FPI - Fractional Product Inefficiency: The Impeccable Hedge

NeoTicker indicators

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michal.kreslik
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Postby michal.kreslik » Thu Oct 19, 2006 1:49 pm

ryan wrote:I assume it is technically possible for all three pairs in a FPI hedge to move against you?


In all honesty, it is not :)

Once you open the Impecable Hedge compound position, you are flat. If you're flat, no matter what the directions the individual Forex symbols set out, they never can possibly go against you.

Having a flat position is the same as having no position at all. No market move affects you.

Michal

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Postby ryan » Thu Oct 19, 2006 2:01 pm

michal.kreslik wrote:
ryan wrote:I assume it is technically possible for all three pairs in a FPI hedge to move against you?


In all honesty, it is not :)


Ok, this is the magic part, which I'm not totally across yet.

Can you explain how this works, if say you BUY-BUY-SELL and the market for each pairs moves against you?

Are you saying all three cannot move against you?
Or that regardless of whether they do it doesnt matter?

And if they can all move against you are you losing in such an event?

I'm a little perplexed on this bit.

BTW ... great to hear that you're looking to incorporate some rollover functionality to look to maximise interest-bearing positions.

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michal.kreslik
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Postby michal.kreslik » Thu Oct 19, 2006 2:24 pm

ryan wrote:Are you saying all three cannot move against you?
Or that regardless of whether they do it doesnt matter?

And if they can all move against you are you losing in such an event?


To make a long story short: since the currencies make a closed ring (see above in the original article), it's the same as if you opened a "futile hedge" position:
  • Buy 100,000 EUR/USD
  • SellShort 100,000 EUR/USD
No matter which way EUR/USD goes, it never goes against you since you are at the both sides of the market with the same exposure. So the amount you lose in the Buy position you gain in the SellShort position and vice versa.

Naturally, if you open the two positions above at the same time, you will be in a slight loss caused by the spread. This slight loss will be constant during the "futile hedge" trade.

Michal

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Postby trevman » Thu Oct 19, 2006 6:56 pm

if you CAN make a closed ring you maybe able to do so in order to collect interest from the positions. the question lies in which ring will produce the required results?

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Postby ryan » Thu Oct 19, 2006 8:13 pm

trevman wrote:if you CAN make a closed ring you maybe able to do so in order to collect interest from the positions. the question lies in which ring will produce the required results?


Surely this is just a case of ensuring you are long in interest bearing currencies at rollover.

From Investopedia (http://www.investopedia.com/ask/answers ... lation.asp)

"In order to calculate the rollover interest, we need the short-term interest rates on both currencies, the current exchange rate of the currency pair and the quantity of the currency pair purchased. For example, assume that an investor owns 10,000 CAD/USD. The current exchange rate is 0.9155, the short-term interest rate on the Canadian dollar (the base currency) is 4.25% and the short-term interest rate on the U.S. dollar (the quoted currency) is 3.5%. In this case, the rollover interest is $22.44 [{10,000 x (4.25% - 3.5%)}/(365 x 0.9155)]."

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Postby ryan » Thu Oct 19, 2006 8:20 pm

Although we know that the FPI must be <1 on entry and >1 on exit what do we think is the best way to optimise profit on these trades given the fluctuating FPI levels?

Is there is static FPI Entry parameter (manually set) that we should pass to an EA or a dynamic indicator based on a simple-moving-average-style value dervived from the previous X ticks of the deviation of the FPI from less than 1?

Equally I assume it would be possible to do something similar for the Exit >1 condition.

Is there a maximum FPI range/pippage that is technically possible per trade using the FPI model?

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michal.kreslik
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Postby michal.kreslik » Thu Oct 19, 2006 11:12 pm

People are still asking me about the correct position size for FPI.

Let's make it perfectly clear now.

We decided to employ this FPI ring:
  • SellShort EUR/USD
  • Buy EUR/JPY
  • SellShort USD/JPY


You see, we have hedged the colored currencies one unit for one. The JPY is not hedged precisely one for one (14,937,000 for 14,934,113), but it can't be closer.

Michal

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Bid Ask and lot size

Postby davidf » Fri Oct 20, 2006 11:01 am

Hi Michal.

can you explain me again calculation a lot size and calcultion FPI? I add my excel sheet with small simulation some levels FPI calculaten with ask and bid prices.

Thanks DavidF
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FPI_lotsize.zip
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davidf
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FPI indicator for MetaTrader

Postby davidf » Fri Oct 20, 2006 6:18 pm

Hi,

I recreated my indicator FPI for calculation with BID BID ASK price. See code below:

[php]
//+------------------------------------------------------------------+
//| DavidF_Hedge.mq4 |
//| Copyright © 2006, MetaQuotes Software Corp. |
//| http://www.metaquotes.net |
//+------------------------------------------------------------------+
#property copyright "Copyright © 2006, MetaQuotes Software Corp."
#property link "http://www.metaquotes.net"

// INFo: http://kreslik.com/forums/viewtopic.php ... sc&start=0
#property indicator_chart_window
//+------------------------------------------------------------------+
//| Custom indicator initialization function |
//+------------------------------------------------------------------+
int init()
{
//---- indicators
IndicatorShortName("Hedge EUR/USD/CHF chart");
//----
return(0);
}
//+------------------------------------------------------------------+
//| Custom indicator deinitialization function |
//+------------------------------------------------------------------+
int deinit()
{
//----

//----
return(0);
}
//+------------------------------------------------------------------+
//| Custom indicator iteration function |
//+------------------------------------------------------------------+
int start()
{
int counted_bars=IndicatorCounted();
if(counted_bars<100) return;
//----
int i;
double EUR, USD, CHF, FPI;

RefreshRates();

EUR = MarketInfo("EURUSD",MODE_BID);
USD = MarketInfo("USDCHF",MODE_BID);
CHF = MarketInfo("EURCHF",MODE_ASK);

FPI = EUR * USD * (1/ CHF);

ObjectDelete("EURUSD");
ObjectDelete("USDCHF");
ObjectDelete("EURCHF");


ObjectCreate("EURUSD", OBJ_HLINE, 0, Time[0], EUR);
ObjectSet("EURUSD", OBJPROP_STYLE, STYLE_SOLID);
ObjectSet("EURUSD", OBJPROP_COLOR, DarkOrange);


ObjectCreate("USDCHF", OBJ_HLINE, 0, Time[0], USD);
ObjectSet("USDCHF", OBJPROP_STYLE, STYLE_SOLID);
ObjectSet("USDCHF", OBJPROP_COLOR, RoyalBlue);


ObjectCreate("EURCHF", OBJ_HLINE, 0, Time[0], CHF);
ObjectSet("EURCHF", OBJPROP_STYLE, STYLE_SOLID);
ObjectSet("EURCHF", OBJPROP_COLOR, LawnGreen);


Comment(
"\n FPI: ", DoubleToStr(FPI,6),
"\n EUR/USD: ", DoubleToStr(EUR,4),
"\n USD/CHF: ", DoubleToStr(USD,4),
"\n EUR/CHF: ", DoubleToStr(CHF,4));

//----
return(0);
}
//+------------------------------------------------------------------+
[/php]
Attachments
fpi_chart.gif
fpi_chart.gif (18.4 KiB) Viewed 2828 times
DavidF_Hedge_chart.zip
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Postby davidf » Fri Oct 20, 2006 6:29 pm

FPI - ask, ask, bid apologize me
David

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