In this blog post, I explained the difference between arbitrage strategies and how to select the best one for your needs and start making money immediately…
Is arbitrage trading suitable for you?
Before talking about arbitrage, I want you to ask yourself the following question: Is arbitrage trading suited for me? What are the differences between involving yourself with arbitrage and other types of trading? When you are trading and using arbitrage, you will need to change your broker often, often will be worried that you aren't receiving profit, and will feel like you can't make money. At a certain point, you will understand that the broker is not your friend, and so on. At the end of the year, however, you will see that you have made more money than a trader who was calm for the whole year, and was friends with their broker, and ended up either suffering losses or making very little profit. If you are ready for these challenges, arbitrage is suited for you. The most important is that the change of trading style will also change the profit that is considered normal for you. Usually, arbitrage traders earn much, much more than traders who use any other method of trading.
Latency Arbitrage Explanation
I will start off by telling you about latency arbitrage. Imagine that you and your friend are standing at the train station, and are don't know which train will go in the right direction, but two people do know which train is the correct one. These people are Usain Bolt and an amateur marathon runner, who are both running towards you to tell you which train is the train that you should be on. Obviously, Bolt will make it there first, and you will get on the train before the amateur runner gets to you. This is like latency arbitrage, where you have a source that delivers quotes to you much quicker than it does to many brokers, and you have a few milliseconds of a window to open an order in the correct direction.
In other words, this is very simple, but obviously, to create a tangible program that executes this strategy, lots of experience is required. Programs that execute latency arbitrage also have a ton of setting sand presets to ensure that this order opens as quickly as possible. The most important issue, however, is masking this order from the broker as the broker does not support arbitrage trading. Hence my point from the introduction stands, the broker is not your friend.
Lock Latency Arbitrage - 4 different algorithms
Lock arbitrage is a variation of latency arbitrage, however, orders open before the arbitrage situation in different directions with a different size of an order, on two different brokers. On broker A you will have a buy order and on broker B you will have a sell order, when you receive an arbitrage situation with the denomination of buy, you close the sell order and reopen it again. In this way, the broker does not see the order opening during the arbitrage situation but sees the closure of the order. In this way, this strategy allows a trader to work with the same broker for a longer amount of time due to the masking of this strategy. There are also many variations of Lock arbitrage, lockCL, lockCL2, lockcCL3, which were developed by our company and have various algorithms for entering and exiting the market, which also allows you to mask latency arbitrage from the broker.
Hedge Arbitrage Trading
So what is the difference between hedge and lock arbitrage, as many traders confuse these. Hedge arbitrage has a different idea in mind. Hedge arbitrage compares two brokers and their quotes between them, and as soon as there is a difference in quotes, for example, broker A has a higher price for EURUSD than broker B, then you sell on broker a and buy on broker b, fixing your profit. Then you wait for the opposite direction of quote differences and close your position. Hedge arbitrage works because brokers have very small differences in quotes that can be used to create profit.
Triangular arbitrage Trading
Another form of arbitrage is triangle arbitrage. In triangle arbitrage, to compare quotes, we use three quotes. A quote of a cross, say EURGBP, and the quote of EURGBP created artificially with two currencies: EURUSD and GBPUSD. When we compare these quotes, we find the difference and lock in profit, and then when the direction of the market changes, we create more profit using the market movements during closure. Before, this arbitrage was available on one broker, but now it is very improbable. Usually, two or three brokers are used in order to find the difference between the quotes of the cross symbol and the artificial symbol.
Statistical Arbitrage Trading
Statistical arbitrage works on the concept that some tradable symbols have a correlation, say if you compare gold and silver, you will see that these symbols grow or lose value with a very large correlation. Statistical arbitrage finds correlating symbols and trading happens on correlated symbols. At the moment where the prices divide, a buy and then a sell happens, the order closes and the trader receives profit. This is a non-toxic arbitrage variation and can be used on one or two brokers.
What is arbitrage trading in crypto?
So what is the difference between crypto arbitrage and the aforementioned arbitrage strategies? In crypto arbitrage, two variations of arbitrage are used. Latency arbitrage trading bot, where the source of fast quotes is used, such as exchanges with large volatility such as Binance. Likewise, hedge arbitrage is used when two exchanges are compared, and a buy order happens on one exchange, and a sell order happens on the other. The only difference happens as on many crypto exchanges in order to create an arbitrage situation on bitcoin; you need to have money in bitcoin. For Ethereum, you need money in Ethereum and so on. For hedge arbitrage involving crypto, a larger investment is needed, and as in forex, there aren't large shoulders such as these. Crypto arbitrage will result in less profit than on the forex market.
The most important question regarding beginning arbitrage is choosing a program and broker. The program for arbitrage needs to coincide with many settings, a company that has a good reputation, has experience with arbitrage, and is in the market for a long time can create a well-developed arbitrage program. This software is extremely hard to develop, especially a program which mimics manual trading, and the broker sees manual trading instead of automated trading. Along with this, the execution speeds need to be fast and feeds need to be extremely fast to be competitive as well.
