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Opportunities are Infinite
Arbitrage comes up less frequently in the market. It is the trading opportunity to buy and sell stocks, where similar assets are purchased and sold at different profits.
The arbitrageurs invest in low-cost assets and sell the expensive at the same time to seize profit without any cash flow. This is the strategy that does not require capital and has no associated risk.
Triangular or the 3-point or the cross-currency arbitrage offers a variety of negative spread that involves the trade of 3 or more currencies where one gets an opportunity at the time of market inefficiency.
In such conditions, the trader may see one currency is overvalued and other undervalued against the third, which provides profit-making opportunities occasionally.
It is useful economically as it gives an option to ensure fluidity as the arbitrageurs help bring prices across the markets into balance.
Pros and Cons
• Triangular arbitrage provides strategies to boost the chances of gains. Such opportunities appear for seconds and anyone who want to earn, need to monitor the market carefully during the extended period.
• Such opportunity rarely exists in the real market as there are large players like institutional investors, and competition is very high as the market constantly corrects inefficiencies.
Some make use of automated forex trading for three currencies e.g. pounds, dollar, and euro where the algorithm is preset to identify the returns of entering and exiting but the speed of algorithm trading should be more than market corrections to avoid moving past the profitable second.
These days such algorithms are used to purchase cryptocurrency but it is still in the developmental stage.
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