Forex Arbitrage implies that a trader opens positions for one and the same currency pair on one or several markets simultaneously for the purpose of gaining profit. It is well-known that there is a close interconnection between many financial markets. The same kind of interconnection is natural for other market types.
It is no secret that Forex Arbitrage systems allow to gain hundreds of percent profit, and risks are minimal. Let’s try to examine Forex Arbitrage and find out, why not everything is as bright as it may seem on the face of it.
In this article we will try to explain the essence of the process of Arbitrage itself, and also potential difficulties and hidden rocks. We hope it will discredit delusions of beginners and will help them to avoid losses.
So, what is Forex Arbitrage and why is it so profitable? There are several types of Forex Arbitrage, but all of them are based on one and the same principle: we know the value of the future price few seconds before we will see this value in the terminal (time depends on the type of Arbitrage). Thus, we can open a predeterminedly profitable position in the terminal. As soon as the position enters the zone of profitability (it also depends on the type of Arbitrage and may take up to several days), it will be closed with a small profit. The advantage of such method is in absence of any drawdown.
How is it possible that we know the “future” price? Broker receives quotes from his liquidity providers; a server processes incoming requests and different quotes from liquidity providers, and some time is required for doing it. So, this is exactly the reason of delays, necessary to Forex Arbitrage systems. Broker’s server needs time to “digest” all the information, and the higher server load (it depends on server capacity and the number of clients) and the greater the amount of requests, the stronger server delay.
In other words, we have two sources of quotes: rapid quotes and quotes with delays (slow). When a price gap appears as a result of high volatility, an expert advisor instantly opens order in the direction of movement of the rapid source, which shows the current real price, but the order is placed at a “slow” broker. As a result, you instantly gain profit. As a matter of fact, a trader, who uses Forex Arbitrage, opens order using a non-market quote, as it delayed because of the technical peculiarities and operation principles of Internet.
The goal of a Forex Arbitrage system is to receive quotes before they come to your trading terminal, calculate a potential profit, open order and close it as soon as it becomes profitable. That is why each position exists no longer than several seconds in such systems. As a rule, real-time quotes are received from the most rapid broker. It is called Interbroker Arbitrage.
There is also such type of Forex Arbitrage, which is called Intermarket Arbitrage by some trades. It works on the same principle, but in this case quotes are received not from brokers, but, for example, from a large bank, which is a liquidity provider. Though even such organizations allow lesser mortals to enter the market, but not with small accounts, but with large amount of capital. This method has several advantages, because such quotes are more rapid that quotes of any ordinary broker; it means that we have more time for opening orders. Each split second counts.
Everything is simple and perspective on the face of it, but brokers have managed to resist such systems long ago. All brokers have regulations; for example, it is written there that a “lifetime” of an order should be at least one minute long (or several minutes) or that minimal profit should be several pips. They also forbid using any kind of Forex Arbitrage.
Moreover, brokers have technical methods, which help to resist Forex Arbitrage systems, for example, requotes. When broker receives a trading order, he re-checks price and sends you requote or offers to open order by other price in case the previous price is non-market price. Almost all brokers do it. Such method of controlling irritates ordinary traders, because it causes long queues for orders execution and, as a consequence, requotes. Additional filtration and re-checking of quotes are the reasons of increase of incoming data processing time, and it implies delays of orders execution.
By the way, such situation is common not only for Forex Arbitrage. In case of manual trade during release of news you will be faced with the same situation: there are a lot of requests, and execution queue is formed. Broker has to check all these requests and needs time to do it, so you will definitely receive requote; of course, if the price is unprofitable for you, a broker will gladly open such order. His first and foremost task is to earn money, so don’t forget about it.
Don’t believe to the statements of such traders, who are trying to convince you that they are able to evade requotes. It is impossible to realize it in terms of technical skills. Cyclical sending of requests to the server in the hope that your order may be opened is not evasion of requotes, but rather a reason for a broker to forbid you using the EA and maybe to add an additional filter, which will make execution on your account even slower and reduce all work of your Forex Arbitrage system to zero.
Here are several possible negative outcomes of usage of Forex Arbitrage EAs. In case your system works fine and brings profit you are lucky, because it is difficult to find such broker. Anyway, your happiness won’t last long: a broker will understand everything and ban your IP and account number (maybe even the whole set of accounts).
Ban and filters are not the worst things. Not to gain profit is normal, but there are more efficient methods in brokers’ arsenal. For example, broker throws a non market quote against the direction of market movement, your expert advisor reacts on it, but it is a set-up. An order will be opened, but it will be unprofitable. A series of such orders will clear your account! Everything is done very skillfully; it is very easy to do it inside a candle, and you will never see anything at a chart.
But that’s not the half of it. Then a dealer, a man, but not a robot, comes in. He knows how your Forex Arbitrage EA works and how to deceive it and make it to open unprofitable positions. In addition to false quotes this man won’t let your Forex Arbitrage system close orders. If you have stop orders, they are probably short, and the dealer will make so that your stop orders will be filled with a considerable slippage. In general, the dealer will easily clear your account, and you won’t even notice it.
One more thing: some Forex Arbitrage EA work perfectly on demo accounts, but don’t work on real accounts. When we say “they don’t work”, we mean it: you will receive only requotes, which won’t let you enter the market using non market prices. Almost all brokers work in such way. It means that you won’t make easy money.
It is very difficult task to find a broker, which allows using Forex Arbitrage systems, Aebitrage EA. Moreover, it takes a lot of time and money, because you have to check everything on real accounts. You will have to pay commission for money transfers to and from deposits of different brokers, and no one guarantees that you will gain profit.
As you can see, you’ve been looking at Forex Arbitrage through rose-colored spectacles, bun now you know the truth. Anyway, Forex Arbitrage worth that time and money, because when you find “a cash cow”, everything will be repaid.
There are sellers of Forex Arbitrage systems who can manage your accounts for some interest. Why do they do it? The point is that some brokers may ask you to sign for not using Arbitrage systems, giving reasons for money withdrawal. In this case you will have to find some third parties and potential investors for further work. If a dealer comes in, as you know, he will clear the deposit, so investors are the ones who risk their money. As you can see, such method of trading is even more profitable, and risk is lower. So if you’ve decided to trust someone your account, you should understand risks.
It often happens that some “professional” traders show you only half of truth. They give you reports from real accounts and even investment passwords of their investors to demonstrate perspectives of your cooperation. But the truth is that only half of investors’ accounts bring profit, while another half of accounts suffer losses. It depends on broker, various settings on various accounts, etc. Anyway, you see only hundreds of percent profits, and cleared accounts stay in the background.
Don’t expect that you will rake in heaps of money if you buy a Forex Arbitrage system. Such systems considered being outside the law by brokers, and they constantly resist all attempts of enterprising traders and punish them by means of cleared accounts.
There is another Forex Arbitrage system, which is called Currency Arbitrage. It is a very interesting type of Forex Arbitrage, and several books wouldn’t be enough to describe it. Let’s examine just the basics.
Currency Arbitrage is a trading operation, when you combine buying or selling of a currency with a corresponding counter transaction for gaining profit from the difference between rates of currencies on different exchange markets (Spatial Arbitrage) or during a definite period of time (Temporal Arbitrage). A transaction involving two currencies is a simple arbitrage transaction, while transaction involving three or more currencies is a complex arbitrage transaction. It should be noted that Currency Arbitrage is a trade without risk! There is no drawdown.