Triangular Arbitrage
Triangular arbitrage description
Triangular arbitrage is used in the foreign exchange market to capitalize on discrepancies between three different currencies. This strategy involves three trades, hence the "triangular" moniker, where the trader exchanges the initial currency for a second, the second currency for a third, and finally, the third currency back to the initial currency.
Here's a simple example to illustrate how triangular arbitrage works:
- Assume you start with USD.
- You notice that the USD/GBP exchange rate is favorable, so you trade some of your USD for GBP.
- Then you realize that the GBP/EUR rate is also favorable, so you trade your GBP for EUR.
- Lastly, the EUR/USD exchange rate is reasonable, so you trade your EUR back to USD.
If the rates were in your favor each time, you would end up with more USD than you started, thus making a profit. The key to triangular arbitrage is that the exchange rates must be mispriced relative to each other.
It's important to note that, in reality, these opportunities are often rare and fleeting due to the efficiency of the forex market. Moreover, transaction costs can often erase potential profits. Hence, it is a strategy more commonly employed by high-frequency trading algorithms rather than individual traders.
Triangular Arbitrage Instruments & Orders
You can create all possible triangular arbitrage rings by pressing the "Build rings" button or create rings one by one if you press the right mouse button and select add ring.
Enabled - controls if the instrument is allowed to trade or not.
Symbol 1, Symbol 2, Symbol 3, - symbols names for accounts 1, 2, 3.
Base lot – base lot size for the triangular rings.
Max Spread 1, Max Spread 2, Max Spread 3 - maximal allowed spread for the particular symbol.
Min profit - minimal profit value for the forced closure if Force close -> Profitable is selected. Check settings tab.
Max profit - profit value for the closure at any time.
Dev open (%) - Deviation in percent between cross symbol and synthetic cross symbol to open the position. For example, between EURCAD and the synthetic cross symbol built from 2 currencies EURUSD and USDCAD.
Dev closure (%) - Deviation in percent between cross symbol and synthetic cross symbol to close the position. For example, between EURCAD and the synthetic cross symbol built from 2 currencies EURUSD and USDCAD.
Current spread 1, Current spread 2, Current spread 3 - current spread.
Max dev buy - the maximum deviation between cross symbol and synthetic cross symbol in percent for the buy position that was detected during software was running.
Max dev sell - the maximum deviation between cross symbol and synthetic cross symbol in percent for the sell position that was detected during software was running.
How to select deselect rings for the triangular arbitrage
You can click the right mouse button on the rings and select one of the following:
Clear Max diff - clear Max dev buy and Max dev sell, which were detected during software was running.
Add ring - add rings one by one.
Open deal on the selected ring - open triangular orders on the selected ring.
Close deal on the selected ring -close triangular orders on the selected ring.
Disable all - disable all rings for trading.
Enable all - enable all rings for the trading.
Enable all majors - enable all rings created by major currencies.
Remove ring - remove the selected ring from the rings list.
Remove all rings - remove all rings from the rings list.
Unblock - unblock blocked ring.