What is arbitrage in forex market

Forex arbitrage is a non-risk trading strategy which allows forex traders (retail) to make a profit with no open currency disclosure. The strategy involves acting fast on opportunities presented by pricing inefficiencies, while they exist. Forex arbitrage is also seeing as a strategic way in which a trader may make attempt to make profit or gain on the inadequacy in the cost of currency pairs. The strategy involves reacting quickly to opportunities, and is usually accomplished through the use of computers.

Arbitrage could also be seen as a simultaneous purchase and sale of an asset in order to make profit from a difference in the price. It is a trade that profits by exploiting the price differences of matching financial instruments on unlike markets.

HOW DOES FOREX ARBITRAGE WORK?

Many Forex brokers are using arbitrage for making money by beating into gaps that may occur between the currency prices. Specifically, the arbitrage trading in Forex can be done by utilizing the fractions of pips that are missed in cross pairs. It involves acting fast on opportunities presented by pricing inefficiencies, while they exist. This type of arbitrage trading involves the buying and selling of different currency pairs in order to utilize any ineptitude of pricing.

ADVANTAGES OF FOREX ARBITRAGE

1.    The largest advantage of using forex arbitrage strategy is that the risk element is next to nil.

2.    Forex Arbitrage also helps greatly in keeping the pay of securities across the markets more or less same and therefore it help in better price discovery of an asset, it the case of variance in price in security across various market, it puts an end to it.

3.    It also helps in making the financial markets more efficient because imagine if there were no arbitrage, stocks would have kept trading at different prices in different markets leading to assumption by few people which would have spoiled the real investors confidence in stock market.

DISADVANTAGES OF FOREX ARBITRAGE

1.    Many people only take into account the price aspect and they ignore the transactions costs and taxes that are associated with buying and selling of asset which in turn results in erroneous estimation of profits and may even lead to loss if price difference is not much.

2.    In real life there are not many Forex Arbitrage opportunities and even if there are then in order to make profit put of such situations you need to have latest technology in order to take positions quickly and also have knowledge to make such transactions which only few people own.

3.    One will require a lot of money in order to do Forex Arbitrage, it is not as if you have 2000 then you can do it rather one need to have much more money in order to do a profitable arbitrage.

The content of this article reflects the author’s opinion and does not necessarily reflect the official position of LiteForex. The material published on this page is provided for informational purposes only and should not be considered as the provision of investment advice for the purposes of Directive 2004/39/EC.

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