Triangular relationships leave footprints on the crosses

[Shadow Trader]

EURUSD, GBPUSD and EURGBP are linked. So are USDJPY, EURJPY and EURUSD. Multiply two of them and the third is implied. If the quoted price of the third drifts away from the implied one, arbitrageurs step in within milliseconds.

Retail traders can't capture those gaps. The speed required is out of reach. But the footprint is useful anyway.

When the cross lags the two major pairs, it tells where the next move is likely to appear. A sharp move in EURUSD and GBPUSD that hasn't yet shown up in EURGBP often means the cross will adjust in the next few seconds. The cross isn't leading, it's catching up.

That can serve as a timing tool or as a reason to avoid trading the cross at that moment, since its price is temporarily stale and its spread is likely to be wider.

It also explains why crosses often have worse execution than majors. Their price is derived, in many cases, from the majors, and the spread reflects the spread of both legs combined.

Building a simple monitor that calculates the implied cross and compares it with the quoted one takes a few lines of code and reveals how often the lag appears.

Has a stale cross ever been spotted in real time, and did it lead to a usable trade?