Triangular Arbitrage Advantage

Triple arbitration - is the profit that occurs when the quoted exchange rate is not equal to the cross-market exchange rates. Triple arbitration uses imperfect markets, due to which a market is overvalued and another undervalued. The price difference between the exchange rate is only a fraction of a cent, so the profitability of this type of arbitration is necessary to trade a large amount of capital. At ECN-brokers may be available for some of the features of such a strategy. However, this is a game for the fastest. Therefore, a large role in determining who will benefit from such arbitrage opportunities, determine the network latency and the location of the servers. You will need a broker with low spreads and fast execution of orders.

Why three currencies?

It is impossible to conduct successful arbitration with only two currencies and receive instant profits, simply by moving dollars into yen, and then immediately transferring the yen back into dollars. In fact, it will cause losses due to the spread between the Bid and Ask prices. Since the work with two currencies only return you to the beginning (minus a spread), to arbitration for a third currency success.

When possible arbitration?

Arbitrage is possible when the three currencies mispriced in relation to each other. Incorrect assessment, allowing quick easy profit remitting money three times - is a rare opportunity, which is always looking at arbitrage trading. Incorrect estimation may take only 1 or 2 seconds, so merchants must be extremely rapid to execute trading. Studies have also shown that the possibilities appear more often during that part of the working day, when the markets are more liquid. An example of this is the time when traders are very active in foreign currencies from Europe and Asia.

Example

Let's assume that the trader sees the possibility of arbitration in the EURUSD and finds that the yen cross-rates offer the best opportunity. Mechanical implementation of this strategy will be roughly follow this process:

• Purchase 100,000 EURUSD Market


• Confirmation of execution of orders on EURUSD at asking price or close to it.




• If the order will be bad performance that is worse than the synthetic currency pair, or if a deal is too expensive, then the transaction is closed, and sought a new opportunity. The costs incurred will be paid by the commission and spread.


• If the order is an acceptable design, the process continues.




• Choosing half synthetic part to perform. The order does not matter. If the first order will be used in the EURJPY, the task is simplified. EURUSD EURJPY pair and have the same base currency. Volumes of transactions must be identical. As was the purchase of a pair EURUSD, EURJPY to sell for hedging the euro component of the transaction. To sell 100,000 units of EURJPY on the market.


• The remaining part of the deal - USDJPY. Buying EURUSD has led to a decrease in dollars. For hedging dollars necessary to buy dollars. Thus, the need to buy USDJPY. However, you can not blindly buy $ 100 000. While previously it was purchased 100 000 €, the transaction cost in the $ 128 200. The lot size must be equal to the purchase of $ 128 000 against the yen. An additional $ 200 are rounded due to limitations on the size of the positions in the Forex market. We have to take a risk on positions in the $ 200.


• Now, the entire transaction is executed. The output should be performed when the trading opportunities will unfold, so the price is below Bid Ask price as the market expected. The output of all transactions in the market.

dignity

• There is the risk that the market moves against your position;


• No risk during the events in the market, such as news or breaks;


• No sending of stop-loss and take-profit to the broker.

Input parameters

• Frist Triangular Pair - first triple couple (eg: EURUSD, GBPUSD)


• Second Triangular Pair - second triple couple (eg: GBPUSD, USDJPY)


• Cross Triangular Pair - the third pair of triplets (eg: EURGBP, EURJPY, GBPJPY)


• HiFPI - (High Fraction Product Inefficiency Hedge) The higher the value, the less open transactions.


• LoFPI - (Low Fraction Product Inefficiency Hedge) is less than this value, the less open transactions.


• MagicNumber - magic number


• Profit in pips - take profit in pips


• Stop loss in pips - stop loss in pips


• lot Size - contract size


• Max Spread to trade - maximum spread for trading

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