The bad news is that, risk-free trading is not feasible at all times. Though there are different forms of forex arbitrage that you can utilize to improve the odds of performing a successful trade. This article will assess the concept of forex arbitrage trading, how the market makers use “true arbitrage,” and, lastly, how retail investors can benefit from various arbitrage opportunities.
The following are the top arbitrage concepts:
Pure Arbitrage
Arbitrage is known as the acquisition of securities on one market for prompt resale on another market to be able to generate profit from a price discrepancy. As a result, immediate risk-free profit is attained.
For instance, if the price of a security on the NYSE is being traded out of sync coupled with its futures contract on Chicago’s exchange, as a trader, you can concurrently sell (short) the security which is more expensive between the two and purchase the other, therefore making profit on your FOREX investments via the difference. This kind of arbitrage calls for the defiance of at least one of the following conditions:
- Similar security should be traded within the same price on all markets.
- Two securities with similar cash flows must be traded at similar price.
- A security with a recognized price in the future – through a futures contract – must be traded today at that price reduced by the risk-free rate.
Statistical Arbitrage
Arbitrage, however, may come in many forms. Statistical or risk arbitrage is another form of arbitrage and considered as one of the best forex trading strategies for many traders. Dissimilar from pure arbitrage, risk arbitrage involves – definitely, risk. While it is deemed as “speculation,” risk arbitrage is considered as one of the most known and retail-trader friendly kinds of arbitrage.
For instance, Company A is presently trading at $10 every share. On the other hand, Company B, which plans to acquire Company A, comes to a decision to set a takeover bid on Company A at $15/share. This goes without saying that all of Company A’s shares are currently worth $15/share, but are only trading at $10/share.
Suppose the early trade increased the bid up to $14/share, there is $1/share providing a chance for risk arbitrage. However, the acquisition may plunge through; in this case the share will be valued at the original price of $10/share.
Gauging Risk
One of the best ways to measure the risk involved in trading is gaining knowledge of the FOREX indicators. Another factor is through true arbitrage used by market makers. The following are some of the advantages that market makers have over retail traders:
- More trading capital
- More skills and experience
- Real time information and news
- Faster computers
- Instant access to the dealing desk
- More complex software
- And many more
When working together, these segments make it nearly impracticable for a retail trader to benefit from pure arbitrage opportunities. The market makers utilize forex arbitrage software that is operated on top-of-the-line computers to lock-in such profitable trading opportunities regularly. Once found, typically the differential is insignificant, and necessitates a huge amount of capital to make money – retail traders most likely will get burned through commission fees – meaning it is almost unattainable for retail traders to contend in the risk-free arbitrage genre.
Risk Arbitrage and Retail Traders
Despite the setbacks in pure arbitrage, risk arbitrage can still be employed by many retail traders. While this form of arbitrage needs taking on some risk, in general, it is considered as “playing the odds.”
The case in point of risk arbitrage above exhibits merger and takeover arbitrage, and they are possibly the most usual kinds of arbitrage. It normally entails finding an undervalued firm that has been targeted by another firm to set a takeover bid. Such bid will convey the company’s intrinsic value. If by all means the merger goes well, all of those who benefited from the opportunity will make money substantially; but, if the merger plunges through, expect a drop in the price. Similar to forex options trading, the key to profitability in this kind of arbitrage is speed.
Conclusion
You may be looking for forex arbitrage opportunities. The good news is that many of the information necessary to discover these things can be acquired online. You can even ask your broker to provide you newswire services that will permit you to read news in real time. Don’t forget to take advantage of forex arbitrage calculator as well.
