USD/CHF. So you probably need to go back to school and focus on simpler stuff. Don’t blow your account on stuff you dont understand. Also I am assuming you do not have a professional level pairs trading platform and data feed, so your going to be exposed to alpha risk when you remove your orders if they dont come off exactly at the same time, also your going to need to rebalance your basket to maintain a GBP neutral position.

1 Like
3

Hi MeiHua !

Thank you for your kind reply. I use ONADA but ONADA doesn’t allow same pair hedging at the same time, only through sub-accounts. Someone recommended Etoro because that allows you to buy and sell the same currency at the same time. So the above question just popped up from internet search so I asked here. Yes, according to Onada, that is USD short and CHF long, but where I got that post, its from forexfactory and the guy even posted a pic of his orders (statement) and it was like losses and profits offsetting each other, net profit being 1142.

Anyways, you have any hedging strategy like this?

Thanks for your help.

4

If the poster on FF thinks that these 3-sided trades are the reason he’s making money then you want to stay far away from him. He’s got no idea what’s driving his performance. If he’s intentionally doing the 3 sided trade to create a synthetic position then he’s throwing money away in spreads and carry. If he doesn’t realize he’s creating the synthetic position and/or that the position has the exact same risk dynamics as USD/CHF then he has absolutely no clue what he’s doing.

5

Thanks for your kind reply Rhody Trader. I won’t copy anyone before confirming from experts.

But Rhody, I did try hedging on Etoro myself. I did some one-click settings, and then immediately bought and sell EUR/USD pair. My stop loss and take profit both are set at $275. But I dont understand why one position is giving a gain of -8% and other -12%.

What I am missing ? Thanks for your kind help.

6

I can’t speak to the specifics without more information, but if you do any kind of “hedge” trade like simultaneously going long and short EUR/USD all you are going to do is lock in a loss the size of the spread because you will have sold at the bid and bought at the offer. You won’t be able to make any gains without at some point taking off one side of the trade to get a singular directional exposure and most likely the whole time you have the “hedge” on you will be subject to negative carry.

7

Hi Rhody !

Thanks for your kind reply. Yes now I got it. Buying at, for example, 1.3075 and selling at 1.3072, of course has 3 pips difference (spread = loss).

But what if I buy and sell, say, EUR USD 1.3000, will that make sense in securing offsetting profits ?

Thanks for your help. :slight_smile:

8

There is no reason to have a hedging strategy in my opinion. Unless you already have a large position in profit and need downside insurance but don’t want to take it off or have actual business transactions that need to be protected, both of these reasons apply to institutions not retail. Hedging by it’s very nature removes the price movement factor, so you limit both up and downsides. If your set on hedging go for it but I would say for the most part it’s a sub optimal strategy for an expert and a losing proposition for a beginner.

9

Just ask yourself what you can possibly accomplish being both long and short at the same time. Run through every scenario you can think of and do the math for both sides of the “hedge”. It won’t take long before you come to a realization.

10

Yes, I did think :stuck_out_tongue: and came to a satisfactory conclusion that there will always be a difference (spread & carry), moreover the profits and losses will offset each other with a net position of zero.

Thanks Rhody for your kind help. :60: