How does Forex arbitrage work? Theory vs. reality


Do you know how does Forex arbitrage work? Mostly used by scamster online fund managers, Forex arbitrage trading theory involves extra risk in reality.

AtoZ Markets Arbitrage trading in Forex is the purchase of securities on one market for the purpose of an immediate resale on another market. The benefit in such approach comes from the difference in price. As a result, you get an immediate risk-free profit. This is at least in theory.

How does Forex arbitrage work?

Many Forex brokers are using arbitrage for making money by tapping into gaps that may occur between the currency prices. Specifically, the arbitrage trading in Forex can be done by utilizing the fractions of pips that are missed in cross pairs. This is how it is working in theory. How does Forex arbitrage work in reality?

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Forex Arbitrage Theory

Did you ever try to calculate the price of a cross by yourself? Even in the most popular pairs, a full triangular connection sometimes is missing one or more pips.

Forex arbitrage theoretical example

For instance, let’s take the current EURUSD price at 1.0633, GBPUSD at 1.2417, and EURGBP at 0.8563. When buying a usual lot of 100,000 Pounds, I would pay 124,170 USD. Then, I could sell these Pounds for EUR and get for them 116,781 EUR. Afterward, I would sell the EUR and buy USD. This would bring me 124,173 USD. In our theoretical example, we got risk – free profit of 3 USD.

Where this example illustrates a very small profit, the theory suggests that you can play with currency cross pairs and find the best opportunity for the arbitrage Forex trading. Moreover, you can go for much bigger lots of 10, and even 100 in order to increase the profit.

Forex Arbitrage Reality

How does Forex arbitrage work? Why are there gaps in the crosses’ prices? If you try to make a calculation by yourself, you will notice more digits – and these fractions of pips actually create an arbitrage gap.

Thus, when the gap is narrow, the revenues of brokers are rising. The gap then might be filled in with the spreads. For this, you can try to calculate the cross by utilizing the correct bid or ask values. Additionally, you might realize that there is not arbitrage opportunity. Such a scenario will always lose. Furthermore, the same applies to brokers that charge a commission for every trade. This might offset your arbitrage profit.

Yet, in case you spot a gap, you will need to act extremely quickly. Even if you utilize some kind of signal service, this might not be fast enough and you can potentially lose the chance. You need to utilize extreme caution.

However, if we talk about the positive scenario and the price is moving in your favor, you can actually lock in bigger profit than initially expected. Yet, it can go the other way and cause you a loss in this “risk-free” method.

Want to trade forex with a regulated broker? Open a live account with AtoZ Markets approved Forex brokers:

Capital.com
96/100
Capital.com Review
Visit Site
xm.com
95/100
xm.com Review
Visit Site
XTB
94/100
XTB Review
Visit Site

Forex Bonus Arbitrage

Meanwhile, there are many scamster fund managers online claiming double up funds within a day. These scammers often use something called, Forex Bonus Arbitrage.

You need to have two victims for Forex Bonus Arbitrage to work. Basically, this scammer will go offer some 50/50 profit share to both of the victims and inform one person to open an account with broker A and get X amount of bonus, while the other person is told to open an account with broker B and get Z amount of bonus. One thing they make sure is to have final equity in both of the accounts to be equal, same amount.

Then the scammer fund manager will look into the market to enter at a high volume with opposite directions. Sell EURUSD on Broker A and Buy EURUSD on Broker B. Now, you probably are confused, why is this guy doing such illogical activity. However, in reality, your Scam fund manager carries zero risks. If he loses the funds, he does not really care, simply said he will come and say - "sorry the market went against us". Meanwhile, if he wins, he will come and claim his 50% of the win.

Unethical Forex Bonus Arbitrage

Here is the spicy part. The account with Broker A will stop out and account with Broker B will double up. Simply said, this scammer transferred one account to the other one. The first investor lost all of his money. Meanwhile, the second investor feels proud to have his account doubled. He does not mind to give 50% of the profit to his fund manager.

But here is the big issue, if your fund manager is using Forex bonus arbitrage, there is a big probability that even the winning account will not get any money. Abusing given the bonus, using Forex bonus arbitrage is against almost every broker's terms and conditions.

Countries to watch for

Fortunately, Forex Regulators globally have been pushing for a bonus free environment. However, there are still a few countries where scam fund managers actively target innocent people. Forex Bonus Arbitrage is specifically popular in the following regions and countries:

Asia: Vietnam, Bangladesh, Pakistan, Malaysia

Europe: Turkey, Hungary, Czech Republic

Africa: Nigeria, South Africa

The moral of the story: Where some advertise arbitrage as a safe and risk-free trading technique, we call for extreme caution. Even practicing in demo account might not bring the good results, just because currencies move very fast. It is always best to invest in your education and learn how to follow the market, rather than trying to beat it.

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