Triangular Arbitrage – Definition, How to Profit, & Calculator

Triangular Arbitrage is a forex strategy that involves three currency pairs. Although this strategy offers small profits, it offers maximum profit potential. 

As Triangular Arbitrage is one of the finest forex strategies, all forex traders should learn all about it. So, what is this strategy? How can you calculate arbitrage? How can you profit from it? These are the questions we are going to cover in this article. That said, don’t go away because you are going to learn a lot. Let’s dive into the topic.

Triangular Arbitrage Definition

Triangular Arbitrage is a forex strategy that involves buying and selling three currency pairs simultaneously to take advantage of the differences in exchange rates of the currency pairs involved. Arbitrage opportunities rarely arise in forex markets and offer low profit but high-profit potential. 

Explanation

Let me explain this strategy using an example. Suppose that you want to convert CADs to Euros. Now, you buy USDs first against CADs instead of buying Euros directly. Then you convert USD to Euros. If you make a profit during the process, it is arbitrage. It is simple! No, not that simple because there is a lot more.

Now, let’s use this example again but with figures and a simple calculation. Say that you bought 10,000 USDs against your 11,000 CADs. Secondly, you sold 10,000 USDs for 9,000 Euros. Thirdly, let’s suppose that you sold 9,000 Euros for 11,040 CADs. So, you made a profit of CAD40. This is Triangular Arbitrage.

The Triangular Arbitrage strategy can be applied in some situations only. Why so? Because forex markets rarely give you opportunities. You can apply it, for example, when there is a discrepancy between quoted exchange rates and the market cross rates. In other words, it is possible that at a particular moment, the exchange rate is overvalued in one market and undervalued in the other. That allows forex traders to apply this Arbitrage strategy. 

Triangular Arbitrage Calculator

Although Triangular Arbitrage calculations seem easy, they aren’t. There are huge numbers involved and it also takes a lot of time to calculate manually. Therefore, you can look for an online Triangular Arbitrage Calculator to help you.

Highly specialized

The Triangular Arbitrage strategy requires you to have some highly specialized tools at your disposal. Experienced forex traders used high-speed algorithms. They help them detect exchange rate discrepancies quickly and easily. That is why these traders exploit price errors and make significant gains. Therefore, you also need such tools to detect a Triangular Arbitrage opportunity to exploit quicker than other players.

Furthermore, if you want to use the Triangular Arbitrage strategy, you can use automated trading platforms. Such platforms offer highly sophisticated and powerful trading platforms that make forex trading seamless. In fact, these algorithms only require you to set some parameters to enter a trade. They automatically do the rest when specified criteria are met.

Why do you need advanced tools? Because forex markets are hyper-competitive. There are millions of players involved including highly experienced and institutional traders. Such huge competition also reduces inefficiency in forex markets. That’s why such Arbitrage opportunities rarely appear. But you need to be ready whenever they appear. Otherwise, you don’t stand a chance.

Triangular Arbitrage  Strategy – Key Points

There are a few key points that you must keep in mind when applying the this Arbitrage strategy. 

1. High amount

As there are very tiny differences between exchange rates, Arbitrage strategy offers smaller profits. However, you can maximize your profits by maximizing your investment. You may also use margins. However, there is a huge risk involved in margin trading.

2. Transaction costs

Transaction costs are also very important when using the Triangular Arbitrage strategy. Obviously, you wouldn’t want high transaction costs to wipe out your entire profit. 

The wrap-up

Triangular Arbitrage is a very popular trading strategy in forex trading. It involves buying and selling three currency pairs simultaneously to take advantage of the differences in exchange rates of the currency pairs involved. However, such discrepancies rarely arise in forex markets because traders have access to highly powerful algorithms. These tools and algorithms improve market efficiency. But the point is, Arbitrage strategy offers high-profit potential and is therefore an enticing strategy. However, you need to have access to highly specialized tools to capitalize on it.