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Triangular Arbitrage

Seadragon

Member
I will share another "wonder" for proove. Anyone, hoo have manu for this EA, pls share. This EA Arbitrage Trades looking EU GU and E / G Costs $ 999! must be something useful. Vorking in EU chart.
I attache "educated" ver.
 

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  • TriangularArbitrage.ex4
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maximo

Member
I've studied this so called, Triangular arbitrage and it's a misnomer. A misheld belief that a currency ring (ie. 3 currencies) has some kind of advantage over trading a single currency, but as I will explain.. it's a fallacy.

Take an example currency ring like:

AUDNZD 1.25
AUDUSD 1.05
NZDUSD 0.84

by dividing AUDUSD / NZDUSD you get the AUDNZD price.

case in point. you would do the same to trade that 1 currency
and save yourself the cost of 2 spreads.

The other point is the other 2 pairs can converge or diverge
longer that you can hold onto a negative trade. They have
a term for this and it's called correlation drift.

I'd just like to save you guys, many hours and many dollars.
 

huuu

Member
I've studied this so called, Triangular arbitrage and it's a misnomer. A misheld belief that a currency ring (ie. 3 currencies) has some kind of advantage over trading a single currency, but as I will explain.. it's a fallacy.

Take an example currency ring like:

AUDNZD 1.25
AUDUSD 1.05
NZDUSD 0.84

by dividing AUDUSD / NZDUSD you get the AUDNZD price.

case in point. you would do the same to trade that 1 currency
and save yourself the cost of 2 spreads.

The other point is the other 2 pairs can converge or diverge
longer that you can hold onto a negative trade. They have
a term for this and it's called correlation drift.

I'd just like to save you guys, many hours and many dollars.

actually this is not the proper analysis. if you buy aud/nzd, sell aud/usd and buy nzd/usd, your exposure is nil except the spread, so how are you getting aud/nzd?
 

maximo

Member
actually this is not the proper analysis. if you buy aud/nzd, sell aud/usd and buy nzd/usd, your exposure is nil except the spread, so how are you getting aud/nzd?

I'm surprised you ask how to get AUDNZD and yet say it's not proper analysis?

AUDUSD / NZDUSD = AUDNZD you can use a calculator on current prices to verify this. The other 2 are always a product of the 3rd.

No your exposure is not nil...

This is how you calculate exposure in a currency ring, using the said pricing of the example 3 pairs, but it works for all currency rings.

AUDNZD 1.25 = buy 100000 AUD$ sell 125000 NZD$
AUDUSD 1.05 = sell 100000 AUD$ buy 105000 USD$
NZDUSD 0.84 = buy 100000 NZD$ sell 84000 USD$

now subtracting the like currencies exposure in USD$ is still long $21000 or .21 lots
and exposure in NZD$ is still short $25000 or .25 lots
so in your example:
buy aud/nzd, sell aud/usd and buy nzd/usd
you are simply short .25 lots NZDUSD, but in a more convoluted way using 3 pairs instead of 1.

So your exposure is niether nil nor is your risk reduced to less than those lots calculated. Anyway the important thing here is not so much the percieved nil exposure, but the view that you are trading anything more than a single currency when you have in fact purchased 3 at nothing but additional cost.
 

Capella

Active member
VIP Member
I once created an EA based on triangular arbitrage, and have also tested this one. My conclusion is that triangular arbitrage only work in theory. The variations between three correlated pairs is simply not big enoough to make profits that covers the spreads. The idea as such is interesting though. A better suggestion is to start opening a position for one pair, and if it runs too much in the wrong direction, then to hedge on of the currencies by opening a second position for any of the two other correlated pairs. This is not true triangular arbitrage but just another way to hedge positions.

For those interested, I have an explanation on how to calculate triangular arbitrage that I wrote in Excel. It can be downloaded from...

 

eigenvector

New member
I know this thread is old but I wanted to clarify in case anyone comes after and reads it. The point made by Capella is valid - in that Triangular Arbitrage from the retail standpoint is mostly a theoretical exercise. There is no risk free trade waiting at the retail level.

But with regards to the example presented, the missing ingredient is the proper sizing. The goal is to offset (cancel out) the net exposures. Thus position sizing must be calculated to ensure that exposure cancellation happens. For the example this would be as follows:

AUDNZD 1.25 = buy 100000 AUD$ sell 125000 NZD$
AUDUSD 1.05 = sell 100000 AUD$ buy 105000 USD$
NZDUSD 0.84 = buy 125000 NZD$ sell 105000 USD$

(note the changes to the NZDUSD sizing). In this case the exposures cancel out to exactly zero making it a theoretical risk free trade. In practice there is substantial execution risk and likely no real opportunity presented for retail traders.

HTH,

I'm surprised you ask how to get AUDNZD and yet say it's not proper analysis?

AUDUSD / NZDUSD = AUDNZD you can use a calculator on current prices to verify this. The other 2 are always a product of the 3rd.

No your exposure is not nil...

This is how you calculate exposure in a currency ring, using the said pricing of the example 3 pairs, but it works for all currency rings.

AUDNZD 1.25 = buy 100000 AUD$ sell 125000 NZD$
AUDUSD 1.05 = sell 100000 AUD$ buy 105000 USD$
NZDUSD 0.84 = buy 100000 NZD$ sell 84000 USD$

now subtracting the like currencies exposure in USD$ is still long $21000 or .21 lots
and exposure in NZD$ is still short $25000 or .25 lots
so in your example:

you are simply short .25 lots NZDUSD, but in a more convoluted way using 3 pairs instead of 1.

So your exposure is niether nil nor is your risk reduced to less than those lots calculated. Anyway the important thing here is not so much the percieved nil exposure, but the view that you are trading anything more than a single currency when you have in fact purchased 3 at nothing but additional cost.
 

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