Earnings on forex arbitration – risk-free transaction?
The concept of arbitration (classical)
In simple terms, arbitrage is the simultaneous purchase and sale of the same asset (in the case of forex – a currency pair) from different brokers / exchanges. Profit here is due to the price difference ( spread ).
Arbitrage is possible due to the fact that the exchanges are decentralized and at some point in time it may happen that the price for buying a currency pair on one exchange will be higher than the price for selling the same pair on another exchange. By purchasing and selling such a currency pair on two exchanges at the same time, you will stay in positive territory for the magnitude of the change in the price difference.
Here is a simplified example of real-life arbitrage: you’ve come to two points of currency exchange, standing side by side. You have 60 rub. You noticed that the exchange office of one bank sells a dollar for 60 rubles, and a point of another bank is ready to buy a dollar for 60.1 rubles. Without thinking, you bought a dollar in one window and immediately handed it over to the second. As a result of this uncomplicated operation, you already have 10 kopecks more in your pocket.
Arbitrage in trading involves the simultaneous comprehensive analysis of a number of trading instruments, the purpose of which is to make a profit on the difference in quotes. For arbitration it is not at all necessary to have a large account, which is important.
Transactions on this strategy are also called “risk-free”, because the profit will be determined by the volume of open positions, and not by the direction of the market movement – up or down. Very unusual for Forex, isn’t it? Although there are risks here …
The foreign exchange market has some conditions for conducting arbitration, since prices are not always objectively formed. When there is an underestimation at one point, and overestimation at another, it gives the arbitrator an opportunity to earn money.
Most likely it was arbitrage trading that caused strong financial fluctuations in world history, and at Forex, arbitrage became the source of millions in profits for certain market participants. It’s time to understand in more detail with this concept.
Positive aspects of forex arbitrage
If you decide to do arbitration – even statistical, even classical – you do not have to analyze the history. You will only need to carefully monitor the current quotes to identify the inefficiency of their formation, from which we must try to make a profit. You do not need to delve into the technical or fundamental analysis. The only thing to control the news is still worth it, because at such times there is a high probability of favorable conditions for the implementation of arbitration transactions.
So, among the advantages of forex arbitrage are:
- there is no need for constant monitoring of the market situation;
- no need for lengthy analysis;
- in the event of a timely opening of the transaction, you almost always close it at a profit;
- with an open transaction risks are lower than in the classical approach.
Negative moments of forex arbitrage
Modern technical and software tools have significantly hampered the possibility of making a profit on Forex in this way, in particular, due to the high accuracy of communication. In the case of highly liquid instruments, market makers themselves are engaged in arbitrage, leaving no chance for ordinary merchants.
If you try your luck with low-liquid assets, you will quickly realize that the risks are much higher here, because the high-quality execution of the order without slipping, increasing spreads and heavy commissions quickly becomes an elusive ideal.
What are the arbitration
Cross-currency forex arbitrage
It is assumed that the trader opens two accounts with different brokers. Immediately there is a need to compare quotes that you can do yourself or trust the arbitration adviser. For example, choose a pair of USD / CHF, expect a suitable movement on the chart, and at the right time open two multidirectional transactions with different brokers. In this case, the volumes must be identical, so you reduce the risks. With the help of timely locking, you get a plus – wait for the price match and close the deals.
Suppose the closing happened so that you made a profit of 14 pp with the first broker, and with the second you were at a loss of 5 points. And now the spread will play an important role. If it is 9 or more points, you will lose in total. As it is known, the spread value varies depending on the price, and this value may be different for dealing centers, which must be taken into account.
This type of arbitration was popular at the initial stage of the existence of Forex. Favorable conditions were low centralization, many small market makers and rather poor aggregation. Often there was a picture when at least one broker quotes significantly lagged behind. Although even nowadays experienced traders are trying to earn in this way with the help of newly built DCs, whose probability of errors in the quotation system is still significant.
But still the “golden age” of spatial arbitration has already been left behind. Almost all processes are automated, aggregators of quotation flows are in effect, and it is practically impossible for a “mere mortal” trader to profit in this way.
If you are ready to be content with small and do not strive for super-profits, then you can try your luck with quite a working method for a long time period. It is necessary to monitor the price of futures and its basic instrument. In the case of a spread increase, we acquire their spread and expect expiration.
If we draw an analogy with classical arbitration, then with long-term arbitration the quality of execution is not so significant, subject to the use of limit orders. In the case of the classic version, the quality of performance, low levels of commissions and spreads are important for us.
But for long-term automation is important, because the right situation can emerge literally on the next tick, unexpectedly. The total profitability is unlikely to seem so significant, although it can bet with a bank deposit.
Suppose you want to make money on the spreads of the GBP / USD currency pair. Enter buy on GBP / USD, but at the same time hedge using synthetic, opening sell on GBP / AUD and AUD / USD. If you do not pay attention to the names of the pairs, then it will be difficult for you to find differences between the real GBP / USD pair and its synthetic counterpart. But with the right tactics, it is possible to identify differences in quotations that allow arbitration.
Refuse the services of brokers that do not allow arbitrage
Some dealing centers prohibit their clients from conducting arbitrage transactions, especially if it is not profitable for intermediaries. Some are checking for coincidence of the trader’s profit indicators and deviations in quotes. Therefore, carefully study the proposed working conditions.
Many experts consider the ban on arbitration to be unfair; moreover, this makes it possible to doubt the veracity of the quotes provided. The broker has the opportunity to play against the client.
Cryptotrading – a paradise for arbitragers?
At the time of this writing, the cryptocurrency market continues to grow rapidly and develop. And indeed, the conditions for arbitragers here turned out to be optimal. The crypt market today is the most decentralized financial market in the world. Cryptobirge, located in different parts of the world, are not connected with each other. Demand and supply on each of the exchanges is formed under the influence of regional factors as well, which leads to such spreads that have never been dreamed of in Forex. What else do arbitrationers need?
At the request of our readers, we have prepared a special material on cryptocurrency arbitration .
Let’s sum up
In general, arbitrage speculators, with the proper approach, earn a good profit without the use of technical or fundamental analysis. At its core, arbitrage strategies are based on hedging principles. With the right approach, even in case of failure, the trader’s losses will be minimal, since there are two multidirectional transactions. However, one should not expect a big profit. Here it is necessary to rely on a stable job in a small plus. The greatest profit for today is to look for arbitragers in crypto-trading.