What is Arbitrage?

Forex arbitrage is a trading strategy in which traders look to exploit the inefficiency in the pricing of currency pairs to maximise their profits. It’s a strategy that requires huge attention to detail, quick reactions and, more often than not, specialised software.

Arbitrage is a term that refers to exploiting a pricing discrepancy in a market. This could be a discrepancy in a financial market or even in some sportsbook markets and it allows traders to pinpoint a profit making opportunity.

For example, if the value of the Euro weakens, this is likely to be reflected in any trading pair in which the € is traded. However, not all trading pairs will reflect this at the same time. Instead, the pair £/€ may reflect the change before the change is reflected in the US$€ pair. Arbiters will exploit this gap between the two by trading in the US$/€ pair, knowing that the Euro is likely to have decreased in value as it has already fallen against other currencies.

Unsurprisingly, these pricing discrepancies do not last long, with many arbitrage opportunities closed within a matter of minutes and even seconds. For that reason, many traders use dedicated software to spot and trade in such scenarios before the opportunity closes.

Related posts:

1. Hedging On occasion, Forex traders might seek something of an “insurance”...

Related posts brought to you by Yet Another Related Posts Plugin.