Three Pairs Hedging

what is your favourite basket that you like? I sat over a week on a BBS e/j/u before bailing on it. Now with the tick value ind I re-adjusted my lots size and won one but I am 24hrs and counting on my 2nd one. I am not greedy I am just trying for about 10pips or so

b-cat

hi cash

do you Buy = EURUSD Buy=USDCHF and Sell=EURCHF ?

hi tex, exactly ;-)

tracking day 4

I haven't read all this thread yet, but so far I see USD-CHF, EUR-CHF & EUR-USD are mentioned recently.

Looks like on Thursday, you could do a BUY - BUY - BUY and be ahead; did anyone notice that?

after the price action you can say that, but before that, how you know to buy buy buy??

Good-day Cash4u,
Thank you for this hedging strategy and many thanks goes to everyone that has contributed.

I joined this forum because of this strategy you posted, because as far as my exposure and experience is concern, it is the best hedging strategy in forex so far because your mathematics is perfect.I have been on the search for a strategy without charts with high profitability.Those Charts are meant for traders to Loss their money.

It is highly profitable and zero loss potential if patience is applied. I am currently working on the loss potential and the risk management application.

Thank you.
Oluwadare

The only reason why this type of system works is that it is not true hedging
After all the banks would be doing it big time
True hedging would have to incorperate different lot sizes for each set of pairs because of the different daily ranges
Ie if daily range of £/usd is 160 points and E/$ is 120, if both went to the top of the daily ranges and we had bought £/$ and sold E/£ we would have 40 pips minus the spread in profit Although if we got it wrong we would be 40 points plus the spread in red assuming that the E/£ did not change

Can't argue with that logic, but that was not my point. Anyway, my trend indicators say -

EUR-USD = Up
EUR-CHF = Up
USD-CHF = Down

so easy to spot which is out of sync, may present an opportunity today as they correct themselves?

i totally agree with you,with patience and follow this simple rule you are always be in profit.

I have tried to use your system, few day, without results :/

I think in this idea is still some oportunity but it's more complicated to get benefit in this way.

Best Regards
Marcin from Poland

I hope you can develop this system to benefit condition.
I will post here something what can help you properly.

Sorry for my poor english.

This post comes from another forum, from another autor,
The autor of this post is great trader working as inerbank trader, I hope it can help samobody.





Hello, friends,

in this article I?ll invite you to discover the FPI - Fractional Product Inefficiency concept. I call the trading technique derived from this concept The Impeccable Hedge. In the text below, you will find out what is FPI, how do we calculate it and how do we trade it.

For starters, I?d like to ponder a littlebit about the quotes origin and purpose since that relates closely to the inefficiency of mutual quotes? products that form the FPI foundation.


General contemplation on quotes origin

From the dawn of civilization, people were exchanging goods and services among themselves to satisfy their needs. The principle of exchange is at the very core of any business. Indeed, we are making exchange-related decisions in our everyday lives.

The introduction of money changed nothing on the ubiquity of this exchange principle, since money is just a medium that facilitates the exchange in a smoother way. As we all know (or do we? ), money itself has no value until we assign some value to it externally. In other words, money can only buy you things if your business counterpart believes the money possesses some value. Certainly you wouldn?t expect an unspotted native from the middle of an African forest to trade his 10 pounds of gold for your colored slips of paper (money). First you have to make him believe those slips are of some value (good luck on that quest ).

Let?s now abandon the question of money being an intrinsically worthless medium of exchange and let?s focus on a thesis that is closely related to it: that no value is actually expressible without a comparison to some other value. This may not seem obvious, but until you express a value of object A in comparison to at least one other value, the object A?s value is uknown.

