How to Trade Arbitrage In the Forex Market
Arbitrage is a trading strategy that has made billions of dollars as well as being responsible for some of the biggest financial collapses of all time. What is this important technique and how does it work? That is what I will attempt to explain in this piece.
What Is Currency Arbitrage?
First and foremost we need to understand this concept before trying to use it to boost our returns. As the name in itself signifies, arbitrage means a process where there are simultaneous buying and selling of the asset in a way that the trader profits from the price difference between the two products. An arbitrage trade is a direct fallout of the market inefficiencies and it facilitates a mechanism that ensures that prices stay close to their fair value for maximum times and chances of any significant divergence narrow down significantly.
A good way to understand arbitrage is to look at an instrument or a security which is traded in different markets. It could be spot vs. futures or a stock that is listed in two different exchanges or for the retail trader, it could be something as simple as trading the price discrepancies between two broker’s feeds.
Forex arbitrage trading; besides being rare, requires the trader to act quickly as the opportunities disappear just as quickly as they appear. Secondly, most forex brokers tend to use enhanced mechanisms to spot any trades that even remotely look like an arbitrage trade which could result in the profits being deducted. Finally, the currency pair’s spreads also need to be taken into consideration as most arbitrage opportunities that come by usually vary by a few pips only and when the spread is added to the equation, the profits are nearly negligible unless a trader is highly leveraged and well capitalized.
Forex Arbitrage Explain
Say at this point in time, GBP/USD is $2.
If you sold 100k GBP/USD with a normal broker and bought GBP/USD with a spread betting company for £5 per pip, no matter which way the market moved, you would have profited.
If price moves to 1.85 in the next few months, the short GBP/USD position with the normal broker would be +$15000 [(2-1.85)*100,000]. The long spread betting position would be £-7500 [15*5].
If we look at both positions in Pound terms we have this:
GBP/USD long £-75.00.
GBP/USD short $15000/1.85 (the rate at the time) = +£81.08.
This would result in a profit of £6.08.
Where Can I Trade Forex Arbitrage
As a matter of fact forex arbitrage trading is real and it exists.There is a forex platform that offers forex arbitrage trade services and also commodities arbitrage trade on one platform and the trading is automated so you wont have to bother about sitting in front of your computer to monitor your trade also you wont have to be under any kind of tension trying to enter the trades before the arb orpportunity disappears.The trades are automatically entered once the opportunities are spotted by the platforms software and the results of the arb trade are on the platform by the software.
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