Arbitrage

Hello,
I am new to this forum and would like to know if someone could give me some information on arbitrage. Is it possible on the FX market? And what’s the best thing to start with.
Any info would be greatly appreciated.

Regards
Steve

Hello,

For the retail forex trader this is not a practical strategy. The spread/commission costs will be greater than any temporary quote differences between brokers. Unfortunately, pure arbitrage is reserved for the market makers.

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Thanks Mugen, but you wrote “pure arbitrage”, would there be a possibility of , say, “unpure arbitrage”? Or something similar with a low risk? Would appreciate some comments.

Thanks a lot

Steve

You’re welcome steve.

There is Risk or Speculative Arbitrage, which has some degree of risk. There’s a few different methods, but for the retail trader most are not practical and profits are small/hard to come by. An example would be Currency Futures vs Spot Price arbitrage. If you’re curious from an academic standpoint, here is a pdf file that’s worth taking a look at. You’ll want to rotate it in acrobat reader to make life easier.

http://pages.stern.nyu.edu/~adamodar/pdfiles/invphiloh/arbitrage.pdf

Here is a strategy that I think is similar to what you might be looking for, it’s definitely worth taking a look at.

It’s trading currencies with a high correlation to another asset. Not a true or pure arbitrage at all, but it can be very profitable. Correlations do not always stay the same. Here is an example with crude oil compared to CAD/JPY. There has been about a 2 month delay, sometimes more sometimes less, between major moves in oil and then cad/jpy. Below is a chart.

The start of the last drop in oil was mid december, it has almost been two months since and cad/jpy is starting to drop. There is the possibility it will continue to drop for another month and a half or so. Keep in mind there are always other factors to take into consideration when trading based on correlations.

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Boris Fesenko (you can google him) has some clear explanations about arbitrage in YouTube videos. I think he’s one of the more well known people in the realm of making arbitrage available to retail traders. I’m surprised he went public with his stuff, don’t understand why. But anyway, his material helped me understand some of the finer points and a few different types of arbitrage.

To me the best form of arbitrage would be as simple as possible and as stealthy as possible. Looking at a good “stealthy arb” trading statement, you should see a mix of winners and losers across different currency pairs, trades opened and closed at random times and held for random lengths of time. You would also want to consider throttling your arbs, meaning don’t use big lot sizes and maybe don’t do it as often as possible. One can profit impressively given the technology we – yes, even we retail traders – have available to us. One of the things I’ve proven to myself is that the technical impossibilities everyone alludes to just aren’t there. Is it super easy? No. You must be an advanced programmer / software engineer, or at least high intermediate. If someone has tried and failed, it’s because for whatever reason they have some knowledge gaps and can’t achieve an efficient implementation. This is not where the real difficulty lies. The real difficulty is in finding a way to get to keep your profits.

To be fair, you will struggle. Don’t think it’s possible personally. I know it’s possible with Crypto, though.