What is arbitrage in forex?
Arbitrage in forex refers to the practice of taking advantage of price discrepancies in different currency markets to make a profit. Traders identify situations where a currency is priced higher in one market than in another, and they buy the currency at the lower price and sell it at the higher price, making a profit from the difference.
This process requires quick execution and efficient monitoring of multiple markets. However, due to advanced technology and high-speed trading, opportunities for arbitrage in the forex market are relatively rare.
Example of arbitrage
The trader buys USD at a rate of 1.2 EUR in Market A and sells it at a rate of 1.25 EUR in Market B, earning a profit of 0.05 EUR per USD.
Arbitrage opportunities are usually short-lived, as they are quickly exploited by traders, leading to price equalization across markets.