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Triangular Arbitrage

Triangular arbitrage is a forex trading strategy that exploits discrepancies between three different currencies to make a profit. It involves converting one currency into a second, then into a third, and finally back into the original currency. The trader profits if the exchange rates between the three currencies are misaligned, creating an opportunity to buy low and sell high in a short period. Triangular arbitrage is typically performed with automated systems due to the complexity and speed required.

Example

A trader exchanges U.S. dollars (USD) for euros (EUR), then euros for British pounds (GBP), and finally pounds back into USD. If the currency rates are misaligned, the trader profits from the discrepancies.

Key points

• A forex trading strategy that takes advantage of misaligned exchange rates between three currencies.

• Involves converting currencies in a sequence to exploit arbitrage opportunities.

• Requires fast execution and is often automated due to the speed and complexity involved.

Quick Answers to Curious Questions

It involves exchanging three different currencies in sequence, profiting from discrepancies in exchange rates.

The opportunities are brief and require quick execution, making automation essential for capturing profits before the rates adjust.

The primary risk is that exchange rates can change rapidly, closing the arbitrage opportunity before the trades are completed, leading to potential losses.