Forex arbitrage is a risk-free trading strategy that allows retail forex traders to make a profit with no open currency exposure. The strategy involves acting on opportunities presented by pricing inefficiencies between two different markets in the short time window while they exist. This type of arbitrage trading involves the simultaneous buying and selling of different currency pairs to exploit pricing inefficiencies between the two markets.
Key Takeaways
- Forex arbitrage is a risk-free trading strategy that allows retail forex traders to profit without open currency exposure.
- This type of arbitrage trading involves buying and selling currency pairs to exploit pricing inefficiencies.
- Arbitrage opportunities often arise during news events, when price quotes experience volatility.
- Exploiting pricing inefficiencies could rapidly close a price disparity, so traders must act quickly when using these strategies.
- Because of the artificial intelligence-driven trading algorithms major institutional trading firms use, these opportunities often last only a fraction of a second, making it nearly impossible for individual traders to participate.
Example: Arbitrage Currency Trading
To illustrate, consider the following currency pairs with these exchange rates:
In this case, a forex trader could buy one mini-lot (10,000 units) of EUR for USD 11,837. They then sell the 10,000 Euros for 7,231 British pounds. Finally, the 7,231 GBP could be sold for USD 11,850 for a profit of $13 per trade. The trader has no open exposure as long positions and will cancel short positions in each currency. The same trade using normal lots (rather than mini-lots) of 100,000 would yield a profit of $130.
Many arbitrage opportunities arise during news events when price quotes experience the most volatility. The act of exploiting the pricing inefficiencies could rapidly close a price disparity, so traders must be ready to act quickly when using arbitrage strategies. For this reason, these opportunities are often around for a very short time.
In fact, due to the advances in artificial intelligence (AI)-driven trading algorithms used by the major institutional trading firms, these discrepancies/opportunities often last only a fraction of a second, making it nearly impossible for individuals trading on their own to act fast enough to participate.
Arbitrage currency trading requires the availability of real-time pricing quotes and the ability to act fast on opportunities. Forex arbitrage calculators are available to aid in this process of finding opportunities in a short window of time.
Forex Arbitrage Calculator
There are many tools available that can help find pricing inefficiencies, which otherwise can be time-consuming. One of these tools is the forex arbitrage calculator, which provides retail forex traders with real-time forex arbitrage opportunities. Forex arbitrage calculators are sold through third parties and forex brokers.
It is essential to try out a demo account first, as all software programs and platforms used in retail forex trading are not one in the same. It is also worth sampling multiple products before deciding on one to determine the best calculator for your trading strategy.
