Understanding the peculiarities of triangular arbitrage Image: Canva

Understanding the peculiarities of triangular arbitrage

Arbitrage, whether in international or local markets, allows individuals to capitalize on discrepancies in value.


Understanding the peculiarities of triangular arbitrage Image: Canva

Arbitrage, as a whole, lets you profit from value gaps in international or local markets. Triangular arbitrage, a strategy involving three currencies, is commonly applied in the FX market, generating instant profits without market risks.

Describing the Process

Triangular arbitration in the FX market allows traders to profit from market inefficiencies by trading multiple currency pairs. The most popular trio is EUR/USD, GBP/EUR, and USD/GBP. 

Triangular arbitrage trading entails purchasing currency A, swapping it for currency B, trading it for currency C, and then selling it back for the first asset, enabling traders to cash in on price variances in market prices.

These exchanges allow customers to buy EUR for USD, exchange it for the British pound, and then buy back USD with the pounds. Crypto triangular arbitrage involves finding suitable pricing gaps but is riskier and time-sensitive.

Describing the Tactics

Forex specialists use price variations in spot and futures contracts to purchase lower-valued pairs and sell highly-valued pairs. Some well-known methods include determining which currencies make sense to exchange A for B and C.

The statistical method compares two currency types to identify future price disparities. Two baskets are created, including overperforming and underperforming currencies. High-value baskets are traded, while low-value baskets are purchased.

Exploiting automated trading, traders in financial markets can make money from minor price variations between various markets before any changes take place, as the markets possess the ability to rectify themselves. This automated variation eliminates the risk of manual calculations and human error, allowing traders to use the market’s rapid speed.

The triangular approach offers three primary benefits: lower trading risks, strong market liquidity, and the ability to use three different tradable assets. Arbitrage is conducted instantly, based on hard numbers, and is not susceptible to price changes. It is a stabilizing agent in the industry, benefiting overall liquidity metrics. 

Trading bots are computer programs that make trades for people quickly, without any delays. Automation helps to avoid big losses in price differences, which makes the triangular approach very helpful for traders.

To sum up, arbitration using the three-sided method entails using a third asset to capitalize on price variations between two different assets. Traders can use this opportunity to capitalize on the unique value disparities between traditional currency and digital currencies.

Also Read: Exploring the Ebb and Flow of Bitcoin Price in Market Tides