Forex Arbitrage: A Risk-Free Trading Strategy Explained

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 in the short window they exist. This type of arbitrage trading involves the buying and selling of different currency pairs to exploit any pricing inefficiencies. We can better understand how this strategy works through the following example.

Example: Arbitrage Currency Trading

The current exchange rates of the EUR/USD, EUR/GBP, GBP/USD pairs are 1.1837, 0.7231, and 1.6388, respectively. In this case, a forex trader could buy one mini-lot of EUR for USD 11,837. The trader could then sell the 10,000 Euros for 7,231 British pounds. The 7,231 GBP could then be sold for USD 11,850 for a profit of $13 per trade, with no open exposure as long positions cancel short positions in each currency. The same trade using normal lots (rather than mini-lots) of 100,000 would yield a profit of $130.

The act of exploiting the pricing inefficiencies will correct the problem so traders must be ready to act quickly is the case with arbitrage strategies. For this reason, these opportunities are often around for a very short time. 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.

Forex Arbitrage Calculator

There are many tools available that can help find pricing inefficiencies, which otherwise can be time-consuming. One of these tools is the forex arbitrage calculator, which provides retail forex traders with real-time forex arbitrage opportunities. Forex arbitrage calculators are sold through third parties and forex brokers. It is essential to try out a demo account first, as all software programs and platforms used in retail forex trading are not one in the same. It is also worth sampling multiple products before deciding on one to determine the best calculator for your trading strategy.

For further reading on the fundamentals of forex trading, see "Getting Started in Forex."