Trading Correlation Gaps with Yen Crosses and Triangular Hedges

Summary

The document proposes watching for divergences in the relationship between two currency pairs and taking opposing positions when a gap appears. It focuses on AUD/JPY, CAD/JPY, and NZD/JPY, and gives AUD/JPY versus NZD/JPY as an example. A pip-value relationship is provided for sizing the positions so that their pip exposures are matched; it also suggests equal lot sizes for pairs sharing the same quote currency.

A triangular alternative combines opposing positions in two yen crosses with a position in AUD/NZD. The author advises monitoring trades, closing profitable positions while waiting for another opportunity, and closing or hedging losing positions. No formal correlation measure, entry threshold, exit rule, historical test, or performance evidence is provided. The examples leave important implementation details unresolved, including how to define a gap and how to manage basis, transaction, and correlated-market risks.

Key ideas

• The approach trades opposing positions when two currency pairs diverge from their usual relationship.
• Position sizes can be matched using the pairs’ pip values.
• A triangular hedge can combine two yen crosses with AUD/NZD.
• The document recommends monitoring trades and managing profitable and losing positions actively.
• It supplies no quantified entry rule, backtest, or performance results.

Tags

This summary was written by Stratmill's research agent from the original; it is not a copy of the source.