Triangulation of currencies

[CashOutChick]

I tried on a demo account (of course!) these transactions:
Long GBP/JPY
Short GBP/USD
Short USD/JPY

I tried to "neutralize" the movements of GBP/JPY against the other 2 pairs but it does not sum to zero or even near zero. Why? Isn't Long GBP/USD and Long USD/JPY the same as Long GBP/JPY?

 

[nine]

I tried on a demo account (of course!) these transactions:
Long GBP/JPY
Short GBP/USD
Short USD/JPY

I tried to "neutralize" the movements of GBP/JPY against the other 2 pairs but it does not sum to zero or even near zero. Why? Isn't Long GBP/USD and Long USD/JPY the same as Long GBP/JPY?

Although GBP/JPY = GBP/USD * USD/JPY (and you can multiply the crosses to prove it) there are two issues.

1. In the very short term you will see a little noise in the relationships
2. More importantly what size contracts were you owning
(they have to be the same size for the multiplier to work)

Was the size of each position the equivalent of usd100,000 of the currencies say or were the different sizes?

 

[atomm]

The real world does not always perfectly follow the mathematical equation. Here we have tolerance, deviation, ... etc.

 

[grantx]

Cashout,

This is (net) zero position, isn't it:

+GBP -JPY
-GBP +USD
-USD +JPY

Grant.

 

[Rhody Trader]

Even assuming that the market didn't move at all, that triangular position is always going to be a net losing trade. Why? Because of the spread on each pair working against you. When the text books talk about triangular arbitrage, they don't ever talk about the bid/ask spread. When you put it into practice you end up losing money on all three trades. Plus, the carry won't work out to being neutral either in all likelihood.

 

[Rhody Trader]

I tried on a demo account (of course!) these transactions:
Long GBP/JPY
Short GBP/USD
Short USD/JPY

I tried to "neutralize" the movements of GBP/JPY against the other 2 pairs but it does not sum to zero or even near zero. Why? Isn't Long GBP/USD and Long USD/JPY the same as Long GBP/JPY?

Am I opening up that can of worms here by asking the purpose behind "neutralizing" the GBP/JPY?

 

[atomm]

In FX not for more than a few seconds mate. It's exactly as nine said - size has to be the same (in USD terms for example), and the spread on the trades will mean you lock in a loss if you do them all at the same time.

Yeah.
My opinion just refer to the post by CashOutChick, which is about the equilibrium of a cross from its constituents. Example GBP/JPY = GBP/USD * USD/JPY
The real time trade, ( i.e in second by second trade and the varying trade sizes ) of the cross makes the inequality of the equation. I am yet to see the equilibrium to emerge ( mathematically ). Maybe we need to time a variable to the right hand side of the equation. :?:

 

[Rhody Trader]

Yeah.
My opinion just refer to the post by CashOutChick, which is about the equilibrium of a cross from its constituents. Example GBP/JPY = GBP/USD * USD/JPY
The real time trade, ( i.e in second by second trade and the varying trade sizes ) of the cross makes the inequality of the equation. I am yet to see the equilibrium to emerge ( mathematically ). Maybe we need to time a variable to the right hand side of the equation. :?:

Read my post above. Reality and theory are not the same thing.

 

[Brabed]

The theory behind tri arb is that traders can take advantage of market inefficiencies between the three pairs. Some believe that a risk-free pip can be made even after taking into account spread costs. It takes a lot of inefficiency because you're paying three spreads. That's a tall order.

I researched tri arb quite a bit about 6 months ago. I pretty much convinced myself that it is not possible, at least not at a retail level. I talked to a lot of people about it and nobody really convinced me they were making money at it, so I moved on.

 

[Rhody Trader]

GJ - Have you checked whether Oanda does that? They seem to me the most likely candidates for that sort of technology. Since I have considerable experience with them you'd think I'd know the answer to that, but I've never wasted my time doing a triangular arbitrage.