In earlier post we explained the calculation as in the chart below.

Top chart is EUR/USD, 2e chart is USD/CHF, 3e chart is EUR/CHF and 4e chart is the indicator.

Normally the changes are small and profits are low , and so is risk, however last Thursday the indicator at the borrom had a big move up at the close (NY 4 PM) indicating to buy EUR/CHF at 1.5103 (incl. b/a spread) and sell both EUR/USD at 1.4113 and sell USD/CHF at 1.0707.

On last Friday close the EUR/CHF was 1.5119 (+13 pips), USD/CHF 1.0787 (- 80 pips) and EUR/USD 1.4012 (+99 pips) wich is nett + 37 $ pips.  

I like to come back on the 3-Way Arbitrage I wrote last weekend:

http://blogs.fxstreet.com/forexhedge/2009/02/01/arbitrage/

Two days later on February 3th, the Balance indicator at the bottom on the chart below was coming back above the zero line indicating to buy the EUR/CHF and sell both EUR/USD and USD/CHF at the same time.

Today the balance indicator showing to sell the EUR/CHF and buy both EUR/USD and USD/CHF at the same time again.

The nett result is around $ 700 based on one lot each (100k.).

Not much profit, so is the risk, as they keep each other in balance more or less all the time.

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.