We may call this comparison a quote and it?s expressed:
either in a form of a product: A = 2 * B
or a fraction: B = A / 2
To better understand the mutual relationship between the values, let?s express some commonly used values as value / value fractions:
1 GOOG stock / 1 USD = 420.00
1 BMW 750i / 1 EUR = 87,500.00
1 hour of your work / 1 USD = 100.00
1 EUR / 1 USD = 1.2
1 GOOG stock / 1 hour of your work = 4.2
1 BMW 750i / 1 GOOG stock = 250
Every such fraction/quote defines the mutual relationship between the two values and based on various conditions, this quote changes. The key term here is ?mutual relationship?: if the Google stock quoted in USD goes down, it means the ratio of GOOG value to USD value is lower. It says absolutely nothing about the intrinsic value of GOOG or USD in relation to other values (like to the value of one hour of your work or to the value of one BMW 750i). In fact, maybe GOOG actually strenghtened after announcing a new revolutionary web service, but USD did strenghten even more after Bernanke said the Fed was gonna raise the interest rates to 10% the next week.

Unfortunately, there is no ?firm? value in the world to which other values (and thus, the quotes to them) could possibly be linked. This value uncertainity makes the world a perfect place for traders though

As we know, the Forex quotes are the ratios between the values of the first currency in the Forex symbol (the base or unit currency) and the second currency in the FX symbol (the quote or the price currency). There is no ?absolute? value of any of these currencies per se. For instance, the quote
EUR/USD = 1.2847
Denotes there?s a ratio of 1.2847 between the value of 1 EUR and the value of 1 USD. But we never can possibly find out what?s the value of ?EUR? nor ?USD? separately.


FPI ? a simple mathematical draft

Let?s make things simpler and let?s picture the Forex quotes as the plain mathematical fractions. Let?s have three Forex symbols, represented by commonplace fractions:
a / b = 2.5
b / c = 2
c / a = 0.2
Are we able to derive the values of a, b and c variables from these three expressions? No way. As stated above, the value can?t be expressed without a comparison to some other value. But we know what is the relation between the values though.

In this example, there are three fractions (FX symbols):
a / b
b / c
c / a
and three separate variables (currencies):
a
b
c
The quotes (the values of these fractions) in this example are not random. Actually, even though we don?t know the values of a, b and c, there is a mutual relationship between the above fractions. We can even derive the third fraction?s value from the first two:
a / b = 2.5
b / c = 2
c / a = ?
c / a = 1 / ((a / b) * (b / c))
c / a = 1 / (2.5 * 2)
c / a = 1 / 5
c / a = 0.2
A simple test reveals the product of the fractions? values is 1 and thus the results are ok:
(a / b) * (b / c) * (c / a) = 1
2.5 * 2 * 0.2 = 1
We can derive the value of any of the above three fractions if we know the value of the two others. We may generalize that in a set of n fractions where every individual variable is present exactly twice, we only need to know (n ? 1) fractions? values to derive the value of the last, unknown fraction. Obviously, this is true for any n, i.e. for any number of fractions where every individual variable is present exactly twice. We will call the set of fractions that feature the attribute of having every individual variable present exactly twice a ring since it resembles a closed ring of variables:




FX symbols: just fractions

Now this is going to be more interesting. Let?s subtitute the variables and fractions for FX currencies and symbols now:

Variables:
a = EUR
b = USD
c = CHF
Fractions:
a / b = EUR/USD
b / c = USD/CHF
c / a = CHF/EUR
Now wait! There?s no CHR/EUR symbol, only EUR/CHF! You?re right. We simply do:
CHF/EUR = 1 / (EUR/CHF)
I hope that I aroused your curiosity about what is the product of this ring (the three FX symbols? quotes). Is it 1 as in the example above with fractions?. Let?s see:
True prices as of Dec/29/2005, 17:00 EST
EUR/USD = 1.1840
USD/CHF = 1.3145
EUR/CHF = 1.5565
The product of the ring:
1.1840 (EUR/USD) * 1.3145 (USD/CHF) * (1 / 1.5565) (1 / (EUR/CHF)) = 0.999915194
Voila! It?s ?almost? one. Why it?s not exactly one we?ll soon discuss. But it?s clear the principle is the same as with the fractions above.


