Forex Arbitrage: Why Arbitrage In Forex Trading?

One of the widely used forex strategies in the forex trading is forex arbitrage

. This is a risk free strategy which is conducted when there is an inequality or fluctuation in the exchange rates of two/three currencies to make profit in a very short period of time.

The forex traders use forex arbitrage calculators to calculate the arbitrage. There are several forex calculators available in the internet to calculate the arbitrage. Many of these calculators can be downloaded and you do not have to pay for it.

A point that has to be noted is that when there is a slight variation in the price of the currencies there would be an immediate speculation among the speculators and traders. Since the fluctuation depends mainly on supply and demand on the currencies, the profits in this type of trading is made while the difference in the rates lasts.

It is calculated using online forex arbitrage calculator. To calculate the forex rates the speculator should have the accessibility to real-time pricing quotes. The forex trader should have the ability to make quick transactions because there are many forex arbiters in the market.

You must understand arbitrage comes with an exposure to market risk and it is not simply an act of buying a product at lower value in one market and selling the same for a higher value in another market. To avoid the market risk, the transaction of buying and selling should take place simultaneously. Arbitrage is a strategy used by the traders dealing with financial products such as currencies and securities.

There are basically two types of arbitrage. One is two-way arbitrage and the other is three-way arbitrage. The more popular of the two is the two-way forex arbitrage.

In the international market the currency is expressed in the form AAA/BBB. AAA denotes the price of one unit of the currency which the trader wishes to trade and it refers the base currency. While BBB is international three-letter code 0f the counter currency. For instance, when the value of EUR/USD is 1.4015, it means 1 euro = 1.4015 dollar.

If the speculator is shrewd and has a deeper understanding of the forex market, then he can make use of this opportunity to make big profits. Forex arbitrage transactions are quite easy once you understand the method by which the business is conducted.

For instance, the exchange rates of EUR/USD = 0.652, EUR/GBP = 1.312 and USD/GBP = 2.012. You can buy around 326100 Euros with $500,000. Using the Euros you buy approximately 248420 Pounds which is sold for approximately $500,043 and thereby earning a small profit of $43.

To make a large profit on triangular arbitrage you should be ready to invest a large amount and deal with trustworthy brokers.

Arbitrage is one of the strategies of forex trading. To make a substantial income out of this strategy you need to make an enormous amount of investment. Though theoretically it is considered to be risk free, in reality it is not the case. You should enter into this transaction only if you have deeper understanding of forex market. Hence, it would be wise not to devote much time in looking out for arbitrage opportunities. However, forex arbitrage is a rare opportunity and if it comes your way, then grab it without any hesitation.

by: Fabian Lee

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