Correlation Arbitrage

I am trying to devlope a system to arbitrage the ongoing differences between EUR/USD, EUR/JPY, & JPY/USD, trading those three pairs only. Can anyone help me out?

long eu, long uj, short ej

if you want to totally hedge that 3 pairs
use this
1 lot buy eu
1,46 lot buy uj
1 lot sell ej

Why and how did you determine to buy 1.46 lots of USDJPY vs just 1 lot?

you want the hedge to be dollar neutral, which means if both pairs move in price, that the difference will be equal. To determine that, divide price by pips to get ratio, for example, eurusd has a ratio of 1 always, when the price of eurusd moves by 1 pip, the price shifts by 1. For example, usdchf has a ratio of 0.8, which means you need more lots of usdchf to match eurusd. To have dollar neutral hedge, i think you need 1.3lots of usdchf and 1 lots of eurusd, which will make the hedge dollar neutral. For usdchf the ratio is 0.8, for eurusd the ratio is 1, you want to make these ratios equal, so the profit and loss are always in dollar neutral, you want to make the profit equal the loss. Otherwise, one position will be out of balance with another.

does hedging work well in forex ?

Depends on what you mean by 'works well'. The best this type of 'hedging' will do is to allow you to take a directional bet on the future price of a single currency by cancelling out the risk of adverse fluctuations in the other. This is how I understand things, bear in mind, having never bothered myself.

On the topic of arbitrage in forex, an example would be trading currency pairs such as EUR/USD and USD/CHF or NZD/USD and AUD/USD. Using the latter pairs, one may decide that the out of sync moves of the NZD and AUD are unjustified because of their economic similarities due to their locality. One may therefore short the over-performer and long the under-performer and wait for them to converge. The bet would be USD neutral.

don't even waste your time with correlation arb or synthetic hedging in forex.

why not,surely looking for pairs taking the same path is a good form of confirmation. Also is it not better to buy the gbp/usd if both gbp/usd and eur/usd are up but the gbp is up asgainst the eur?