# Forex Arbitrage Definition & Trading Example

## What is Forex Arbitrage?

Forex arbitrage is a trading strategy where a speculator attempts to make a profit by exploiting the inefficiency in currency pairs.  This inefficiency is always self correcting, so the window of opportunity for profiting from the spread is very limited.

## How to Calculate the Arbitrage

In order to calculate the arbitrage traders use forex arbitrage calculators.  There are a number of free forex calculators available for download on the internet.  Prior to initiating trades, speculators should use free demo accounts to see if trading the arbitrage can be a profitable venture.  A trader would need accounts with forex brokers in multiple locations around the world.  Most arbitrage techniques require trading in two to three currency pairs.

Below is an excerpt from http://www.nobletrading.com.

The basic formula for the relationship of three related currency pairs, having 3 different currencies, is as follows.

AAA/BBB x CCC/AAA = CCC/BBB

Chance of triangular arbitrage occurs whenever this equation goes wrong. A triangle arbitrator buys BBB spending AAA, then buys CCC spending BBB and lastly returns to AAA selling CCC, capturing a small profit. The chance of profit is maximized by utilizing margin from brokers and trading with higher amounts.

For example take exchange rates EUR/USD = 0.6522, EUR/GBP = 1.3127 and USD/GBP = 2.0129. With \$500,000 one can buy 326100 Euros, using that he can buy 248419.29 Pounds. He can now sell the pounds for \$500043.19. Thus he can earn a profit of \$43.19.

## Can You Make A Living Trading Forex Arbitrage

As you can see from reading this article making profits from arbitrage is a complicated and sophisticated trading approach.  Making money from forex arbitrage requires a lot of patience and complex computer programs.  Also, these windows of opportunities are very limited as other traders are looking at the same information.  So, in order to make a decent cash flow from forex arbitrage would require the use of an enormous amount of margin.  The best option for traders is to use forex arbitrage as a small part of their trading strategy, and not the main source of income.

Tim Ord
Ord Oracle

Tim Ord is a technical analyst and expert in the theories of chart analysis using price, volume, and a host of proprietary indicators as a guide...

Tradingsim.com
Day Trading Simulator

Tradingsim.com provides the ability to simulate day trading 24 hours a day from anywhere in the world. TradingSim provides tick by tick data for...