Posted by forex at 7:31 AM
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1. Understand what a currency pair is. Currency is quoted in pairs. The first currency is the base currency and the second currency is the quote currency. The quote is read: X units of the quote currency are needed to buy one unit of the base currency.
2. Understand how currency prices work. If the GBP (great British pound) is trading at 1.95 and moves to GBP/USD 1.9510 it means the pound is stronger and the U.S. dollar is weaker. However, if the currency moves from GBP/USD 1.95 to 1.9490 it means the pound is getting weaker while the dollar is getting stronger.
3. Work through an arbitrage example. Let's assume the current exchange rates for EUR/USD, EUR/GBP, GBP/USD pairs are 1.1837, 0.7231, and 1.6388, respectively. You buy 100,000 Euros for $118,370.
4. Find an arbitrage opportunity. Sell the 100,000 EUR for 72,310 pounds and then sell these pounds for $118,500 USD. The profit is $130 per trade. Long positions cancel all short positions and you're left with no exposure.
5. Act quickly and continue until the pricing inefficiency is traded away. Once your find a trading inefficiency, trade it as much as possible before the opportunity erodes. Chances are, you are not the only one to recognize the opportunity.
6. Use a forex arbitrage calculator to identify opportunities. The most challenging part about forex arbitrage is finding the arbitrage opportunity. Finding it manually can take a great deal of time. Instead, use a calculator to find the opportunities for you. You can pay a fee to forex brokers or you may be able to find a free-trial for a calculator. Try out (demo) multiple calculators before making a decision. Just be sure that the calculator offers Level II (real time) quotes.