Trading The "Normal State" | Page 4 | Forex Factory

Options

Go to
Permalinks
Print Thread

Similar Threads

Broker Challenge "NDD/STP" vs. True "ECN" and "Mkt Mkr" broker talk 46 replies

Dealing with "Invalid Price", "Requote", "Server Busy" in MT4 3 replies

What do you consider a "normal" ping on MT4? 1 reply

Forex spread betting versus "normal" trading. 1 reply

It’s our job to trade "Futures" not "Histories", by Joe Ross 7 replies

Attachments: Trading The "Normal State"
Exit Attachments

Trading The "Normal State"

  • #61
  • Oct 10, 2007 5:54pm Oct 10, 2007 5:54pm
Quoting philmcgrew
I called and they said you were right. All of their clients are up 125% on the GBPJPY carry trade this year just as you predicted. I guess I didn't get the memo.
That is interesting; it means that the effective leverage is 15:1 or less. The more that has been made on currency movement the lower the leverage actually is. ...or did you skip the tongue-in-cheek emoticon?
Minesweeper target: 284
  • #62
  • Oct 10, 2007 6:15pm Oct 10, 2007 6:15pm
Quoting Primate
That is interesting; it means that the effective leverage is 15:1 or less. The more that has been made on currency movement the lower the leverage actually is. ...or did you skip the tongue-in-cheek emoticon?
Let's go with the latter on this one.
  • #63
  • Oct 10, 2007 6:19pm Oct 10, 2007 6:19pm
Quoting philmcgrew
Using real numbers you would need 2 USDCAD contracts to make a GBPCAD (approximately). It's not always a 1:1 relationship to cancel out the USD.
huh?

we are talking about tri-pair relationships. unless you are just adding an additional insight?
Relax and be happy.
  • #64
  • Oct 10, 2007 6:47pm Oct 10, 2007 6:47pm
Quoting merlin
huh?

we are talking about tri-pair relationships. unless you are just adding an additional insight?
I've never made a synthetic pair but here's how I think it would work:

If you buy 1 contract of GBPUSD you own 100,000 pounds and borrow 203851 USD. When you buy 1 contract of USDCAD you own 100,000 USD and borrow 981670 Canadian.

GBP/CAD = GBP/USD x USD/CAD
GBP/CAD = 100000GBP/203851USD x 100000USD/98167CAD

You have twice (approximately) the amount of USD on the GBPUSD side when compared to the USDCAD side. Therefore the USD's can't simply cancel each other.

If you were to buy 2 USDCAD contracts the equation would look like this:

GBP/CAD = 100000GBP/203851USD x 200000USD/196334CAD

Using a slight bit of rounding to make the 203851 = 200000 the USD now cancels out.

GBP/CAD = 100000GBP/196334CAD or reduce each side by dividing by 100000
GBP/CAD = 1.96334

Which is very close to the actual quote of 2.0056 for the GBPCAD. It would have matched exactly had I not rounded or had I traded in the exact ratio required (it's not a perfect 2:1 ratio)
  • #65
  • Oct 10, 2007 7:06pm Oct 10, 2007 7:06pm
im simply looking at the prices of the pair. NFX asked why the following equations worked...

Quote
GBP/JPY = GBP/USD x USD/JPY
EUR/CHF = EUR/USD x USD/CHF
EUR/GBP = EUR/USD divided by GBP/USD
GBP/CAD = GBP/USD x USD/CAD
AUD/NZD = AUD/USD divided by NZD/USD
GBP/SINGAPORE DOLLAR = GBP/USD x USD/SGD

and the answer i gave him was to show why it worked.

lets look at it with real prices. take this one for instance...

EUR/CHF = EUR/USD x USD/CHF

in price terms, thats...

1.6738 = 1.4138 x 1.1838

this works for each of the equations given above. i havent tested each but i can tell just by looking at how the fractions are setup.
Relax and be happy.
  • #66
  • Oct 10, 2007 8:43pm Oct 10, 2007 8:43pm
Yes, ye old wizard of the pennies, but if you look closely at what phil is saying, you'll see that you will not be able to buy 1 lot GBPCAD unless you balance it out the way he describes. In other words, you want to buy 1 lot of sterling, so you figure out how much dollars you need, then how much loonie equivalent to those those dollars.

Quoting merlin
im simply looking at the prices of the pair. NFX asked why the following equations worked...



and the answer i gave him was to show why it worked.

lets look at it with real prices. take this one for instance...

EUR/CHF = EUR/USD x USD/CHF

in price terms, thats...

