GBPUSD/USDCHF vs GBPCHF

I was prompted to write this post after reading yet another one of those "trading GBPUSD and USDCHF is NOT the same as trading GBPCHF" posts that the uninformed insist on posting to the detriment of beginners who may not understand why this is not the case.

First, some background for those who may not be familiar with this concept.

If you go long GBPUSD and USDCHF, then you're buying GBP and selling USD, and buying USD and selling CHF. The USD cancel each other out and you're effectively long GBPCHF. Not everyone gets this and many believe that trading GBPUSD and USDCHF will give a different result to simply trading GBPCHF. I will now prove this is not the case.

For this example the following conditions should be understood:

1) I used an Alpari UK account to obtain the data used.
2) I am using hourly close figures.
3) 5 digit broker so 1 pip=0.00001
4) Standard lot size of 100,000 units
5) I am not taking bid/ask spreads into account (negligible for this demonstration anyway)
6) The principle demonstrated here applies to any triangle, I'm just using GBPUSD/USDCHF and GBPCHF as an example.



First let's trade GBPUSD and USDCHF:

Open:
Buy GBPUSD on "2012.08.24 21:00" at 1.58099, 1 lot (£100,000 trade size because base currency is GBP)
Buy USDCHF on "2012.08.24 21:00" at 0.95921, 1.58 lots (convert £100,000 to base currency USD = $158,099, so lot size is 1.58)

Close:
Sell GBPUSD on "2012.08.31 20:00" at 1.58605, 506 pips (506 * $1 per pip = $506)
Sell USDCHF on "2012.08.31 20:00" at 0.95542, -379 pips (-379 * $1.64 per pip = -$621.56)

Overall P/L: -$115.56

Note the USDCHF pip value of $1.64 is calculated as follows: (0.00001 * (100,000/USDCHF quote of 0.95542)) * lot size of 1.58




Now lets do the same trade with just GBPCHF:

Buy GBPCHF on "2012.08.24 21:00" at 1.51653, 1 lot (£100,000 trade size because base currency is GBP)

Sell GBPCHF on "2012.08.31 20:00" at 1.51542, -111 pips (-111 * $1.04 per pip = -$115.44)

Overall P/L: -$115.44

Note the GBPCHF pip value of $1.04 is calculated as follows: (0.00001 * 100,000 * (1/USDCHF quote of 0.95542))





Ok, so there's $0.12 difference, but leaving that aside I think it's pretty obvious that both trades are, to all intents and purposes, identical, except that in real trading you'd pay twice the spread with the first example so trading GBPCHF is clearly superior.

So why do people insist that the above trades are NOT identical? Because they make money with it and therefore assume it must "work". In reality most people who conduct these trades do not understand that the lot size must be adjusted, as I have done, to keep the amount of money traded in each currency pair the same. They simply trade 1 lot GBPUSD and 1 lot USDCHF. This means trading £100,000 in the GBPUSD and $100,000 in the USDCHF, a difference of approx. $50k. Therefore this is a directional position which will make or lose money in exactly the same way that a trade on any single currency pair will win or lose.

I hope that FOREX newcomers will find this post useful and not be led into oblivion by those who are well meaning but nevertheless uninformed. As they say, the devil is in the details.

My very good man, you seem to have forgotten two important things. Interest and margin.
Interest wise, Oanda interest calculator tells me, holding 1 lot G/U long for 167 hours, will cost you $12.09 in swaps. Holding 1.58 lots U/C for the same time will cost $12.07 in interests. That's more than $24 lost.
Holding 1 lot G/C long for 167 hours will cost "only" $12.12. Not quite the same as above.

Margin wise, you need more than $3100 to open 1 lot G/U using 1:50 leverage. You need more than $3100 again, to open the 1.58 lots U/C. Whereas you only need this amount (approximately) only once, if you want to open 1 lot on G/C. Quite a difference, $3100 vs. $6200.

So trading G/U + U/C vs. G/C is the same, exposure wise and trade result wise (provided that you open/close the proper lot sizes at the same time), but not the same in any other ways.
Simplify this. One trade good, two trades bad.

Hi friends , Head and shoulder

Thank you for your input, but I was simply demonstrating a principle, not suggesting that both trades are identical in every way but only in terms of risk exposure to price action, nothing else.

People who trade GBPUSD and USDCHF rather than GBPCHF do so because they believe they have a greater chance of making a profit, which is not the case. Taking swap and spreads into account makes it even more obvious that the GBPCHF trade is superior.

I wouldn't agree with "one trade good, two trades bad" as it's not that simple. A G/U and U/C trade can synthesize G/C for those dealing with FIFO or a broker that doesn't offer the symbol they wish to trade etc, I would advise always trading one symbol where possible but it is certainly not "bad" to trade two if there's a reason for it.