Complementarity

For sure, as was the case with the fractions above, we can derive the price of whichever of the quotes in ring if we know the other two:
EUR/USD = 1.1840
USD/CHF = 1.3145
EUR/CHF = ?
EUR/CHF = 1 / (1 / (EUR/USD) / (USD/CHF))
or better
EUR/CHF = EUR/USD * USD/CHF
EUR/CHF = 1.1840 * 1.3145
EUR/CHF = 1.5564
Bingo! We?ve just ?recreated? a price for EUR/CHF from the other two quotes. Again, our ?reverse engineering? came up with the price 1.5564 instead of 1.5565 and we?ll cover that later.

For a recap, the first ?1? in the equation
EUR/CHF = 1 / (1 / (EUR/USD) / (USD/CHF))
is there because there?s no CHF/EUR ( c/a ) quote on the market, only EUR/CHF, so we need to invert it this way. The second ?1? in the equation is there because the overall product of all the fractions (Forex quotes) equals 1. So we are simply dividing consecutively this overall product (1) by the rest of the fractions in ring to come up with the last ?missing? fraction (quote).

Remember, this rule applies to any number of fractions (quotes). If we had a set of 20 Forex quotes and every individual currency would be present exactly twice in that set (thus, they would form a ring), we would be able to devise the value of whichever of these 20 quotes based on the values of the rest of the quotes.


The fractional product almost never equals 1

Now you are probably asking what is so amazing about being able to tell the overall product of the Forex quotes (fractions) in ring is one?

Frankly, the amazing thing about this is that:
the product almost never is exactly 1.
Have a look at the product of the close prices on the following 15 min chart:



As you can see, the product oscillates around the ideal value of 1, but it rarely equals 1 sharp. This fact alone disproves the Efficient Market Hypothesis which maintains that the market prices are efficient and it's not possible to take advantage of market inefficiency on a regular basis.

Certainly, one of the factors contributing to the fact that the product is not exactly 1 constantly is that we are not using a mean value between Bid and Ask, but instead only a Bid price here. But that would account only for an absolute shift from the ideally effective product of 1, not for the wild oscillation we can see on the screenshot.

Now whatever is the reason for the value of the product to not being the ?correct? value of 1, this obvious inefficiency can be capitalized on. The value of the product oscillates moderately during the quiet market times, but the amplitude widens considerably during the times when the market is fast-moving:



It seems the market is not able to react fast enough on the changes in all FX symbols? quotes at once so that a minor inefficiencies like this occur. We may picture this concept simply as if EUR/USD quote was updated fast at one brokerage and slowly at some other brokerage. Evidently, when there are two different quotes for the same value / value ratio (EUR/USD), perfect arbitrage opportunities arise. That's exactly what's happening here: the ratios are simply not updated fast enough, so the trader can take advantage of this inefficiency.

And what?s astonishing, with FPI this inefficiency is present permanently! It means that at almost any time (except at the time when the product is exactly 1, which is a rare case), the market is inefficient in terms of mutual quotes between the FX symbols in ring! It seems like nobody had noticed this almost constant inefficiency yet, or at least I was not able to find any traces about any such idea on the internet.


The Impeccable Hedge

I guess you have already figured out that if we open a position in the direction of the ring, i.e.:
Buy EUR/USD
Buy USD/CHF
SellShort EUR/CHF
we are actually opening a hedge position since we neither gain nor lose anything. This is the Impeccable Hedge position ? the symbols make a perfect, closed ?hedge ring?. It?s similar to opening a standard, ?futile hedge? position:
Buy EUR/USD
SellShort EUR/USD
but we are including more than two FX symbols in the hedge en bloc.

