need arbitrage tips

Need a little help remembering something I read last year. A guy wrote that he would pick two closely correlated pairs and then buy into each with extremely small lots. The idea was to wait until the running profits went at least 100 pips out of synch, then buy into them with real money this time and wait for the pairs to reverse into profit. I think he said he got just 3 or 4 trades a month this way, but they were rock solid.

I'm sure I'm forgetting parts of what I read. Can someone help me fill in the blanks? If anyone's trading this I'd appreciate a detailed step-by-step on how it's done.

Thanks in advance!

This thread by billbs covers the theory you mention: http://www.forexfactory.com/showthread.php?t=160679

Also Trader101 basket trading is quite interesting here: http://www.forexfactory.com/showthread.php?t=107119

Hope this helps and that I have understood your query properly.

Thanks Mike. I was able to dig this up pdf from my laptop. The first entry on the pdf explains the idea, but in very bad English. Can you add anything to it?....

This has absolutely nothing to do with Arbitrage....

You are looking at correlation trading!
Bassicaly you took 2 highly correlated pairs and trade them
when they got out of standard correlation....
Best combo is EURUSD and EURCHF(negatively correlated)
You buy or sell them both and wait for correlation to return
to its normal percentage!
Regards

Notice it was posted in the rookie section? Do you have anything positive to add or not?

I'm familiar with the correlation threads. But I've never seen this guys trading style mentioned anywhere besides this pdf. But the English is so bad. I'm hoping someone can clear it up for me.

Mike, can you understand the first post in that pdf?....

Sorry I am not particularly familiar with this concept and so I can't advise you. I just replied with the links I thought would be appropriate.

No prob! Thanks for coming in!

What is it that you dont understand!???
I could explain it to you, but be more precise.
Regards

For some reason this guys grammar is killing me. I've been to 23 countries so normally this isn't a problem.

In his text he uses the word "Buy" universally. Normally you would break it down into Buy, Sell, Long, Short, etc., but not this guy. That's probably the biggest hindrance to my understanding his post. If you are understanding what I can't then I'd ask you to pretend to be his editor and rewrite his post with improved grammar and clearer directions. Thanks!

We are trading 2 highly correlated pairs, in this case it is combo of
EURUSD & USDCHF....this 2 pairs are most correlated (negatively) pairs
out there, both long and short term.
Since they are moving oposite of each other we are trading them
in one direction, either buy or sell!

This type of trading is a type of statistical arbitrage!

All you need to do is to execute 2 trades (either 2 buys or 2 sells).
Then you wait....lets say after some few hours your "hedge"
looks like it is out of correlation....your EU shows profit of 200$
while UC in in loss 100$, this is the differenceyou wait for....
around some 100 pips, wich means that pairs are out of correlation.
Then you open your real account and trade your hedge but in opposite
direction hoping that correlation will return to its normal value wich will
in effect got you some profit.

I highlited word hoping, cos that is what it is....if this was so simple,
everybody will be doing this! There is a ton of stuff you need to know about this type of trading......

Here, I added 2 indicators that will help you a lot, OverLayChart.mq4
will help you visualise your 2 pair on one chart, and tghe other one,
i-Equity_GM_v61e.mq4 gives you a preety close visual on pip differences
between any 2 pairs.(it shows you an exact pip difference for hedge).

Regards

Sounds fantastic. What's the drawback?

OK, the missing piece has fallen into place. Much appreciated.

Mike, the biggest drawback I can spot right away, is that since the 2 pairs are NEGATIVELY correlated that you're running the chance that they could turn against each other and not return for several days, or even longer.