correlation adjustments when trading multiple pairs

[Sidekicker]

If you trade correlated pairs, for example anything linked to the USD, you expose yourself to any dollar related moves.
eg EURUSD, AUDUSD, GBPUSD, etc.

Should trades be adjusted if trades are open at the same time on these correlated instruments.

There are others eg USDCAD and OIL, AUDUSD and GOLD, index and bonds, etc.

 

[Mr X]

Just my humble opinion that could be way off but:

I try not to think too much about it except from how exposed I am during any big moves.

Today for example, there was large buying of Usd/Jpy. I had sell orders on eur/jpy at 100.75 and Gbp/Jpy at 120.50. Due to the buying of Usd/Jpy, I cancelled the Gbp/Jpy order as thought if Eur/Jpy breaks through, Gbp/Jpy will (or vice versa).

 

[Mr X]

And to think like "I better buy Aud/Usd as Gold is going up this year" is pretty ignorant thinking. I believe things are so much more complicated than that, esp for us amateurs. Even the experts seem to have no idea. Just my personal and irrelevant opinion.

 

[Sidekicker]

And to think like "I better buy Aud/Usd as Gold is going up this year" is pretty ignorant thinking. I believe things are so much more complicated than that, esp for us amateurs. Even the experts seem to have no idea. Just my personal and irrelevant opinion.

Have you done the correlation between AUDUSD and Gold?
Yes, things are more complicated but the commodity currencies are very closely linked.

 

[scose-no-doubt]

Just my humble opinion that could be way off but:

I try not to think too much about it except from how exposed I am during any big moves.

Today for example, there was large buying of Usd/Jpy. I had sell orders on eur/jpy at 100.75 and Gbp/Jpy at 120.50. Due to the buying of Usd/Jpy, I cancelled the Gbp/Jpy order as thought if Eur/Jpy breaks through, Gbp/Jpy will (or vice versa).

I'm no expert on this but I think if you're short EUR/JPY & GBP/JPY then through FX non-arbitrage, you're exposing yourself to other crosses - EUR/GBP in this instance. Any weakness in EUR against GBP will likely show as strength in GBP/JPY and vice versa.

As I said I'm no expert but I think you're basically short GBP to the tune of

GBP/JPY x [¥100,000 + (¥100,000 x EUR/GBP)]

Get Rhody Trader or someone in here. He knows this stuff.

 

[Rhody Trader]

I'm no expert on this but I think if you're short EUR/JPY & GBP/JPY then through FX non-arbitrage, you're exposing yourself to other crosses - EUR/GBP in this instance. Any weakness in EUR against GBP will likely show as strength in GBP/JPY and vice versa.

As I said I'm no expert but I think you're basically short GBP to the tune of

GBP/JPY x [¥100,000 + (¥100,000 x EUR/GBP)]

Get Rhody Trader or someone in here. He knows this stuff.

Here I am to save the day!

Can't recall which cartoon hero used to sing that and probably would be dating myself considerably if I did.

Being short EUR/JPY and GBP/JPY at the same time has no EUR/GBP implications. That would only come in if you were long one and short the other as the JPY parts would largely cancel each other out. Recalling your math education, its like the difference between EUR/JPY x GBP/JPY and EUR/JPY x JPY/GBP.

Getting back to the initial subject, if you're trading highly correlated pairs (those including the same currency, for example) then you're going to want to think that if one goes bad and gets stopped out, they probably all will (or close to it). As a result, if you're intending to risk 5%, for example, and you're playing 5 USD pairs you probably want to only risk 1% each, or something like that.

 

[scose-no-doubt]

Here I am to save the day!
Being short EUR/JPY and GBP/JPY at the same time has no EUR/GBP implications.

Really? I'd have thought it did - not directly but if EUR/GBP spiked up you'd be expecting the EUR/JPY to perform badly and the GBP/JPY to perform pretty well, no?

I was talking in terms of effect on aggregate effective position size as opposed to direct exposure to moves though.

Clear as mud I suppose.

 

[Rhody Trader]

Really? I'd have thought it did - not directly but if EUR/GBP spiked up you'd be expecting the EUR/JPY to perform badly and the GBP/JPY to perform pretty well, no?

I was talking in terms of effect on aggregate effective position size as opposed to direct exposure to moves though.

Clear as mud I suppose.

If EUR/GBP rallies it will tend to mean better EUR/JPY because of euro strength and softer GBP/JPY because of sterling weakness. Keep in mind that EUR/GBP (pounds per euro) must be equal to GBP/JPY divided by EUR/JPY.

 

[scose-no-doubt]

If EUR/GBP rallies it will tend to mean better EUR/JPY because of euro strength and softer GBP/JPY because of sterling weakness. Keep in mind that EUR/GBP (pounds per euro) must be equal to GBP/JPY divided by EUR/JPY.

That's what I'm saying... so your euro short will be worth less GBP

I know what I mean anyway lol.

 

[Rhody Trader]

If EUR/GBP is rising that means the euro is worth more sterling, not less. That symbol means GBP per EUR, not EUR per GBP.

 

[scose-no-doubt]

your EUR/JPY short will be worth less in GBP terms I mean... just ignore me, we're obviously on different pages lol.

 

[Rhody Trader]

I have no idea where the EUR/JPY in GBP terms is coming into this. We might be reading from totally different books!

 

[scose-no-doubt]

Stop plugging your wares