Has anyone tried to make an ea, search and take advantage of triangular arbitrage setups? Does this actually work in practice, or would brokers just not allow it?
What about a true ECN broker like dukascopy?
This isn’t for retail traders like you and me. Banks could probably make some money from this because they are at the top of the food chain in terms of market access. We are at the bottom and are just lining your broker’s pockets if you attempted something like this.
There’s plenty of other ways to make money for our kind however, so don’t let that discourage you!
The majority of trades on the NYSE and NASDAQ last an average of 3 seconds. I can’t imagine Forex is any different. These are not very profitable trades for retailers for one reason – spread. UBS, Barclays, Citigroup, etc., who can easily take advantage of arbitrage situations, do not pay spread (unless it is to themselves). You do. They can take advantage of small price discrepencies whereas a retailer is just opening up his wallet for his broker.
How is that possible?How do they manage to make profits in an eye blink?Don’t they need to pay any spreads?Don’t they have any slippage?
No, they (market makers, JP Morgan, Goldman Sachs, etc.) pay no spreads or fees and they have no slippage. They are the ones on the opposite side of nearly every one of your trades. It is THEIR market. You pay your broker the spread in forex and your broker a trading fee in stocks and your laptop computer is not going to keep up with an institution’s direct market access. You suffer the effects of slippage, not them. They are able to see every buy and sell position as well as every stop that is placed in the market at large (in stock markets) and through them in forex.
Banks do this all the time and generally do not even need a chart. They get an order from an institution wanting to buy 20 million euros for 1.2800. All the Bank has to do is wait till price drops below 1.2800 and boom instant profit. That fast no guess work involved. The further it goes below 1.2800 befor they buy it the more money they make but it does not matter what the market does. If price does not make it below 1.2800 then all they have to do is requote the institution for a higher price and boom they made a profit.
And that is why investment banks employ very few analysts and traders but entire armies of of mathemeticians and computer scientists.
What if the price touched 1.2800 for just a second and than reversed fastly and they couldn’t trigger the order?Won’t they be blamed?
When you deal with a retail broker you’re either dealing with a true ECN (all pass through) or an order aggregator or MM. The only way a triangular arbitrage strategy within a single broker works is via latency and the counterparty won’t take kindly to your activities.
If you do broker to broker arbitrage the same rules apply - the losing broker won’t take kindly to it.
Unless you’re an extremely proficient professional developer it’s hopeless. And even then you might not make it because the technology and logistical challenges are immense (for a small profit). But if you’re determined to find out more you can learn a lot from the discussions in this thread: My Own Broker Arbitrage @ Forex Factory
I suggest instead of focusing on the risk free profit (which isn’t actually risk free because execution risk is substantial), focus on a more hedged approach such as statistical arbitrage or pairs trading. You won’t get thrown out of the casino if you make money with these strategies and you don’t necessarily have to be a high end developer to succeed. There is a good thread on babypips in the Systems section on Stat Arb. Take a look. 301 Moved Permanently
Finally, there are some ideas that can be gleaned from triangular arbitrage that may be helpful to a strategy developer. There is no question that FX markets revolve around arbitrage. While triangular arbitrage may not be a practical retail strategy, understanding how to compute the out of balance Triangular Arbitrage pair may help some traders develop strategies based off the arbitrage concepts.
I read about triangular arbitrage on Blackwell’s blog and tested it with them. Seemed to work, but hard to find opportunities.