Forex Arbitrage

Filed under: Learn Forex Trading |

Screen shot 2013-08-27 at 11.37.01Forex arbitrage is a technique used by traders to make a profit on a forex pair based on the inefficiency of currency pairs. However, in the digital age, traders now have to react very quickly to such price discrepancies, and as such, this kind of trading usually requires the use of a computer.

 

Due to the efficiency of the forex market and the vast number of participants, any price anomalies are usually exploited and soon rectified because of this exploitation. Arbitrage forex trading might involve buying and selling different currency pairs to exploit any inefficiency in this pricing.

 

For example, lets say the exchange rates of the EUR/USD, EUR/GBP, and GBP/USD are 1.2567, 0.8122, and 1.5701. A trader could buy one min-lot of EUR for $12,567. Then, they could sell the 10,000 Euros (one mini-lot) for 8,122 British pounds, and sell the pounds for $12,752 (8122×1.5701), for a profit of $185. There would be no exposure on the trades, as any long positions would cancel out any short positions. Although such a large arbitrage is unlikely, you could make good profits off of very small arbitrage margins if you traded large positions.

 

So how would you go about finding such risk-free trading opportunities? Doing these calculations manually can be very time consuming, and the opportunity could be lost while you are doing the math. Therefore, a better way is to use an expert advisor that is coded to find such opportunities – but doing this yourself is difficult. What might be better is to pay someone to code this for you, or to buy one that is commercially available. There is also some forex arbitrage software out there, but the jury is very much out on those, and I suspect that large institutions eat up most arbitrage opportunities before individual traders can.

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