Some brokers even allow for opening the same symbol positions in the opposite directions on the same account. The trouble is, there?s no difference between EUR/USD quote and EUR/USD quote on the same account (not surprisingly, eh? ), so you gain nothing by opening the opposite direction positions with the same symbol (well, if you are arbitraging between two different brokers, the quote may be different). Actually, you lose the spread twice during such ?futile hedge? operation.

On the other hand, if you open the Impeccable Hedge position, you are getting the best of both worlds:
your overall market position is flat as with the ?futile hedge?. So you can turn off your computer, go on a vacation and sleep well.
as with the futile hedge, there are no stops nor profit targets, so your Impeccable Hedge position remains open until you close it and this fact does not have any impact on your account margin
you make money if you open the Impeccable Hedge position when the product is at one, say the lower extreme ( < 1 ) and close it when the product is at the opposite extreme ( > 1 ):



In fact, only the absolute difference between the opening FPI level and the closing FPI level matters. Open/close levels don't have to be below/above 1. The amount of profit made by opening and closing the Impeccable Hedge position is very small. Yet ? it is sure ). Virtually, you can?t lose money by trading the Impeccable Hedge if you follow the above rules.


FPI relies on your broker not being a bandit

As we said above, the fractional product inefficiency is rather microscopic , so the success of using FPI in a real trading environment is much dependent on a fast and literally razor-sharp execution and low spread, because the FPI operates with market orders ?at the moment? ? we need to catch the inefficiency precisely when it happens. If your broker often plays games with your market orders, forget about FPI.

From the technical point of view, the Impeccable Hedge position opening and closing would be much easier if the broker supported a ?composite hedge order?: for instance, the FPI trading system would post the order to open three positions at once (buy EUR/USD, buy USD/CHF, sellShort EUR/CHF), but the positions would not be buffered into the market one after another ? instead the whole Impeccable Hedge ring (all the three positions) would either be placed or no position would be placed at all.

As of the time of this writing, I don?t know of any FX broker who would support this type of orders (please feel free to suggest such a broker). But anyway, if you are dealing thru a good broker (not that there are more than a few), you shouldn?t experience any troubles regarding market order execution.


FPI Control Panel for NeoTicker in C#.NET

I?ve written an application in C#.NET that hooks up to the NeoTicker trading platform chart and controls the FPI indicator externally. The FPI Control Panel application/indicator takes the symbols on the chart as the input, sifts them thru to get only valid FX symbols and sifts these symbols once more to get a list of unique FX symbols on chart. It means you can have EUR/USD, EUR/USD and MSFT on the chart and the FPI Control Panel will know there?s only one valid unique FX symbol (EUR/USD).

The FPI Control Panel uses my NeoEventsClass object class that generates events for the rest of the application. Event-driven programming is a modern and resources-efficient way of coding. NeoTicker doesn?t provide events in its NTIndicatorObjects library yet, so I decided to write my own events library based on NeoTicker objects and will use it until the events architecture will be available in Neo.

My entire code for FPI and all the supporting DLL libraries (including NeoEventsClass) is available for free here, so you are encouraged to use it and build upon it. You can download the projects source files at the bottom of this article. The FPI_source.zip archive also contains a set of precompiled DLLs and an indicator IDL file ready to be copied into the NeoTicker/indicator folder and run.

I have implemented only several NeoTicker events for the FPI Control Panel, but based on my events library, you can easily add literally hundreds of other useful events. If you do, please tell me and I?ll include them together with your name in the NeoEventsClass so that this effort will be sort of centralized.

