Monday, August 23, 2010

Probability Senario's

***Keep in mind this is a theoretical idea that I am trying to prove right or wrong***

ok so for the eurgbp stat arb/dynamic hedging idea I created 9 different possible outcomes:

1: Euro up Gbp up
2: Euro up Gbp sideways
3: Euro up Gbp down

4: Euro sideways Gbp up
5: Euro sideways Gbp sideways
6: Euro sideways Gbp down

7: Euro Down Gbp Up
8: Euro down Gbp Sideways
9: Euro Down Gbp Down

Going through 1000 ticks (insanely small sample, but I am doing this by hand) for both eurgbp long and then for eurgbp short. Noticing that you have several numbers in a row. Could be what I was looking for. For example, I have a 6 then a 7. Euro goes from 1.4540 to 1.4537, while cable goes from 1.61106 to 1.61143...so that's 3 pips on euro and 3.7 on cable.

Still haven't the faintest idea how to calculate the buy/sell spread into the equation. Looking for someone to help with this possibly (or refer me to a source I could learn from). Just trying to prove that they have possible profitable situations on a statistical level.

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