Thursday, April 28, 2016

What is Triangular Arbitrage in Forex

Ever encountered a situation wherein there is an inconsistency in the prices of the different currency pairs? Do you know that this kind of situation is actually profitable for you if you know how to act on it? If you don’t, then this is the right time for you to learn about arbitrage in forex trading.

Forex arbitrage is a trading strategy used by forex traders to earn profit with no open currency exposure. This kind of trading strategy requires the trader to act fast on pricing inefficiencies between different currencies, while the opportunity is still present. It involves buying and selling different currency pairs to take advantage of the inconsistencies of their pricing. 

This trading strategy is called triangular arbitrage for a reason. Refer to the illustration below so you could further understand what I am trying to say.


Triangular strategy is the process of trading a currency for another currency, then converting it again to another currency, and finally, converting it back to the original currency within a short time frame. Traders do this to take advantage of the inconsistencies in the prices of the currency pairs.

For example, the current exchange rate of EUR/USD, EUR/GBP and USD/GBP are 0.8631, 1.4600 and 1.6939 respectively. If, for example, the trader initially has 100,000 US dollars, he can trade it for €86,310, then he can sell the euros for 59,110 GBP before finally trading it back to dollars at an amount of $100,120. 

From these transactions, assuming that there are no transaction fees or taxes involved, the trader would earn a total of $120 worth of profit just by taking advantage of the inconsistencies in the pricing of the currency pairs.

Learn more about the forex market and further understand what is forex by reading our forex-related articles. See who the best forex brokers are, visit Wibestbroker.com to find out.

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