What is Arbitrage?

Arbitrage Definition – Arbitrage in foreign exchange is a trading strategy that is used by forex traders who try to profit from the market’s inefficiency in the pricing of various currency pairs. The strategy involves reacting more quickly than the market has time to correct the imbalance. Since timing is so critical, computers are often used to create trade orders. As with other arbitrage strategies, the act of finding and exploiting pricing inefficiencies will actually stabilize the market. However, since several independent traders use automated techniques to find these unique conditions, these opportunities disappear very quickly. Arbitrage currency trading requires the availability of real-time pricing quotes and the ability to react quickly as opportunities present themselves. Large banks and hedge funds have used forex arbitrage “black boxes”, relying on proprietary algorithms, for years. Recently, automated trading “robots”, which attempt to replicate this arbitrage trading of large firms, have arrived on the market for use by individual investors interested in forex trading. However, as with all software, programs and platforms used in retail forex trading, it is important that the consumer try them out in a demo environment first to determine ease of usage and effectiveness. Trying out multiple products before making a final decision on one is the only way to evaluate what is best for the forex trader.

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Risk Statement: Trading Foreign Exchange on margin carries a high level of risk and may not be suitable for all investors. The possibility exists that you could lose more than your initial deposit. The high degree of leverage can work against you as well as for you.