The FPI Control Panel connected to the NeoTicker chart looks like this:



It displays:
the list of all symbols on the chart
the list of unique FX symbols on the chart
the detailed information about every unique currency on the chart (the FXCurrencies object that provides the information about all valid FX currencies in the world, their names (Canadian Dollar), alphanumeric codes (CAD) and ISO codes (124) is a part of my FX libraries available for free download below)
the list of FPI Rings available for this set of unique FX symbols. The list is calculated automatically upon clicking the ?Calculate FPI Rings? button:



Then if you click on one of the FPI Rings displayed in the listbox, the FPI value of that particular FPI Ring is displayed on the chart in NeoTicker as the FPI indicator (see above)

If you pick another FPI ring in the FPI Control Panel, the FPI indicator on the NeoTicker chart gets automatically recomputed. If the FX symbol is reversed in the ring, it?s displayed in parentheses:
not reversed: EUR/USD, we multiply by EUR/USD value
reversed: (EUR/USD), we multiply by 1 / (EUR/USD) value


Currency pairs matrix

I devised a simple and fast algorithm for calculating all the possible combinations of FPI rings given the particular set of unique FX symbols on chart. It uses a matrix of unique currencies on the chart. To better understand how this combinatorial matrix works, let?s show that on an example.

Let?s have 23 unique FX symbols on chart:
AUD/JPY, AUD/USD, CAD/JPY, CHF/JPY, EUR/AUD, EUR/CAD, EUR/CHF, EUR/GBP, EUR/JPY, EUR/SEK, EUR/USD, GBP/CHF, GBP/JPY, GBP/USD, NZD/JPY, NZD/USD, USD/CAD, USD/CHF, USD/DKK, USD/JPY, USD/MXN, USD/NOK, USD/SEK (for a screenshot, see above)
As you can see on the screenshot, there are only 12 unique currencies present in those 23 pairs:
AUD, CAD, CHF, DKK, EUR, GBP, JPY, MXN, NOK, NZD, SEK, USD:


The key to the matrix calculations is to ? well, work with the currencies in a matrix The matrix abstraction is all done by the PairsMatrixClass within the C# FPI code, so you can assess by yourself how it works under the hood since I make that code available in its entirety below.

In a nutshell, we can picture this matrix by putting a ?1? (or ?true? in the actual C# code) in every row/column intersection for every valid FX symbol. As we said at the beginning of this article, the quotes are always two-way, so for the EUR/USD pair we put a ?1? at the intersection of EUR and USD as well as at the intersection of USD and EUR in the matrix:



By the same token, we fill up the rest of the valid FX symbols intersections for all above 23 FX symbols that feature 12 above unique currencies:



Notice the matrix is symmetric. It represents the currency intersections of all available FX symbols.


FPI Rings combinations

Now how do we come up with a set of valid rings with the help of the matrix?

I?m using a brute-force testing algorithm that goes thru all possible combinations of FX symbols. The total number of possible combinations we are testing is:
2 ^ n
where n is the number of total unique FX symbols that are available for testing. So, for instance, for 23 FX symbols, there are 2 ^ 23 possible combinations = 8 388 608 combinations total. By the matter of fact, converted to binary (see the C# code), the first combination will feature one FX symbol and the last combination will feature all FX symbols.

Now how do we assess the currently tested combination of FX symbols is a valid FPI ring? That?s simple. First of all, let?s recap what we?ve learned earlier in this article:
A ring of fractions is formed if we?ve got a set of fractions where every individual variable is present exactly twice.
In this definition, a variable is the FX currency and the fraction is the FX symbol. So this time, we will mark the corresponding intersections in the matrix as used in the tested ring. Let?s create a matrix for EUR/USD, USD/CHF and EUR/CHF ring:



Now we will check whether our chosen combination of FX symbols complies with the above rule. In the currency matrix, we do that simply by checking that in every row the total number of ?used in ring? currency pairs (FX symbols) is either 0 or exactly 2. Actually, we can check these sums in columns as well. That doesn?t really matter because ? as you remember ? the matrix is symmetric.

