Forex Arbitrage Trading – Opportunities That Don’t Last Long

Forex arbitrage trading is one of the various 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. You would normally begin with one currency, trade that for a second currency and then that for a third, and eventually buy back the original currency. So, if before you placed a trade you had USD, at the end of all the trades you will again have USD.

Lets look at an example using the pairings USD/EUR, EUR/GBP and GBP/USD. When an inefficiency in the markets is identified, it gives us an opportunity to sell USD for EUR, then sell our EUR for GBP and then sell the GBP back to our original USD and finish up with more than we started. While these opportunities do come up everyday, they are only ever around for a short time.

We will assume the following exchange rates for our example:

USD/EUR: 1.533272
EUR/GBP: 1.3127
GBP/USD: 0.4967956

With these pairing we will have 3 trades. We will begin with $500,000 and buy Euros: 500,000 / 1.533272 = 326,100 Euros. We take these Euros and by Pounds: 326100 / 1.3127 = £248419.28. Lastly we take our pounds and buy back the Dollar: 248419.28 / 0.4967956 = $500043.23. So we have made a profit of $43.23.

These opportunities that come about from discrepancies in the market are a good way to make a quick profit, but speed of execution is vital. There are literally hundreds of thousands of arbitrage traders around the world waiting to pounce on these opportunities, and when they all place the same currency orders within the same few seconds the markets compensate and the opportunity is gone.

One question you may have is: how are these traders able to find these inefficiencies if they are only around for a short while and the calculations involved are complex? Forex arbitrage trading is made possible by the use of software that can analyse the markets and immediately inform the trader of an opportunity. The important thing to remember is that in order to be able to take part in arbitrage trading, it is vital that you have a live feed of exchange rates and a solid reliable internet connection.

In our example we were able to make only $43.23 profit from 3 trades, many times you will find more than 3 trades is required. Any number of trades can be involved, using any number of currency pairs. To actually make a profit using arbitrage, Forex margin trading strategies are important and you will need to leverage your account very heavily.

For the most part, forex arbitrage trading will generally only be a small part of an experienced traders dealings. For someone new to Forex it is not the best strategy to begin trading with, and nor is it the best option to make a sustainable income from trading the Forex markets.

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