The arbitrage trading strategy seeks to profit from temporary price differences of the same asset in different markets or exchange platforms. The central idea is to buy the asset where it is cheaper and sell it where it is more expensive, simultaneously or nearly simultaneously, ensuring a profit with minimal risk.

How Does Arbitrage Work?

Arbitrage opportunities arise from market inefficiencies, such as:

Supply and demand imbalances: Different buying and selling pressures can create small price variations.

Information delays: News or order flow can reach one market before another.

Transaction costs and exchange rates: Differences in these factors can also create opportunities.

Liquidity differences: A less liquid market could have slightly different prices.

When an arbitrageur detects one of these differences, they execute a series of trades to capture that price disparity.

Common Types of Arbitrage Strategies

Spatial (or Pure) Arbitrage: The simplest. You buy an asset on Platform A (where it is cheaper) and immediately sell it on Platform B (where it is more expensive). It is common in the cryptocurrency market.

Example: If Bitcoin is $50,000 on Platform A and $50,050 on Platform B, you buy on A and sell on B, making $50 per Bitcoin (minus fees).

Triangular Arbitrage: Involves three different currencies or assets.

Example: You exchange USD to EUR, then EUR to GBP, and finally GBP back to USD. If the exchange rates are misaligned, you can end up with more USD than you started with. It is common in the foreign exchange (Forex) market.

"Cash-Futures" Arbitrage: Involves buying an asset in the spot market and simultaneously selling a futures contract of the same asset.

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