1.6738 = 1.4138 x 1.1838

this works for each of the equations given above. i havent tested each but i can tell just by looking at how the fractions are setup.
Virtue finds and chooses the mean. Aristotle, Ethica Nichomachea
  • #67
  • Oct 10, 2007 9:14pm Oct 10, 2007 9:14pm
are we talking about the same thing here? NFX listed 6 equations and asked why they work. are you suggesting there is another reason why they work, other than what i have described?
Relax and be happy.
  • #68
  • Oct 10, 2007 9:18pm Oct 10, 2007 9:18pm
By the way, the answer Vik & Phil gave was very important in illustrating how the market is structured and the role of traded volumes in determining which currencies are used as a reference.

For example, we never say GBPAUD = 1/EURGBP * EURAUD even though it is mathematically correct and the prices really work out. The reason is that the supply & demand of currencies versus each other are usually influenced by activity on the majors rather than orders made on the pairs themselves, i.e an indirect effect. I wish somebody in a brokerage or with long experience could describe what exactly the procedure is for determining the price on a pair after movement on another related pair. Darkstar's essay on the broker forum does not address this, does it?
Virtue finds and chooses the mean. Aristotle, Ethica Nichomachea
  • #69
  • Oct 10, 2007 9:20pm Oct 10, 2007 9:20pm
Whew-I've got a headache!
  • #70
  • Oct 10, 2007 9:20pm Oct 10, 2007 9:20pm
Quoting Plutonite
I wish somebody in a brokerage or with long experience could describe what exactly the procedure is for determining the price on a pair after movement on another related pair.
the market sets the price via arbitrage:

but the broker knows where to make his market via the exact formula i just gave. currency pairs are exactly like fractions!
Relax and be happy.
  • #71
  • Oct 10, 2007 9:27pm Oct 10, 2007 9:27pm
Actually I think phil added that as an insight like you said, as I think the math is simple enough to explain why the equation "works". I do believe newstrader was however talking about why we used these particular ones, rather than others which also cancel out as fractions. For example

EURJPY = EURUSD * USDJPY

rather than

EURJPY = EURGBP * GBPJPY

Which still works.

PS: isn't GBPJPY an actual traded pair with considerable volume i.e non-synthetic?


Quoting merlin
are we talking about the same thing here? NFX listed 6 equations and asked why they work. are you suggesting there is another reason why they work, other than what i have described?
Virtue finds and chooses the mean. Aristotle, Ethica Nichomachea
  • #72
  • Oct 10, 2007 9:31pm Oct 10, 2007 9:31pm
Quoting Plutonite
I do believe newstrader was however talking about why we used these particular ones, rather than others which also cancel out as fractions. For example
i believe that is done arbitrarily because the dollar is such an important currency.
Relax and be happy.
  • #73
  • Oct 10, 2007 9:37pm Oct 10, 2007 9:37pm
Quoting merlin
the market sets the price via arbitrage:

but the broker knows where to make his market via the exact formula i just gave. currency pairs are exactly like fractions!
Yes, but how exactly does that work? With a single pair it's quite simple, but your equations do not seem to work both ways. For example, if lots of people/institutions/whatever sold EUR and bought GBP, we know EURGBP will naturally fall because the first price willing to provide you with 1 lot of EURO versus X lots of GBP will be less due to supply/demand. But what will happen to the dollar versus the pound if there were people buying dollar at the same time? How does the arbitrage work exactly in the interbank?
Virtue finds and chooses the mean. Aristotle, Ethica Nichomachea
  • #74
  • Oct 10, 2007 9:39pm Oct 10, 2007 9:39pm
Quoting merlin
i believe that is done arbitrarily because the dollar is such an important currency.
You're probably right. I think I need to drink some tea.

Quoting newstraderfx
Whew-I've got a headache!
LOL, i wonder what would happen if you tried complex integral calculus. I was crying earlier
Virtue finds and chooses the mean. Aristotle, Ethica Nichomachea
  • #75
  • Oct 10, 2007 9:40pm Oct 10, 2007 9:40pm
Quoting merlin
the market sets the price via arbitrage:
Exactly.
Triangle trades used to be pretty hot (but that was before my time) now it's pretty much of a non-issue except whent the market is moving quickly. Any deterministic jump on a major pair -like when all the Japanese FX grandmas decided to sell off prior to the Obon holiday - sets up an arbitrage - or at least a market - opportunity on related crosses, and the rest is just a matter of supply & demand. I think of it like a whole collection of taut springs wired to each other, strike one & they all vibrate......

As for the USD relation, aside from the math relationship (and you could use the Zimbabwean ccy or gold, just as you did the NZD) it's more an accident of history than anything else; a holdover from the fact the US was the only major ccy really left standing after WWII. Which meant for a long time most trading banks would usually have supplies of their own ccy & USD (and perhaps some of their neighboring country ccy's), while only a few large banks had adequate enough supplies of others to make a full market. So if you wanted to effect a cross trade - it was generally cheaper to make it up out of 2 legs, both involving the USD. I think the book The Vandals Crown has more info on that.

