I have found an arbitrage example with below 3 currency pairs.
I struggle to understand how it is possible to know when to either BUY or SELLSHORT each of the
3 currency pairs?
Does it depend on which order the currencies are in the symbol etc.
Is there a rule to understand this in below example?
Thank you!
Below are the arbitrage example:
EUR/USD = 0.8631 (BUY or SELLSHORT and why?)
EUR/GBP = 1.4600 (BUY or SELLSHORT and why?)
USD/GBP = 1.6939 (BUY or SELLSHORT and why?)
With these exchange rates there is an arbitrage opportunity:
Sell dollars for euros: $1 million x 0.8631 = 863,100 euros
Sell euros for pounds: 863,100/1.4600 = 591,164.40 pounds
Sell pounds for dollars: 591,164.40 x 1.6939 = $1,001,373 dollars
I am looking for if there is a rule to follow in order to know when to either BUY or SELLSHORT a currencypair in the below
triangular arbitrage example:
EUR/USD = 0.8631 (BUY or SELLSHORT and how do I know that?)
EUR/GBP = 1.4600 (BUY or SELLSHORT and how do I know that?)
USD/GBP = 1.6939 (BUY or SELLSHORT and how do I know that?)
Opportunities like this are few and far between and add unnecessary variables to the trades you make. Even if you were to get in on time for all, the chance you’ll mix up the quantities and misstime them is quite big.
You can’t realistically do this kind of triangular arbitrage profitably as a retail trader: dealing-costs and time-lags will kill you, unless you have dedicated servers setting next to the exchange with a 10 [U]micro[/U]second ping to the exchange and execution server, [I]and[/I] have really powerful high-frequency trading algorithms working overtime.
To sell dollars for euros you would go long EUR/USD
To sell euros for pounds you would short EUR/GBP
To sell pounds for dollars you would short GBP/USD
The first currency in the pair, “the base currency” is the one you are buying if you are going long and selling if you are going short. The second currency in the pair, “the counter currency” or “the quote currency” is the one you are shorting when going long and buying when going short.
That said, you can’t actually conduct that arbitrage with an fx dealer for many reasons.
Thank you for answer. I beleive I then do understand the example when to buy and sellshort.
However, I don’t understand this statement:
“That said, you can’t actually conduct that arbitrage with an fx dealer for many reasons.”
If I have an account in USD. What reasons makes it not possible to conduct that arbitrage with an fx dealer?
Important to mention is that I don’t account for it to be possible to enter the trades due to latency/milliseconds etc.
My question is [B][U]theoretical[/U][/B] as the example tells. Is there any special reason it is not possible to enter those trades if the prices actually would be avaliable for a [B][U]theoretical[/U][/B] 10 seconds at an fx dealer with an USD account?
If the broker was to offer you those prices then what is there to stop you clicking on buy or sell? Absolutely nothing. So yes, you could in theory (with super fast fingers) complete those trades.
The back-end of eight 12hr shifts & broken sleep due to a small human meant I misinterpreted the query. My apologies!
Yes baz1982, you are right, what would stop from clicking buy or sell
So I am just theoretically try to understand the mathematics on how to put the trades in reality. For the example I don’t care if we will succeed to actually place the trades.
So now I understand that it is possible to place the trades in reality(I am used to stocks so forex trades are quite new so I just try to understand some things)
I would just need a confirmation on what sizes this arbitrage example trade will have when placing the orders.
[B]The correct Arbitrage Example found on internet said this:[/B]
Sell dollars for euros: $1 million x 0.8631 = 863,100 euros
Sell euros for pounds: 863,100/1.4600 = 591,164.40 pounds
Sell pounds for dollars: 591,164.40 x 1.6939 = $1,001,373 dollars
[B]The profit would be looking at the example:[/B]
$1,001,373 - $1,000,000 = $1,373
[B]An answer earlier in this trade was:[/B]
How to actually place the currency pair trades in reality:
To sell dollars for euros you would go long EUR/USD
To sell euros for pounds you would short EUR/GBP
To sell pounds for dollars you would short GBP/USD
[B][U]2 QUESTIONS[/U][/B]
I assume the below and I know if below is correct that we would need to do some rounding
in microlots/minilots etc also but I leave that out for the example.
[B]Question 1:[/B]
So this means that below sizes are correct in terms of practically place those orders at a broker?
[B]Question 2:[/B]
Below 3 orders will/should be placed simultaneously so sufficient funds to cover for all 3 trades will be needed on the account?
When you enter into a position with an fx dealer it is not the same as converting dollars for euros. You can’t walk away with those euros. You have to close the position by selling euros for dollars. If you go long EUR/USD, short EUR/GBP, and short GBP/USD you are not done. You have three unconnected positions simultaneously open.
You have to close them by doing the entry in reverse and thus undo the whole arbitrage. The best you could do is go into all three when the disparity in the rates is historically high and close them when it is much lower. But even if you bag the whole disparity (unlikely) you will have many hundreds in fees that will likely eat up those profits in a big way.
I see, then I understand that I need to close the positions as well!
I will need to refer to my questions in my previous post again to be sure what the answers are:
[B]2 QUESTIONS[/B]
I assume the below and I know if below is correct that we would need to do some rounding
in microlots/minilots etc also but I leave that out for the example.
[B]Question 1:[/B]
So this means that below sizes are correct in terms of practically place those orders at a broker?
[B]Question 2:[/B]
Below 3 orders will/should be placed simultaneously so sufficient funds to cover for all 3 trades will be needed on the account?
