Each trader who tried himself in the forex market is well aware that high yield is impossible without high risk. However, there are exceptions to this rule too. One of the exceptions is the strategy of arbitrage trading, which allows one to earn profit near or even exceeding 100 percent of used capital with minimum risk. Let’s figure out what arbitrage trading is and how you can implement it in the forex market.
Classic arbitrage trading involves making profit from differences in prices using identical financial instruments that are traded on different exchange markets. The main point of arbitrage trading is that when the price of an asset on the first exchange market becomes higher than on the second exchange market, an automatic sale on the first exchange market and an automatic purchase on the second exchange market are made. When the prices become the same again, the positions are closed and trader receives guaranteed profit. It is natural that price difference must exceed the trader’s expenses (spread and charges) at both markets. Such arbitrage transactions are appealing because they provide guaranteed profit and low risks as an aggregate position is always neutral in relation to the market.
Let’s consider how you can implement arbitrage in forex. Many traders have probably noticed that different forex brokers may have slightly distinct quotes at times. One way to implement arbitrage strategy consists in finding two brokers that have the greatest divergence in prices for a certain currency pair and organizing trading between them. In this case, when the prices diverge, you will have to open reverse transactions with both brokers. This would be an implementation of classic two-legged arbitrage.
However, so-called one-legged arbitrage, when a transaction is concluded only with one broker, appears to be more profitable. The fact is that the divergences in prices usually appear because the quotes of one broker begin to lag behind actual prices during specific periods of time. Thus, if you have an outrunning source of quotes, for instance, from another broker with a faster price feed, you will be able to open a position with the lagging broker in the direction of actual prices during the lagging periods to get guaranteed advantage. It is natural that there is no point in opening a hedging transaction with the second broker in this case.
The forex arbitrage strategies certainly have disadvantages. First, it is quite difficult to find a broker with lagging prices and a source of outrunning quotes. Second, forex brokers usually don’t appreciate this way of making money, so you have to be careful when implementing this strategy to avoid violating trading regulations. However, risking is worth the reward in this case because, if you succeed, you will be able to receive hundreds’ percentage of profits and compensate all the expenses, making a hefty profit above that. To know more on the implementation of arbitrage strategies on forex, click here.
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