Strategies · Library · Currencies
§8.5Pairs and relative value
FX triangular arbitrage
Trade around a loop of three currencies and profit if the product of rates exceeds one after bid/ask spreads. Gaps close in moments so speed is essential.
- Asset class
- Currencies
- Held for
- Intraday
- Data
- Needs data ARCANE lacks
- Symphony
- Cannot be built as a symphony
The rule
- Signal
- Product of the three bid/ask rates around the loop.
- Entry and exit
- Execute all three legs at once when above one.
- Sizing
- Equal notional per leg.
How it fails
- Disappears before execution
- Latency
- Fees
Data it needs
- tick-level bid/ask for three pairs
Only daily closes; no quotes.
How ARCANE uses it
Not usable.
Needs tick quotes.
Filed under the pairs and statistical arbitrage card
Find two securities whose prices moved together for a year. When the gap between them opens past two standard deviations, buy the laggard and sell the leader.
A paper plan from this card holds 5 to 126 days, stops at 1.5× the expected move and uses at most 50% of your risk budget. The card
Source: Kakushadze and Serur (2018), 151 Trading Strategies, §8.5, p. 90 of the SSRN version. Described in our words. Pairs and relative value is ARCANE’s filing, not the book’s.