Arbitrage trading is basically extracting profit from price differences between the same instrument traded on different exchanges. Out of all trading strategies arbitrage strategies stand out by offering traders high profitability coupled with low or nonexistent risks.
How can arbitrage strategies be used on Forex market?
First — currency pairs forex arbitrage. The idea is finding two brokers who have divergences in their price quotes, and implement a kind of “pair trading” on price divergences. To do that, we buy the “under priced” broker’s currency and sell the “overpriced” one. After price divergence ceases, we close the positions. The result will be profit (of course) equal to price divergence (minus spread, commissions and possible slippage).
Situations when one Forex broker’s price quotes lag after another one’s are not seldom. In this case we can use a special strategy called one-legged arbitrage. In this strategy we exchange higher profits for higher risks opening positions only on “slow” broker.
Another perspective opportunity for implementing arbitrage strategies is using CFD instruments. In our days lots of brokers offer CFD instruments in addition to currency pairs, which provides thousands of arbitrage combinations. The basics of CFD arbitrage are the same as when trading currency pairs, but there are some quirks. First, CFD contracts usually have much lower liquidity than currency pairs. It can be used to an avdantage with price divergences being relevant for hours, allowing safe position entry without order requotes or rejects. Second, CFD contracts use real exchanges’ instruments as main asset, so CFD-real instrument arbitrage can also be tested and traded.
In the end we would like to point out that arbitrage strategies are highly dependant on speed of analysis and entry and are mainly traded using automated systems. A good example of such an automated system, very versatile yet easy to set up, is Megatrader, providing its users with the opportunity to build, back test and profit from arbitrage on Forex, futures and equity markets.