In Forex trading, there are various ways to earn a profit. The most common method used by most of the traders is to anticipate the currency fluctuations. Another popular method used by the traders is to carry trades and then accumulate rollover profits. To execute this method traders buy higher-yielding currency and sell a lower-yielding currency simultaneously. The interest rate differential is the profit.
There is another strategy which can be used by the aspiring Forex traders who do not want to risk a lot of investment and yet earn a good profit. Forex arbitrage is this strategy, and if you want yo know more about this, this article is the source of the right information.
Introduction To The Use Of Arbitrage In Forex
In the financial markets, arbitrage is a quite popular practice. The traders try to take benefit from the differences in the price of the same asset, in different markets. The traders practicing arbitrage would buy an asset or more and sell them in different markets. This is done if there is a difference of value in the asset and the profit is based on the price difference.
To simplify this read this example. A man bought a car in his country for $20000 and sold it another market where the value is $30000. This man makes a profit of $10000. Since we have taken this example to make you understand the arbitrage of the forex, we did not calculate the price of transportation, fuel, import duties, etc.
A similar thing happens in various financial markets including the forex market. In the forex market, the traders buy currencies in one market and sell it at a higher price in another market.
Shortcoming Of Using The Arbitrage Strategies
1. Is Not Foolproof To Risks
The arbitrage has a few risks too and if you are thinking of using this strategy, then you should also the risks involved in it.
About arbitrage, it is said that the risk is not very high, and it has also been termed as a risk-less way to earn profits. This is partially true because sometimes you can also suffer a big loss.
2. The Profits Are Not Sufficient
The profits that you earn with the arbitrage forex are not going to be sufficient to make your graph of growth go high. For the reason that forex market is highly liquid, the opportunities for arbitrage are very less, and when they happen, the return from it is also not so great. To utilize this strategy well, a trader will have to hold large position sizes.
Hafizzat Rusli | Professional Trader and succesful businessman 