OTOH, making up a synthetic trade to mimic a cross (if you want to hold it for awhile and get precisely the same percentage gain as would show on the cross) is a little difficult, since the weightings of the 2 legs have to change to keep pace.
  • #76
  • Oct 10, 2007 9:50pm Oct 10, 2007 9:50pm
Quoting Plutonite
But what will happen to the dollar versus the pound if there were people buying dollar at the same time? How does the arbitrage work exactly in the interbank?
there are robots that keep all this stuff in line. those 6 equations, and many others, must always hold true. if the equations are NOT true (as happens when news is released) then the robot traders jump on it, buying/selling the appropriate pair. if there were no robots there might be a chance for me and you to make some money like this. i have tried, and had some success during news, but nothing sustainable. arbitrage like this is what holds the financial markets together
Relax and be happy.
  • #77
  • Oct 10, 2007 9:53pm Oct 10, 2007 9:53pm
Quoting HalifaxCB
OTOH, making up a synthetic trade to mimic a cross (if you want to hold it for awhile and get precisely the same percentage gain as would show on the cross) is a little difficult, since the weightings of the 2 legs have to change to keep pace.
yeah synthetic crosses are a whole other subject, and quite complex. but unless you have some crazy strategy, who needs em
Relax and be happy.
  • #78
  • Oct 10, 2007 10:10pm Oct 10, 2007 10:10pm
Quoting merlin
but the broker knows where to make his market via the exact formula i just gave. currency pairs are exactly like fractions!
Only sort of....The relationships hold if everything is static. The fun is when something unusual happens. Suppose on a nice quite Sunday night, somebody decides he just has to have to buy a few billion Euros using Yen.
Eur/JPY will shoot up like a rocket.
But EUR/JPY = EUR/USD*USD/JPY
so the (EUR/USD*USD/JPY) also has to shoot up like a rocket. But predicting how much EUR/USD or USD/JPY moves to compensate is not an easy question. they can move wherever they want as long as the result on each side of the equation match...
You can get into some intriguing relationships here - for example, suppose EUR/JPY is shooting up by 5% and USD/JPY is staying fixed. Then EUR/USD has to compensate by going up 5%
BUt EUR/USD = EUR/XAU*XAU/USD, which one moves there?
or EUR/USD = EUR/GOOG*GOOG/USD....hmmmmm the math is getting hairy...

it gets even worse if one tries to make a synthetic and match the rate of change in pip values. If we use d() to indicate differencing (and someone mentioned integral calulus, here differential is more useful), for example, in the triangle between EUR, CNY, and USD we have

d(EUR/USD) = d(EUR/CNY*CNY/USD)
= d(EUR/CNY)*CNY/USD + EUR/USD*d(CNY/USD)


(note to actually use this with most FX rates, we usually have USD/CNY, not the other way round, and d(CNY/USD) = -[(USD/CNY)^(-2)]d(USD/CNY). So buyer beware...)
  • #79
  • Oct 10, 2007 10:15pm Oct 10, 2007 10:15pm
Quoting merlin
there are robots that keep all this stuff in line. those 6 equations, and many others, must always hold true. if the equations are NOT true (as happens when news is released) then the robot traders jump on it, buying/selling the appropriate pair. if there were no robots there might be a chance for me and you to make some money like this. i have tried, and had some success during news, but nothing sustainable. arbitrage like this is what holds the financial markets together
Lol, I think we are working along the same lines here..The only problem is is that the robots can only guess at what the demand for the other legs might be; from what I understand it's based on things like kalman filters & bayesian analysis & correlations, tobots in the long run aren't real good at open questions. One of these days we might get lucky and get the equivalent of the portfolio insurance breakdown that got the stock markets in the late 80's. Keep liquid
  • #80
  • Oct 11, 2007 12:36am Oct 11, 2007 12:36am
Quoting Plutonite
Actually I think phil added that as an insight like you said, as I think the math is simple enough to explain why the equation "works". I do believe newstrader was however talking about why we used these particular ones, rather than others which also cancel out as fractions. For example

EURJPY = EURUSD * USDJPY

rather than

EURJPY = EURGBP * GBPJPY

Which still works.

PS: isn't GBPJPY an actual traded pair with considerable volume i.e non-synthetic?
It still revolves around the dollar because u can re-write the above equation:

EUR/JPY = EUR/USD divided by GBP/USD (which is what EUR/GBP is) multiplied by the product of GBP/USD and USD/JPY (Which is what GBP/JPY is)

Every currency equation there is can be re-written in terms of the dollar
2 traders viewing now