May 15, 2010

Forex Crunch Forex Arbitrage – Theory and Reality

Forex Crunch Forex Arbitrage – Theory and Reality

Forex Arbitrage – Theory and Reality

Posted: 14 May 2010 01:00 PM PDT


Arbitrage trading is a risk free way of making money by tapping into gaps that may occur. Theoretically, arbitrage trading can be done in forex by enjoying the fractions of pips that are missed in crosses. Here’s how it works – in theory. In practice, remember that forex trading isn’t easy money.

Did you ever try to calculate the price of a cross pair by yourself? Crosses such as GBP/AUD or NZD/CAD don’t necessarily appear by default on your site’s quote list. But even for popular pairs, did you see the full triangular connection? Sometimes a pip or more are missing:

The theory

At the time of writing, EUR/USD is priced at 1.3339, GBP/USD at 1.5343 and EUR/GBP at 0.8688. Buying a standard lot of 100,000 pounds would cost 153,430 dollars, according to GBP/USD. These 100,000 pounds could be sold for euros, according to EUR/GBP and get the trader 115,101. Now these euros could buy back  153,533 US dollars.

So, all in all we paid 153,430 and got 153,533 back – a profit of 103 dollars. If this kind of trading is risk free, why settle for one  standard lot -why not 10 or 100?

The reality

One of the reasons for these gaps is that the representation for the crosses isn’t complete – if you make the calculation by yourself, you’ll see many more digits – these fractions of pips make the arbitrage gap. Some brokers take this into consideration and show more digits, narrowing down the gap.

And when the gap is narrow, the broker’s revenue kicks in. This gap may be filled by the spreads – try calculating the cross by using the correct bid or ask values, and you might find that there’s no arbitrage – such a deal will always lose.

The same applies for brokers that charge a commission for every deal – the commission may erase your theoretical profit.

Even if you’ve identified a genuine gap, are you quick enough to act? Probably not. Even if you use some kind of signal service to give you an alert ons such an arbitrage opportunity, you might blink and miss your chance. There are many forex arbitrage calculators out there – you be careful with them.

Another option is that you might be lucky and the price moves with you  - making you a bigger profit than expected. But it might go the other way and cause you loss in this “risk free” method.

Another note: trying out this method on a forex demo account might be interesting, but can’t be trusted – the quotes in demo accounts sometimes lag – the gaps could be the result of this issue. You can see this work many times in demo account, but fail in a real account. I highly recommend a demo account for many purposes, but in case of this forex arbitrage, it just won’t work.

Want to see what other traders are doing in real accounts? Check out Currensee. It's free.

EUR/USD Candle Breakout Update

Posted: 14 May 2010 06:06 AM PDT


Guest post by Jason Madison, independent trader and founder of BeatWallStreetNow.com

Hello Everyone,

I hope the forex markets have been treating you as well as they have been treating me and I hope you all have been using that technique I showed you to make lots of pips.

Today we are going to take a look at what happened with the eur/usd breakout I told you to watch out for in my previous post

In case you missed it here is the chart I showed you guys last time:

eur usd candle

I told you to watch for a candle to close outside the yellow lines and then open up a trade in the direction of the break.

Now let's see what happened:

This was a huge breakout that hopefully you guys traded and made some money on this breakout. This pair moved down hard as the price fell for about 500 pips before it pulled back. I chickened out and only grabbed about 300 off of this trade. Did any of you guys do better? Let me know how much you made in a comment below.

This trade is an excellent example of the power of this technique and I really hope you guys try this out and use it to make some pips. I have already gotten feedback from some of you telling me how this technique has made your trading simpler and way more profitable, but I'm not going to stop until I hear from all of you.

Do you want to take your trading to new heights? Do you want to become one of the 5% of traders that actually make it in this business? Do you want to discover the revolutionary techniques that will allow you to trade for a living? Well then visit beatwallstreetnow.com
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