Using triangular arbitrage strategies on the FOREX market has one very salient advantage: predetermined profits can be realized if the trades execute smoothly. Unfortunately, die disadvantages of this strategy are numerous:
- Higher transactions costs. The trader must pay the bid/ask spreads on three separate trades.
- Higher margin requirements. Roughly three times the margin is necessary to execute the arbitrage strategy and odd-lot trading may be required for the small capital investor.
- Precision timing is required. Arbitrage opportunities are usually short lived.
- Multiple dimensions. The trader must thoroughly understand the arbitrage mechanism in order to determine which currency pairs to buy and which to sell. Each arbitrage package consists of two buys and one sell or one buy and two sells. Miscalculating any one of the three trades can cause disaster.
- Advanced monitoring techniques are usually required. This means calculating the above analysis on several pairs simultaneously in real-time and will involve a software program that analyzes streaming quotes continually- It is possible to perform these tasks manually but the trader must have a high tolerance for tedium.
When executing an actual arbitrage trade, the investor must supply both bid and ask rate where applicable.
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