Forex arbitrage is a method of trading used by Forex traders who attempt to make money on the inefficiencies observed in the pricing between a pair of currencies. The Forex arbitrage trading strategy involves reacting quickly to opportunities, and is usually accomplished through the use of Forex arbitrage software. A Forex arbitrage system and a Forex arbitrage calculator are essential tools to use with this strategy to make profits with your Forex investment trading.
As with most other arbitrage strategies, the act of exploiting pricing inefficiencies will actually correct the problem existing in the Forex trading market. For this reason, these Forex opportunities are often only around for a very short time. To be successful in arbitrage currency trading, the trader must have live streaming price quotes and the ability react quickly as opportunities present themselves.
What is a Forex Arbitrage Calculator?
In order to locate and calculate the Forex arbitrage opportunities, traders use a Forex arbitrage calculator. There are a number of free Forex calculators available for download on the Internet if one knows where to search. Prior to initiating trades, traders should use free demo accounts to verify if Forex arbitrage trading can be a profitable venture. A trader would need accounts with Forex brokers in multiple locations around the world. And most arbitrage techniques in Forex trading require trading in two to three pairs of currencies.
Let’s understand the calculations involved in Forex arbitrage trading with an illustration.
The basic formula for the relationship of three related currency pairs, having 3 different currencies, is as follows:
XXX/YYY x ZZZ/XXX = ZZZ/YYY
Chances of triangular arbitrage present themselves whenever this equation goes wrong. A triangle arbitrator buys YYY spending XXX, then buys ZZZ spending YYY and lastly returns to XXX selling ZZZ, capturing a small profit in the bargain. The chance of profit is maximized by utilizing margin from brokers and trading with higher amounts.
To illustrate with numbers, let’s assume the exchange rates EUR/USD = 0.6522, EUR/GBP = 1.3127 and USD/GBP = 2.0129. A trader with $500,000 at his disposal can buy 326100 Euros, and using that he can buy 248419.29 Pounds. He can now sell the pounds for $500043.19. Thus he gets to earn a profit of $43.19 on a 3 way Forex arbitrage trading.
Can You Make a Living Trading Forex Arbitrage Full-time?
As it can be seen from the above illustration, making profits from Forex arbitrage trading is a rather complicated and sophisticated trading approach. Making profits of any kind with Forex arbitrage trading requires a lot of patience and as well deploying a complex Forex arbitrage system with suitable Forex arbitrage software. Also, these windows of Forex arbitrage trading opportunities are very limited as other traders are looking at and wanting to make use of the same information. So, in order to generate a decent quantum of profits from a Forex arbitrage strategy, it would call for the usage of an enormous amount of margin to start with.
The best option for traders would be to use Forex arbitrage strategies as a small part of their trading strategy, and not as the main source of their income.
For a Forex arbitrage EA (expert advisor) and indicator, check out this discussion at FXFisherman.com. For the OverlayChart by S.B.T that you can put multiple currency pairs on one price chart, go to http://codebase.mql4.com/2757. Here is a view of the GBPUSD and USDJPY currency pairs on the same chart.
