I have has stones thrown at me before by saying this, but here goes anyway. It is prety useless trying to do "pairs trading" or hedging spot FX positions with other spot FX positions (a real hedge in FX would involve a derivative). A bold statement you are thinking? Ok let me explain. If you are, say, long eur/usd and short gbp/usd, this is NOT a "hedge" stricto sensu and, I would even go so far as to say that such a set up is often a waste of margin and spreads. Why? Because long eur/usd + short gbp/usd = long eur/gbp. In otherwords, if you are long eur/usd and short gbp/usd, you have an outright position in eur/gbp.... so why bother paying the extra spread on 2 pairs (eur/usd AND gbp/usd) when you could just trade eur/gbp ? Furthermore, most dealers will block alot more margin for 2 positions open (eur/usd and gbp/usd) than just one position on eur/gbp. I have noticed that quite a few guys trading FX do not understand some basic mechanics in FX and are lured into believing that it is easy to "hedge" spot FX pairs with other spot pairs. FX pairs are just fractions and there will always be a perfect triangular relation between 3 pairs (eur/usd, gbp/usd, and eur/gbp for example). If you think that a short gbp/usd position is a "hedge" against a long eur/usd position, you are fooling yourself... such a position is just a plain old unhedged eur/gbp position. Don't want to rain on anyone's parade, but I think its better to understand rather than trade in ignorance. All the best, and good trading all.
You should have seen the forum a while back when people proposed being long and short EUR/USD simultaneously, in order to "lock in" profits whichever way the market went first. It's the first thing retail office managers try to impress you with, which shows how dumb they assume you are.
Ha !! Yes, I've seen those "hedging" gadgets that let you go "long and short" at the same time .. DUH ... why don't the joker dealers who offer such stupid things just ask outright their clients to "please donate a free spread" ... same thing. The worst though is the retail crowd who believe that those "hedge" gadgets are actualy of some use. If anyone attempts justifying those hedging gadgets, don't expect any response from me... I'm not going to waste my time on that subject anymore with people that can't do some basic math to see that it is pure stupidity.
What is with these newbie types so intent in trying to "get around the system" for a measly 5% yield ? If you are so obsessed with interest and yields, why don't you close your FX account, and leverage yourself to the teeth on bonds ?
I concur with the person that used the EUR/USD and GBP/USD example. I've tried a similar trade using USD/CHF and EUR/USD. What I ended up with was basically EUR/CHF outright (the USD on the two pairs essentially cancel each other out). The only way to gauge where that "hedge" or "spread" was going was to look at a EUR/CHF chart. For example, if one were long EUR/USD and long USD/CHF, one would essentially be long EUR/CHF. If the EUR/CHF chart was going down, your position would in the end lose money. I can see where people would thing "gee, these two instruments move opposite directions, but have a 80%+ correlation, thus hedge." But it simply doesn't work that way. I'm still a newbie compared to the rest of the pros on here, so yeah I've done this trade thinking the same things. But despite the high correlation, the two aren't the mirror images of each that many would think. I have seen the EUR/CHF chart move up, but the EUR/USD move down while the USD/CHF trade go up; overall producing the similar result of a long EUR/CHF trade. But, if EUR/CHF makes a move to the downside, you only hope would be that one pair that is long, that the losses on that pair are less than the gains on the short pair. The closest I have ever come to producing a "hedge" trade with FX, came about by accident. I was short EUR/USD, short USD/CHF, short CHF/JPY and long EUR/JPY. The units involved were adjusted where I was making (or losing) $1 pip (keep in mind I am a newbie at spot trading, so no monster positions like you good folks). My intention was not to produce a hedge trade of any kind, this was an observance I made while on this trade. With the JPY trades, my long position in the EUR/JPY and short position in CHF/JPY essentially canceled out the Yen, leaving me with a long EUR/CHF. At the same time, I had my short EUR/USD and short USD/CHF position, creating a "short" EUR/CHF. But wouldn't these two trades also cancel each other out? According to Oanda, the answer is no, because I still have exposure to all these currencies. I'm not saying this is "it", and probably more like a fluke of sorts. At the end of the day, I believe the best "hedge" one could make in FX is what another person said, to utilize a derivative. For example, on Interactive Brokers, one could establish a long or short position of about 125k of EUR/USD, and "hedge" it with a CME Euro futures contract (which I believe is also 125k worth of Euros). The pricing will be bit off on the futures, given the month selected, but it is a hedge of sorts.
Good day Traderjb, Yes, you do have a good basic understanding of the mechanics of the relations between pairs. However, I would just like to correct you on one point. When I said it is realy only possible to hedge a spot FX position with a derivative, I meant an option more precisely. Trying to hedge an FX position with a furures position is exactly the same as trying to hedge a spot position with a spot position because of the perfect correlation between spot & futures prices. Ok, I know some of you are thinking "but futures prices are slightly different that spot prices" ... yes, true, but this is only because the interest credited/debited on spot positions are not incorporated in the price whilst the interest credited/debited in FX futures are priced into the contango/backwardation. ... see for yourself, just look at how eur/usd futures are more expensive (contango) as you go further out in the expiries. This contango will almost precisely equal the interest paid, over the same period, on a long eur/usd spot position (vice versa for short positions). To sum up, trying to hedge spot FX positions with other spot FX positions is futile because of the perfect triagular relationship between FX pairs, and trying to hedge a spot FX position with another spot FX position will just give you outright exposure on a different cross. The only efficient way to properly hedge an FX position is to use options. ... and lets not forget that hedging is often a very expensive activity that limits gains. My advice is just to concentrate on outright positions without taking on so much size that makes you feel you need to hedge at all. Happy trading all.
is it same or different dealing a long eur sell gbp and a long eur/gbp? i have done this trade some time ago. i have to say i am no gurus in the mechanics of fx. the attached is for reference only.