There are 6 references cited in this article, which can be found at the bottom of the page. Essentially the trader relies on a particular currency being priced differently in two different places at the same time. Trading forex arbitrage is not recommended as a sole trading strategy in forex. The foreign exchange market, commonly referred to as forex, is an international exchange for the trading of currencies. Each trade is both a purchase and a sale, as one currency is sold in order to buy another one.
Arbitrage is the practice of buying an asset in one market and immediately selling it at a slightly better price elsewhere. In theory, a given currency should carry the same price in different markets. Know how to use arbitrage to make profitable trades. Forex traders take advantage of minor price differences by buying currencies where they are less valuable and selling them where they are more valuable.
This usually involves multiple trades of intermediate currencies in practice. Intermediate currencies are other currencies used to express the value of the currency you are trading. In the real world, price differences would never be this extreme. In fact, they are usually fractions of a cent. Traders make money by trading in large volume.
Volume trading allows traders to make enough profit to offset transaction fees. Institutional traders rely on computers and automated trading to buy and sell currencies quickly enough to stay ahead of the markets. Know how to read currency prices. Market prices are expressed in a very specific way.
As mentioned, currencies are priced in relation to other currencies. In order to have a triangular arbitrage, you must compare the exchange rate of three “currency pairs” that you can trade between. As in any such triangular arrangement, there are three currencies involved, and each currency is paired separately with each of the other two. Get the current exchange rate for each pair. The arbitrage is made by buying and selling the correlating currencies against each other. Currency is traded in what are called “lots.
Standard lots are blocks of 100,000 units of a currency, and mini-lots are blocks of 10,000 units. Sell the euros for British pounds. Sell the British pounds for U. 502,550 after a few simple trades. Get access to a forex trading platform and software. Brokers and traders who trade arbitrage don’t calculate arbitrage manually.
They use software programs that can identify opportunities in the market and calculate the arbitrage in seconds. The software can be set up to buy and sell at the precise moment that the opportunity arises. You can access similar platforms online and trade in the forex market. There are forex arbitrage software programs for sale online. Before using these programs on a real account, try them on a demonstration account first.
This will prevent the loss of money through the use of faulty software. Have an experienced arbitrageur recommend software and trading platforms. Some online forex trading platforms offer calculators or automated programs for finding arbitrage opportunities. Take advantage of this service if your trading platform offers it. You can also use an independent forex arbitrage calculator to determine if an arbitrage opportunity exists.