I heard a weird strategy from my friend and I was wondering what your take on it is:
Consider the following trading strategy:
Two currencies are at parity (1:1)
An investor holds 100 units of both.
Now, there is a movement, and one of the currencies appreciates. Now the ratio is (2:1).
Our careful investor seeks to maintain the same amount of both currencies, so he dumps a bit of the more expensive currency and now has 150 of one currency and 75 of the other.
Now, the price drops back suddenly to 1:1 – but he holds 225 total units, up from 200 before.
Thus, he made a profit of 25 units.
Why doesn’t this strategy work in real markets (with more realistic numbers, such as 1-2% gains)?