FPI  Fractional Product Inefficiency: The Impeccable Hedge
Moderator: moderators
Please add www.kreslik.com to your ad blocker white list.
Thank you for your support.
Thank you for your support.
 eagles
 rank: <50 posts
 Posts: 28
 Joined: Mon May 22, 2006 6:38 pm
 Reputation: 0
 Location: Plano, TX
 Gender:
I think I must be missing something.
In the rings as Michal explains, the exposure to any particular currency is minimal (based on Michals example on page 7, the discrepancy would be 2887 Yen, or about $25 from exactly equal).
Once the correct lot sizes are determined and the trade placed, no adjustments should be necessary. That is once the trades are placed the lot sizing would not be dynamic.
Lot size may be slightly different from ring to ring, even two instances of a ring the same pairs, because of fluctuations in FPI, but once the position is taken, it should be a static position.
Profit & loss may fluctuate as FPI moves, but it is in a pretty finite and small range.
In Michal's original statements, the intent is to place a ring position at an extreme of FPI, which minimizes risk, and close the ring position at the opposite extreme of FPI, which should be profitable on pip values.
The challenge is to figure out if there is a bias to opening and closing positions
from low extremes to high extremes of FPI, or
from high extremes to low extremes of FPI, and
to figure out if there is an advantage for the positions being
buy/sell/sell, or
sell/buy/buy.
And to understand why one choice is better or worse than any another.
These should be factors of spread, swap, and broker execution, and should form the basis for picking the best ring.
This is my understanding of how the FPI rings should work. If I missed the boat here, please let me know.
In the rings as Michal explains, the exposure to any particular currency is minimal (based on Michals example on page 7, the discrepancy would be 2887 Yen, or about $25 from exactly equal).
Once the correct lot sizes are determined and the trade placed, no adjustments should be necessary. That is once the trades are placed the lot sizing would not be dynamic.
Lot size may be slightly different from ring to ring, even two instances of a ring the same pairs, because of fluctuations in FPI, but once the position is taken, it should be a static position.
Profit & loss may fluctuate as FPI moves, but it is in a pretty finite and small range.
In Michal's original statements, the intent is to place a ring position at an extreme of FPI, which minimizes risk, and close the ring position at the opposite extreme of FPI, which should be profitable on pip values.
The challenge is to figure out if there is a bias to opening and closing positions
from low extremes to high extremes of FPI, or
from high extremes to low extremes of FPI, and
to figure out if there is an advantage for the positions being
buy/sell/sell, or
sell/buy/buy.
And to understand why one choice is better or worse than any another.
These should be factors of spread, swap, and broker execution, and should form the basis for picking the best ring.
This is my understanding of how the FPI rings should work. If I missed the boat here, please let me know.
 michal.kreslik
 rank: 1000+ posts
 Posts: 1034
 Joined: Sat May 13, 2006 2:40 am
 Reputation: 3
 Location: Monte Carlo, Monaco
 Real name: Michal Kreslik
 Gender:
 Contact:
eagles: you're correct. Once the Impeccable Hedge ring is in place, the position sizes are held constant. Otherwise you are "trading" and not "hedging". Nothing against trading, but FPI is about making money while "not trading"
It absolutely doesn't matter what the underlying pairs are doing once the ring is "closed".
Thus, there is no advantage in predicting the direction or trend of any of the underlying pairs. Just as there is no advantage of predicting the trend of an underlying security if the security is perfectly hedged (1 unit for 1). The mutual fluctuations simply erase each other out.
Only the absolute difference in FPI values for ring open/close matters.
Michal
It absolutely doesn't matter what the underlying pairs are doing once the ring is "closed".
Thus, there is no advantage in predicting the direction or trend of any of the underlying pairs. Just as there is no advantage of predicting the trend of an underlying security if the security is perfectly hedged (1 unit for 1). The mutual fluctuations simply erase each other out.
Only the absolute difference in FPI values for ring open/close matters.
Michal
 TheRumpledOne
 rank: 10000+ posts
 Posts: 12112
 Joined: Sun May 14, 2006 9:31 pm
 Reputation: 286
 Location: Oregon
 Real name: Avery T. Horton, Jr.
 Gender:
 Contact:
Gert Frobe wrote:here is a mt4 that will open the multi trades as well as close all of them over at the FF board. so thank you stockwet for the MT4
http://www.forexfactory.com/forexforum/ ... php?t=9502
but whats funny look who is working (not stockwet) on it to do somthing like FPI. is this the guy that banned TRO and put the FPI in the Classified Ads?
I didn't even know they had CLASSIFIED ADS.
Classified Ads
spam container, buyer beware!
What a bunch of %^*(&*(!!!
If a bunch of you posted that TRO is NOT a SPAMMER, maybe they might get the message!
 Gert Frobe
 rank: 150+ posts
 Posts: 177
 Joined: Fri Jun 30, 2006 9:51 pm
 Reputation: 0
 Location: Arlington, Texas
 Real name: ben arata
 Gender:
Please add www.kreslik.com to your ad blocker white list.
