Arbitrage as a trading strategy in Forex

арбитраж на Форексе

In a simple sense arbitrage in the Forex market — the opening of the opposite or the same positions on different correlated assets. The purpose of the arbitration — insurance and profit. If there is an understanding that the market of the underlying asset might suddenly turn around, but there is a linked asset (e.g., the dollar and the Euro at the same time react to the events associated with China), one asset is set as long position, the second — short.

  • Arbitration is often called hedging. Hedging insurance risk, including by opening opposite positions. Different ways to apply a hedging in derivatives markets (swaps, options, futures, contracts for difference, etc.). Binary options hedging involves opening a buy position and a sell on the same asset (although hedging may provide different assets), arbitration in different ways. Arbitration also may be not for the insurance risk, but rather a doubling of profits.

There is another option of arbitrage in the Forex market: offers the same position on diverse assets. For example, if the securities of U.S. companies are rising, the dollar falls. So indefinitely (in any case not volatile!) the market should open two long (short) position in both markets and wait. Once the trend becomes clear, unprofitable position closed.

Classification of arbitrage in Forex

  1. Depending on the number of currencies, involved in the transaction. 2 currencies is a simple arbitrage, 3 — complex.

Arbitrage in the Forex market is built on imbalance prices. On different exchanges pricing have come under pressure from many factors, and intelligent professional trader will quickly understand what  triangle arbitrage should be built. An example of such  triangle:

  • investment of currency A to currency B;
  • investment of currency B to currency C;
  • investment of currency C to currency A.

The following is an example of triangular arbitrage, where currency A is US dollar, B — canadian dollar, C — Swiss franc.

triangular arbitrage in financial market

The advantages of triangular arbitrage:

  • low risk (Yes, it is still present). However, the earnings on the spread (and as it turns out) are also small. As you can see from the previous example, $ 1 million. USA was able to earn a little more than 1 thousand.;
  • the investment scheme is very clear, but the experience of the trader here is in charge. After all, fundamental factors can expand the currency so that the triangle will open;
  • strategy is suitable for volatile markets. It is important to choose the right currency.
  1. Depending on the method of generating profit:
  • time Forex arbitrage. Provides transaction due to the time difference. You buy currency in the morning with the aim to make a profit in the evening, knowing that the evening rate will increase;
  • jumper arbitration. Its essence in making a profit due to the divergence of the courses currencies correlating between. For example, if the pair Euro/pound rises, the pair GBP/JPY is falling. The meaning of the arbitration — opening long position at the first pair and short the second. In the case of hedging on the second pair would open a long position;
  • interexchange arbitration. Includes work on different stock exchanges (speculation). If the course in new York 1 pound = 3 dollars, and in Frankfurt — $ 2, it turns out advantageous to buy dollars in London and sell in the United States. Example of a conditional, but the General gist is clear.

An example of arbitrage strategies in the Forex market. Based on the historic data of two correlated currencies and follow them. As soon as the correlation weakens, weaker pair is bought, the stronger is sold. And when the degree of correlation is returned to the previous level, it is possible to fix profit. In arbitrage trading, it is preferable to work with the daily charts.

For those who want to try themselves in statistical arbitrage (simultaneous bying and selling or buying two different assets), note on the currency pair Euro/US dollar and US dollar/Swiss franc. They often move in opposite directions.

Often arbitrage in the Forex market is so successful strategy that some DC (not related to brokers) prohibit such transactions. Actually, it is logical — dealing centers, scrolling through the transactions themselves, such low-risk strategies lose the spread.

About the author

JOIN THE DISCUSSION

twenty − 11 =