A:

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 fast on opportunities presented by pricing inefficiencies, while they exist. This type of arbitrage trading involves the buying and selling of different currency pairs to exploit any inefficiency of pricing. If we take a look at the following example, we can better understand how this strategy works.

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 $11,837 USD. The trader could then sell the 10,000 Euros, for 7,231 British pounds. The 7,231 GBP, could then be sold for $11,850 USD, 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 100K, would yield a profit of $130. This can be continued until the pricing error is traded away.

As with other arbitrage strategies, the act of exploiting the pricing inefficiencies will correct the problem so traders must be ready to act quickly. For this reason, these opportunities are often around for a very short-time, before being acted upon. Arbitrage currency trading requires the availability of real-time pricing quotes, and the ability to act fast on the opportunities. To aid in the ability to find these opportunities quickly, forex arbitrage calculators are available.

Forex Arbitrage Calculator
Doing the calculations to find pricing inefficiencies yourself, can be time consuming to actually be able to act upon any opportunities found. For this reason, many tools have appeared across the Internet. One of these tools is the forex arbitrage calculator, which provides the retail forex trader with real time forex arbitrage opportunities. A Forex arbitrage calculator are sold for a fee on many Internet sites by both third parties and forex brokers; and is offered for free or for trial by some upon opening an account.

As with all software programs and platforms used in retail forex trading, it is important to try out a demo account if possible. The wide variety of products available, it is near impossible to determine which is best. Trying out multiple products before deciding on one is the only way to determine what is best for the forex trader.

For more, see Getting Started In Forex.

RELATED FAQS
  1. How do I use On-Balance Volume (OBV) to create a forex trading strategy?

    On-Balance Volume, or OBV, is a technical indicator that operates based on the assumption that price movements are preceded ... Read Full Answer >>
  2. What is arbitrage?

    Arbitrage is basically buying in one market and simultaneously selling in another, profiting from a temporary difference. ... Read Full Answer >>
  3. How is the value of a pip determined?

    A pip in foreign exchange trading is a measure of a price movement in a currency pair. "Pip" is an acronym for price interest ... Read Full Answer >>
  4. Is there a difference between financial spread betting and arbitrage? (AAPL, NFLX)

    Financial spread betting is a type of speculation that involves a highly leveraged derivative product, whereas arbitrage ... Read Full Answer >>
  5. What are the goals of covered interest arbitrage?

    The goals of covered interest arbitrage include enabling investors to trade volatile currency pairs without risk as well ... Read Full Answer >>
  6. How does arbitrage affect the price of exchange traded funds (ETFs)?

    Arbitrage may be used to bring the market value of an exchange-traded fund (ETF) back into line with the net asset value ... Read Full Answer >>
Related Articles
  1. Budgeting

    Is Living in Europe Cheaper than in America?

    Learn how living in Europe has financial advantages over living in the United States. Discover the benefits to take advantage of when it makes financial sense.
  2. Mutual Funds & ETFs

    3 ETF Strategies for Growth in Europe for 2016 (FXEU, DFE)

    Learn about the outlook for European economies and how European equities could be poised for a more prosperous 2016 than U.S. equities.
  3. Forex Strategies

    How To Build A Forex Trading Model

    The forex market is volatile, but a forex trading model with clear, step-by-step rules based on a sound strategy can help decrease losing trades.
  4. Forex Fundamentals

    Explaining Slippage

    Slippage occurs when a trade is executed at a different price than what was expected.
  5. Investing News

    The Two Biggest Flash Crashes of 2015

    A flash crash occurs when prices plunge in minutes, and then often recover just as quickly. Here are two major flash crashes that occurred in 2015.
  6. Investing Basics

    NYIF Instructor Series: Risk Arbitrage

    In this short instructional video Jack Farmer explains what risk arbitrage is outlines three different examples of it.
  7. Forex Education

    Top 7 Questions About Currency Trading Answered

    Whether you're puzzled by pips or curious about carry trades, your queries are answered here.
  8. Mutual Funds & ETFs

    FEZ: SPDR EURO STOXX 50 ETF

    Learn about FEZ, the Euro Stoxx 50 ETF. FEZ tracks the 50 largest companies in Europe, making it the Dow Jones Industrial Average of Europe.
  9. Mutual Funds & ETFs

    UUP: Powershares DB US Dollar Bullish Fund ETF

    Explore information and detailed analysis of two popular currency exchange-traded funds, the PowerShares DB U.S. Dollar Bullish and Bearish Index Funds.
  10. Investing

    A New Reason Behind This Strategy’s Outperformance

    One of the great anomalies of investing: The historical long-term outperformance of smart beta or factor-based strategies relative to the equity market.
RELATED TERMS
  1. Sprexit

    Sprexit, or SPanish euRo exit, is the possible case of Spain ...
  2. Grexit

    Grexit, an abbreviation for "Greek exit," refers to Greece's ...
  3. Eurogroup

    Eurogroup is an informal, meeting of the finance ministers of ...
  4. Brexit

    The Brexit, an abbreviation of "British exit" that mirrors the ...
  5. Credit Card Arbitrage

    Borrowing money at a low interest rate from a credit card then ...
  6. Forex Spread Betting

    A category of spread betting that involves taking a bet on the ...
Hot Definitions
  1. Black Swan

    An event or occurrence that deviates beyond what is normally expected of a situation and that would be extremely difficult ...
  2. Inverted Yield Curve

    An interest rate environment in which long-term debt instruments have a lower yield than short-term debt instruments of the ...
  3. Socially Responsible Investment - SRI

    An investment that is considered socially responsible because of the nature of the business the company conducts. Common ...
  4. Presidential Election Cycle (Theory)

    A theory developed by Yale Hirsch that states that U.S. stock markets are weakest in the year following the election of a ...
  5. Super Bowl Indicator

    An indicator based on the belief that a Super Bowl win for a team from the old AFL (AFC division) foretells a decline in ...
Trading Center