How to Use an Arbitrage Strategy in Forex Trading
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.1
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:
EUR/USD pair is 1.1837
EUR/GBP pair is 0.7231
GBP/USD pairs is 1.6388
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.2
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.