Traders define arbitrage in Forex in different ways:
- this is the opening of a long position on an asset at one dealer, and at the same time short on the same asset at another dealer (two-legged arbitration). The meaning of the transaction is to win on the difference in asset prices from different dealers, that is, to buy from the one who has it cheaper and sell it – from whom it is more expensive;
- this is insurance (hedging) of risks. The essence is the same, but different goals. In the conditions of uncertainty of the price, two deals are opened in different directions with the same lot. And as soon as a trend is determined, a losing trade closes.
There is the concept of “one-legged” arbitrage, when transactions are opened with one broker, but not every broker is allowed by the rules. Therefore, Forex arbitrage is often found in the USA and Europe, where traders earn on the difference in quotes of different exchanges.
Types of Forex arbitrage
Depending on the number of currencies, arbitration in Forex is simple (2 currencies) and complex (triangular, 3 currencies). The essence of triangular arbitrage is a triangle-enclosed investment, an example of which is given below.
The advantages of triangular arbitrage:
- minimal risk. True, the salary is also minimal;
- The essence of investing seems to be clear, but in practice it is possible to choose pairs with different quotes correctly only after gaining experience. There is a risk of triangle opening due to fundamental factors;
- The strategy works in volatile markets, which traders often prefer to wait out.
Other Forex Based Arbitration Strategies:
- temporary arbitration. Buying and selling currency at different time intervals with the expectation of changing the course in a certain direction;
- cross arbitration. It consists in generating income due to the divergence of the rates of mutually opposing currencies. For example, if the euro / pound pair rises, the pound / yen falls. The first pair opens a long position, the second – a short one;
- inter-exchange arbitration. If, for example, in New York 1 euro = 1.2 dollars. USA, and in London – $ 1.1. US, it is more profitable to buy euros in London and sell in New York.
Arbitrage-based trading advisors have been developed, but they show little profit.
Summary: Arbitration in Forex for the purpose of making money on the lagging of quotations is possible only under the condition of working with brokers from different countries. Therefore, as an income, traders choose a different path:
- determined on the basis of historical data correlated between two currency pairs;
- a trade is opened at the moment of weakening correlation: a strong currency pair is sold, a weak one is bought;
- on the restoration of the correction is fixed profit.
For beginner traders, we recommend using Forex arbitrage as a risk insurance. And remember: the smaller the spread, the greater the earnings on the difference of quotations of the asset. And the FxCash rebate service – a service to return the spread, will make your earnings even more!