Zero occurences of the currency in a matrix row means this currency is not present in any FX symbol in the ring we are testing for validity as is the case for JPY, for example:



Two occurences mean the currency is present exactly twice which complies with the ring creation requirements, as is the case for EUR here:



Any other sum (i.e., not zero and not 2) means the whole tested ring is invalid. For example a matrix for EUR/USD, USD/CHF, EUR/CHF, USD/MXN FX symbols features this invalid row for USD:



If any row is found to be invalid during the testing, it?s unnecessary to test the following rows. We may skip this entire combination test and continue on to the next combination test because we know that all rows must be valid.

To declare the currently tested FPI ring as valid:
all rows must comply with the above rule (exactly zero or 2 pairs used in a ring)
the number of pairs used in ring must be higher than zero
the tested combination must not contain more than one valid FPI ring
In the combination testing algorithm, I am skipping all the combinations with less than three FX symbols since it?s obvious the minimum FX symbols count needed to create a valid FPI ring is three.

At the end of each ring combination test that yields a valid FPI ring we also need to determine in which direction the particular set of FX symbols will be used in the ring. Since the matrix is symmetric, it tells us nothing about the direction (buy or sell) of the FX symbols used in the ring. It only provides us with a set of currency pairs used in ring. As stated above, the FX symbols used in the opposite direction are shown in parenthesis in the FPI rings list on the FPI Control Panel:



In this case, GBP/JPY symbol is used in the opposite direction in the ring.


FPI: same time prices only

In the FPI Control Panel, you have to tell the program on which prices to base the FPI calculation. You have two choices:
open price
close price


Why there?s no high or low price to choose from? Simply because we never know when high or low occurred during the bar. Open and close prices are time-precise ? we always can tell that the open or close prices across the various FX symbols on chart did occur at the very same time. This is also the reason why it?s not possible to apply FPI to a tick chart. It?s only possible to calculate the FPI from prices that occurred at the same time.


There?s money waiting to be made with FPI

The FPI might be used:
directly for trading the FPI extremes (explained above), or
to predict the behavior of one of the FX symbols in ring
Concerning the latter usage, as we have learned above, we can determine the value of the missing fraction (FX symbol) in ring if we know all the rest of the fractions in ring. Let?s imagine we are analysing three FX symbols: EUR/USD, USD/CHF and EUR/CHF. Sure, if we know the prices of the first two, we may determine the price of the third one. But by the same token, if our analysis reveals us the direction of the first two symbols, then we can also tell what is the direction of the third one, too, despite of the fact that there might be no hint on the chart as to what is the direction of the third symbol.


Conclusion

As exaplained, the Impeccable Hedge takes advantage of the mutual inefficiencies of FX quotes. We can use the FPI indicator to display the current state of the mutual inefficiency. The Impeccable Hedge trade makes very small amount of profit, but this profit is sure. The success of this concept depends very much on the quality of your broker?s execution.

Thanks for your interest in FPI. I?m looking forward to your questions and comments!

Have a very nice day all,
Michal Kreslik

note: if you can't see the attached source files archive below this text, please log on

Marcin103, please open your own thread!

Yes, persia, patience is the key. Some people here think, that three pairs hedging has to show quick results. It is not like that. Sometimes you get quick results, when the pairs move right in our favour after the trades are opened. But also sometimes, it takes a few days to see profit. If you want quick results, I am sorry, this is not for you!

Your right this isnt a get rich quick scheme....
I closed my second e/j/u basket last night(48hrs)....my challenge right now is to run 2 baskets one a BBS and other is SSB. Having trouble with my broker getting logged on with the second MT4. Unless an ea exists otherwise...

B-cat

absolutely right brother,you did a good job,keep going.
regards

please post results people, using this system....

a littl weird indeed,

actually, it takes may be just a few days to demo trading this idea before one can find out it is useless

surprisingly, this thread still survives.

Agreed. Surprising because the mathematics involved has been shown numerous times. I guess it's quotes like this that keep the dream alive for some:

Please show us or link us to threads that show this is a useless strategy....We are all here to learn and share. Constructive
criticism is welcomed but not comments like that.....

Thanks....
b-cat