Trading Forex in Baskets to diversify trading risk for both, speculative trading or hedging Forex risk by 
Most traders trading just one currency at the time and also intraday.
Another way to reduce risk is to try to take advantage when correlated currencies are not in balance.
We all know to trade the EUR/USD and USD/CHF in the same direction, so buy both or sell both, because one is quoted in USD while the other is quoted in CHF, so the diffence is EUR/CHF.
All three exchange rates, EUR/USD, USD/CHF and EUR/CHF are connected to each other, for example 1 EUR is 1.3000 USD = SFR 1.4800 (EUR/CHF) so the balance is zero.
Sometimes the three are not in balance like on the chart below with daily prices: top chart is EUR/USD, the 2e is USD/CHF and the 3e is EUR/CHF.
At the bottom of the chart you see that theoretical the balance must be zero, but in practise it is not and moving above or below one.
Try the following formula: EUR/USD x USD/CHF x (1/EUR/CHF).
The outcome is normally zero, but in realtime the bottom of the chart is realtime balance calculation moving above and below one.
In practise, when the Balance is below 1 you sell EUR/CHF and buy both EUR/USD and USD/CHF v.v.
Interesting idea your abitrage model. But in practice i cant see how you want to do this. These imbalances are only there for some seconds or less. In the time you calculated them, the prices have already changed again. Second, its nearly impossible to place three trades simultanesously in a matter of seconds, if you notices an arbitrage opportunity. chances are too high to get requoted with at least one pair, and you lose.
Hello, thanks for your comment.
The chart shows daily bars and there ìs imbalance from time to time.
The screenshot is from the real-time chart with daily bars.
Of course it’s not easy to get in/out at the right time but this type of strategy is for those who don’t like to take much risk, so is the profit.
The alternative is to trade EUR/USD against (EUR/USD x USD/CHF) and you are actually trading than EUR/CHF !
On a losing position you can double new positions to stay near you 1e entry price, but don’t adjust individual legs.
This strategy has some more risk of course and also more profit potential.
Best regards,
Ron
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Hi Ron,
usually how many pips can you earn from the arbitrage?
As I see at the daily chart, the difference could be 4-5 pips. But to entry 3 pairs we need at least 6 pips (2 pips for each pair) for the spread.
Also by keeping overnight the 3 pairs we need to pay
swap interest.
So, it’d be useful to know from your experience what to expect.
I like your blog very much, because it gives fresh ideas
about trading! Something different than the ordinary methods/strategies.
Cheers/Anti
P.S. Regarding the hedging strategies, how do you find
the rate that you have on the charts?
It is from -100 to 100, but no info on how you
calculate it.
[...] http://blogs.fxstreet.com/forexhedge/2009/02/01/arbitrage/ [...]