Confusing crosses

Hi,

Okey i am unsure about some things... maybe there is someone who know these things in and out.

Well, you don't need to be a math genious to realize that if you know the values of x/y and z/y you can easily get the value of z/x as well. But i am not sure how it actually happens in real life with forex pairs.

Imagine that both gbp/usd and eur/usd for some short time moves sharply in one way... but eur/usd moves quite a bit more than gbp/usd. As we know price changes because of supplay and demand, so that to correct eur/gbp there should be need for some artifical supplay/demand. Well.. who wouldn't like to do this if they can make money of this, huh?

Question) Who makes sure that this works like that? Banks? HFT? You? Me?

Okey, now lets consider eur/gbp. Volume is somewhat decent, but compared to eur/usd and gbp/usd the volume is very very small.

Now, it would make sense to me that eur/gbp and gbp/usd work as leading pairs and eur/gbp as lagging, because of the volume difference. So i have that kind of feeling when looking at eur/gbp chart that what i am actually looking at is a bit of actual, and quite a bit a consequence of eur/usd and gbp/usd.

When i see a rise in eur/gbp... i could say that buyers stepped in.... but what might actually be the case is that buyers stepped in eur/usd more than they stepped in gbp/usd.

Question) Best way to use corsses?... if use them at all?

Question) Who makes sure that this works like that? Banks? HFT? You? Me? Arbitrage traders keep the imbalances in balance.

But to answer your main question, what you are looking at is a rate of exchange. So whenever something is bought in the FX market something else is sold for it.

Example... If someone somewhere or a group suddenly start buying a whole bunch of EUROS for whatever reason this is EUR demand. To Buy Euros on the exchange they will be bought in exchange for whatever other currency.. Perhaps 70% USD, 20% AUD, 10% GBP who knows... But whatever happens demand for something is generated by the supply of something else. This is why the rates will always balance no matter which way you slice it.

So you can work out the rate of one pair when given the rates of any other tow pairs that hold the same constant.

EUR/JPY = EUR/AUD x AUD/JPY (as you said)

If you think of it as a large bucket of water with different colors representing all the different currencies, as soon as one part is removed say red, the same amount that was removed will be added to another part, say blue... This blue amount will now have have a larger % weight against all the other colors, the same way the red amount will now have a lesser % rate against all the other colors.

To buy something in exchange for something else, you need to sell something.

Everything is kept in balance because as soon as it is out of balance, risk free profits can be earned by arbitrage traders. Some one therefore losers, and that person who is at risk of losing will not let that happen.

You didn't mention the common denominator...the USD. GBP/USD and EUR/USD, moved strongly because whoever (you, me, banks, the illuminati), sold the USD. This appeared accross the board. But seemed most evident in these two pair.

The disparity you see in EUR/GBP is the result of this action. If the GBP had been the currency of choice, then you would've seen EUR/GBP fall, GBP/USD rise (along with most other GBP pairs) and EUR/USD stay flat, or fall slightly. The point being that you must consider the relationship with all the majors.

Usually only one major gets "worked" at a time. Clearly last friday it was the USD, from the sell side. Leading up to that it was the JPY. In fact it could be argued that the USD sold off to correct the USD/JPY...

I seriously doubt you can work it out with any kind of logical formula via math. This action is the result of humans interacting with the market, whether it is you, me, or some mystical market controler, it is NOT logical from the sense that you can work out an exact formula. The better idea is observe the interaction and react to it as a human interactin with other humans. You will gain more than some mindless fomula that cannot detect subtilties of human interaction