Pro Arbitrage EA Trading Strategies, Details, Examples – Analysis and Forecasts – May 14, 2024

adminMay 14, 2024

Pro Arbitrage EA trades based on triangular arbitrage. Triangular arbitrage (also known as cross-currency arbitrage or three-point arbitrage) is the act of exploiting arbitrage opportunities that arise from price differences between three different currencies in the foreign exchange market. A triangle arbitrage strategy involves three trades, exchanging the initial currency for the second currency, the second currency for the third currency, and the third currency for the initial currency. During the second transaction, the arbitrageur secures a zero-risk profit due to the mismatch that exists when the market cross rate does not match the implied cross rate. Profitable trading is only possible if there is a market defect.

strategy :

Triangular arbitrage opportunities can only exist if the quoted exchange rate is not equal to the market’s implicit cross rate. The following equation represents the calculation of the implicit cross rate, which is the exchange rate expected in the market implied by the ratio of two currencies other than the base currency.

If we consider a,b,c to be currencies, it looks like this:

Exchange rate (a/c) = Exchange rate (a/b) * Exchange rate (b/c)

where

Rate(a/c) is the implicit cross rate for currency c relative to currency a.

The exchange rate (a/b) is the quoted cross-market exchange rate for currency a against b.

Rate(b/c) is the quoted market cross rate for currency b against c.

If the market cross-rate quoted by the bank is the same as the implicit cross-rate implied by the exchange rates of other currencies, the no-arbitrage condition remains. However, if there is an inequality between the market cross rate, Rate(a/c), and the implicit cross rate, Rate(a/b) * Rate(b/c), an arbitrage opportunity exists. Difference between two exchange rates.

yes:

For example, a broker will quote dollars with a bid of 0.8171 €/$, sterling with a bid of 1.4650 $/£, and sterling with a bid of 1.1910 €/£. The quoted market cross rate is 1.1910€/£, but the trader realizes that the implied cross rate is 1.1971€/£ (calculated as 1.4650 × 0.8171 = 1.1971). The market suggests that the implicit cross rate should be 1.1971 euros per pound, but the market is selling pounds at a lower price of 1.1910 euros. Traders can exercise triangle arbitrage in a hurry by exchanging dollars for euros, exchanging euros for pounds, and finally exchanging pounds for dollars. The following steps demonstrate triangular arbitrage.

1. A trader sells $5,000,000 in Euros and receives €4,085,500. ($5,000,000 × 0.8171 €/$ = €4,085,500)

2. Trader sells €4,085,500 per pound and receives €3,430,311. (€4,085,500 ¼ 1.1910 €/£ = £3,430,311)

3. The trader sells £3,430,311 for dollars and receives $5,025,406. (£3,430,311 × 1.4650 $/£ = $5,025,406)

4. The trader ultimately earns an arbitrage profit of $25,406 on the $5,000,000 capital used to execute the strategy.

A quick look at the strategy:

There are two ways to exchange currency a for c.

1. Exchange a directly for c

2. Change a to b and then change b to c.

The above methods generally give the same results. However, in some market conditions there are differences (several points range). EA waits for those conditions and then initiates the transaction. For example, if Method 2 is cheaper, exchange for Method 2 first, then immediately reverse to Method 1.