Thank you for your support.
Thank you for your support.
 Nicholishen
 rank: 50+ posts
 Posts: 52
 Joined: Thu Oct 26, 2006 8:44 am
 Reputation: 0
 Real name: Nick
 Gender:
Nicholishen wrote:
Yes, obviously we are going to be buying at the Ask and selling at the Bid, but the question at hand is which direction do we trade the ring (buy,sell,ell OR sel,buy,buy)? Lets do a quick experiment. Say we have a perfect world and the FPI of the above meantion ring starts at one (or closest to 1 when Normalizing the price quotes). The scenario is the USDCHF breaks out 50 pips, leaving the market in the dust. The market then catches up to maintain it's equalibrium, as represented in the following illustrations.
eurusd 1.2734 1.2734 sub
usdchf 1.2648 1.2698 sub
eurchf 1.6106 1.6106 alpha
FPI 0.9999 1.0039
buy sell
eurusd 1.2734 1.2764 sub 30 30
usdchf 1.2698 1.2678 sub 20 20
eurchf 1.6106 1.6183 alpha 77 77
FPI 1.0039 0.9999 67 67
Now, as you can see there is an obvious right way, and an obvious wrong way to trade this ring. There is only one direction to take. That is, unless, you like loosing money :shock: . Which brings us to the second point.
The market jumped 50 pips yet once the market moved back to the perfect FPI of 1, the net pips moved 67. Where did the extra 17 pips come from? Herein lies the problem with the hedge because unless you can dynamically control positioning (which i have developed an algorithm to prove it can be done) it will be impossible to maintain a flat equity curve. Does anyone know where to trade with zero spread? If so we might have an opportunity to make the hedge a viable option...
The actual item being traded is the spread between the equivalence. This balance can be traded ad naseum on very wide variety of instruments. Rather than specify how this can be done and what the driving variables are, I will provide an illustration and then specifically point out what is that you ALWAYS want to do. If one is asking whether to SBB or BSS, then it is not understood as to what they are trading and what it is they are looking to capture.
So let's look a bit closer at what the "Impeccable Hedge Is". What has been stated is that (a/b)*(b/c)*(c/a) = 1. Michal's statement of this equivalence is so simple and yet so valuable especially when considering the imbalance (ie. where the product is <> 1). By rearranging the equation, we can view the equivalence as (a/b)*(b/c) = (1)/(c/a) =(a/c). As a result, we wind up with the actual equation that folks are trading (ie. BBS vs SSB). So taking our classic pair (EUR/USD)*(USD/CHF) = (EUR/CHF), what is it that you want to trade. The answer is the differential between this equivalence equation, or to put in SIMPLY, it is the spread between the two sides. So when your indicator is indicating >1, what it is really saying is that the left hand side of the rewritten equation is 1.001x greater than the right hand side. Let's work out the math so everyone can be crystal clear...
ORIGINAL FORM: (EUR/USD)*(USD/CHF)*(CHF/EUR) = 1
REARRANGE VIA SIMPLE MATH: (EUR/USD)*(USD/CHF) = 1/(CHF/EUR) = (EUR/CHF)
TRADEABLE FORM: (EUR/USD)*(USD/CHF) = (EUR/CHF)*(1)
*NOTE VERY WELL HERE HOW THERE IS ACTUALLY AN EXPLICIT 1 ON THE RIGHT HAND SIDE OF THIS EQUIVALENCE EQUATION*
That 1 is the indicator value some of you have programmed. The key is that when it is not 1, you want to be taking this easy money. A value that is different than ONE is telling you that the variables of the equation are unblanced and more precisely, which direction the imbalance is occuring among the variables. As for the equation, the EQUATION is ALWAYS balanced. Think about this really hard. THIS EQUATION IS ALWAYS BALANCED...
So let's look at the 3 scenarios folks are aware of. x<1, x=1, x>1.
Assuming an indicator value that is less then 1 (ie. .99), the equivalence equation informs you that the product pair (EUR/USD)*(USD/CHF) is .99 the size of (EUR/CHF). Hence, the pair (EUR/USD)*(USD/CHF) is smaller than (EUR/CHF). What trade is one to take? To answer this, one has to know what it is that they are actually trading. The answer of course is the SPREAD between the variables of the BALANCED equation. As a result, the indicator is actually a REALTIME COEFFICIENT that indicates what COEFFICIENT VALUE BALANCES the variables of the equation. So now, what trade is one to put on? The answer is straight forward... If the COEFFICIENT is .99, we know that the left side is smaller than the right side. By thinking of a SEE SAW, this coefficient is saying what needs to occur between the variables in order to balance the SEE SAW. So we know that the pair (EUR/USD)*(USD/CHF) is .99x the size of (EUR/CHF). In other words (EUR/CHF) is numerically higher (think see saw) than (EUR/USD)*(USD/CHF), numerically lower. In order for the variables to be balanced, either (EUR/CHF) must move lower by (1.99)*(EUR/CHF) pips, or (EUR/USD)*(USD/CHF) must move higher... Since (EUR/USD)*(USD/CHF) must either stay the same or go higher to balance out the variables, then one must Buy (EUR/USD) and Buy (USD/CHF). Since (EUR/CHF) must either stay the same or move lower to balance the variables of the equation, then one looks to Sell (EUR/CHF).