Brokers for arbitrage trading
Choosing a broker is not an easy task. This takes a while since some brokers won't be compatible, won't work the way they are supposed to, or use plug-ins in order to create slippage which eats up the profit that you made. So why are brokers against arbitrage trading? The standard explanation by brokers is that you are causing harm to a server. This is not true. Imagine what happens when a broker, which declares themselves as an ECN, even though this term is not entirely correct, has thousands of people changing currencies in one way or another every second, and the broker's job is to deliver this information to the liquidity provider and then to the bank. The broker creates many short deals and makes a commission on each trade, and the broker should be happy about this. The broker however is unhappy as he is not trying to make money on commission, but rather on putting your account into B-Book.
This means you are trading against the broker. If you make money, that means the broker loses, and if you lose money, the broker wins. So the broker does everything in his power in order for you to lose and lose your deposit. So an arbitrage trader who has no ability to lose their deposit is very detrimental to the broker. Any claims of an ECN broker are not real, and you should not believe this. You need to check if this is truly an ECN broker or not. If you see that the execution time and slippage are very small you know that this broker is suitable for arbitrage trading, and you can prepare this broker to use them in an arbitrage program. Some traders tell us that the broker claims that arbitrage is illegal. This is not true, and there are many articles on highly reputable sites that explain that this is legal and helpful to the market.
How to prepare your account for arbitrage trading?
To prepare an account for arbitrage trading, there are some steps you can take. Of course, you can just make an account and start using it for arbitrage trading. If this is a variation of lock or hedge arbitrage, you can use an account like this to trade, you will be profitable but soon the broker will realize that your actions happen during an arbitrage situation. This is especially true if the broker has plug-ins that work based on fast feed. This is why it is better to prepare accounts for arbitrage trading. There are many ways of doing this. You can use different strategies on these accounts, and the dealer which watches your account will believe that this is not arbitrage trading. The second way is to pour from your main account to another account. Pouring is using correlating currency pairs in order to make your account look like it's suffering losses. You will lose money on spreads and commission, but this will help you out in the long run, as upon seeing an unsuccessful account, the dealer will stop monitoring your account and will remove your account from their control. The ideal variation is using both of these strategies, first pouring from an account and then using other strategies which will keep the account at around 0. Then with the help of arbitrage, you can make a profit. After a certain period of time, you should redo this profit in order to create the illusion of loss. This constant change of strategies, the addition of new strategies, and pouring will allow you to work with the same accounts and the same broker for a very, very long time. Likewise, it is important to note that some brokers use quotes for currencies and CFDs from different sources. For example, CFDs could come from one liquidity provider and forex currencies from another, metals from another, and so on. The brokers look for the best conditions for them. This is why when you are looking for a broker, it is important to conduct tests for currencies, CFDs, and metals. This will allow you to find the most profitable instruments. If you want to trade using exotic pairs, you should also find a liquidity provider suited for you. I mean pairs such as German Crona, or Dutch Crona, and so on. To find the best arbitrage software you need to compare sevral of them.
Arbitrage Trading Platform
The question which we are often asked is what platform is best to use for arbitrage, is this standard trading platform or FIX API. This all depends on how much capital you have. If you have a large capital, over 10,000 dollars, then the FIX API broker will be right for you as you will be able to use FOK or IOC limit orders and you will be able to control slippage. The delay between FIX API quotes will be shorter than for or , therefore you will get fewer arbitrage situations.
AI's Influence on Arbitrage Trading
Another exciting application of AI is in the field of arbitrage trading. Arbitrage is a trading strategy that takes advantage of price differences in disparate markets or forms of the same asset. It's an approach that's been used for centuries, but AI is now transforming how it's implemented.
Arbitrage opportunities are often fleeting, disappearing in the blink of an eye. This rapid pace requires an equally swift response, which AI excels at. AI algorithms can process vast amounts of market data in real-time, identifying arbitrage opportunities when they arise. They can execute trades instantaneously, capitalizing on these opportunities before they vanish.
Moreover, AI can act as a powerful filter for arbitrage strategies, separating profitable opportunities from potential pitfalls. By analyzing historical data and learning from past trends, AI systems can predict which arbitrage opportunities will likely result in profit. This ability reduces risk and increases the likelihood of successful trades.
However, AI's role in arbitrage trading goes beyond identifying opportunities and executing trades. It also assists in risk management, an essential aspect of any trading strategy. AI systems can analyze market conditions, evaluate the level of risk associated with different arbitrage opportunities, and suggest the most suitable risk management strategies.
In conclusion, AI's influence on financial market predictions is substantial, extending from forex and standard trading strategies to the volatile world of cryptocurrency and the rapid-fire realm of arbitrage trading. As our understanding of AI deepens, and its capabilities expand, its role in financial market predictions will likely grow, offering traders more sophisticated tools and potentially more profitable opportunities. learn more...
Is Arbitrage trading profitable?
Using this program will allow you to mix strategies and use all of these strategies as a standalone. This will allow you to be more flexible and profitable in your trading. Using small deposits, you are better off using the or platform, as these brokers do not request large deposits to open an account, and you will be able to begin trading using only 100 or 200 dollars.
Often people report 1000% gains on the internet, and this can happen once, and this profit will likely be locked by the broker in one way or another. A realistic figure would be closer to 30-50% monthly profit. Hopefully, this article can help you make the right decision and help you understand whether or not you become an arbitrage trader. Good luck!