Forex Arbitrage Trading

Forex Arbitrage Trading is one of the good strategies employed by day traders on the Forex markets. The idea revolves around there being inefficiencies present in the markets for very short periods, which can be profited from. The nature of this kind of trading is complicated, especially for the beginner, and usually requires high levels of leverage to make any serious profit.

Forex arbitrage trading involves trading in at least 3 different currencies and 3 different currency pair combinations that you can derive from these. It works by making three or more currency trades with the 3 picked currency pairings, with the final trade buying again to your original currency. So, if before you placed a trade in  USD, at the end of all the trades you will again have USD.

Let's take an example using the pairings EUR/USD, GBP/EUR, and USD/GBP. When an inefficiency in the markets is identified, it gives us an opportunity to sell USD for EUR, then sells our EUR for GBP and then sell the GBP back to our original USD and finish up with more than we started. These inefficiencies do exist in the markets every day but are only available for a short time.

Let's use an example, assuming the following buying FX rates:

EUR/USD: 1.22

GBP/EUR: 1.14

USD/GBP: 0.72

Now let's go through each trade in our example. We will start with $500,000 and buy Euros: 500,000 / 1.22 = 408530 Euros. We take these Euros and by Pounds: 326100 / 0.88 = £360223.76. Lastly, we take our pounds and buy back the Dollar: 360223.76/ 1.39 = $500043.23. So we have made a profit of $253.54.

These opportunities that come about from discrepancies in the market are a good way to make a quick profit, but the speed of execution is vital. With thousands of traders the world over waiting for one of these windows of opportunity to come about, the time it takes for the markets to correct themselves due to these traders placing their currency orders is short.

You may be wondering then, how do traders actually identify these opportunities, given that the time frame they are available is so short and the calculations many and Complicated. Forex arbitrage trading is made possible by the use of software or by any Forex Trading Tips that can analyze the markets and immediately notify the trader of an opportunity. The vital thing to remember is that in order to be able to take part in arbitrage trading, it is important that you have a live feed of exchange rates and a solid reliable internet connection.

As you can see it took 3 stages and trades to make just $43.23 profit, and this strategy doesn’t mean limited to just 3 trades. Any number of trades can be involved, using any number of currency pairs. In order to make serious money with arbitrage, Forex margin trading strategies are necessary and you will need to leverage your account very heavily.

Experienced traders tend to use forex arbitrage trading as only a small form of their overall strategy. For someone new to Forex it is not the best strategy to begin your trading, and nor is it the best option to make an endurable income from trading the Forex markets.