Understanding this explanation, it is then easy to full understand the x>1 case. As a result, we now have a complete understanding of the entire trading paradigm from math, to coefficient, to execution (ie. B or S).
Earlier someone mentioned the hedges going against you. This is impossible due to programmed arbitrage. But, let's look at what this means!!! Say the COEFFICIENT went to 1.5. This would mean that (EUR/CHF) is trading at a higher price then (EUR/USD)*(USD/CHF). It would be exactly like buying a $1 and then immediately selling the $1 elsewhere for $1.50. In otherwords, FREE MONEY. NO MARKETS allow for such gross arbitrage opportunities.
The principle behind the equation is that whether you exchange your EURO directly for CHF or indirectly by first converting to to USD and then converting USD to CHF, you should always end up with the same amount. Otherwise, one could arbitrage the opportunity.
The coefficient explicitly says their is a small opportunity to sieze. We have just described exactly why the opportunity is really and bound to being small and not large...
So what to do to create more opportunities? Personally, I like to play with a variable that is there but has been removed from the equations (ie. t=TIME). Folks have mentioned how they have to pull the trigger quickly on all 3 simultaneously. I on the other hand, don't mind varying the individual time component of each variable...
Let's see how much of this folks are chewing before we can crank the discussion up several notches... Also, the 17 point or 67 point move is not in the space of possible outcomes of this type of SPREAD trading. In other words, the individual movement without regard to the other variables has nothing to do with this type of framework...
Regards...
 michal.kreslik
 rank: 1000+ posts
 Posts: 1034
 Joined: Sat May 13, 2006 2:40 am
 Reputation: 3
 Location: Monte Carlo, Monaco
 Real name: Michal Kreslik
 Gender:
 Contact:
Gert Frobe wrote:LOL Avery, what is it with you and form police named scott. this is the second one. i nearly s**t when he outlined Michal's PFI and said he had an idea that he was working on.
I have been thinking about FPI for more than a year now. First I published the concept on a private Rob Booker's web forum (I was taught by Rob) and then I published it on Tradestation web on Dec/28/2005. I remember Avery tinkering with FPI at that time in Tradestation and coming up with several variants of it.
Michal
 michal.kreslik
 rank: 1000+ posts
 Posts: 1034
 Joined: Sat May 13, 2006 2:40 am
 Reputation: 3
 Location: Monte Carlo, Monaco
 Real name: Michal Kreslik
 Gender:
 Contact:
A simple C# utility to generate Excel spreadsheet from the csv file exported from the FPI Control Panel (the rings list):
Punch in the prices and the FPI value is updated automagically on the left:
Source code attached.
Michal
Punch in the prices and the FPI value is updated automagically on the left:
Source code attached.
Michal
 Attachments

 FPIsheet.zip
 (34.19 KiB) Downloaded 287 times

 FPIRings.zip
 (3.12 KiB) Downloaded 265 times

 FPI_convertor.zip
 (104.86 KiB) Downloaded 325 times
 michal.kreslik
 rank: 1000+ posts
 Posts: 1034
 Joined: Sat May 13, 2006 2:40 am
 Reputation: 3
 Location: Monte Carlo, Monaco
 Real name: Michal Kreslik
 Gender:
 Contact:
Nicholishen wrote:Now, as you can see there is an obvious right way, and an obvious wrong way to trade this ring. There is only one direction to take. That is, unless, you like loosing money . Which brings us to the second point.
The market jumped 50 pips yet once the market moved back to the perfect FPI of 1, the net pips moved 67. Where did the extra 17 pips come from? Herein lies the problem with the hedge because unless you can dynamically control positioning (which i have developed an algorithm to prove it can be done) it will be impossible to maintain a flat equity curve. Does anyone know where to trade with zero spread? If so we might have an opportunity to make the hedge a viable option...
Just briefly: the pip value is different in different FX pairs. That's why it doesn't add up in your example correctly.
If you're attempting to compare the moves of the FX pairs in ring directly, you have to do it by calculating the moves' percentage values, not the pips. With percentage calc, you will come with something close to 0% total move.
To make my point more clear, let's say we got only two positions in the Impeccable Hedge (thus pursuing the "futile hedge" ) and let's say the two positions are:
 Buy EUR/USD @ 1.0000
 Buy USD/EUR @ 1.0000
I hope it's clear now.
Michal
Please add www.kreslik.com to your ad blocker white list.
Thank you for your support.
Thank you for your support.