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Triangle Arbitrage

  • #1
  • First Post: Mar 28, 2008 4:57pm Mar 28, 2008 4:57pm
I have been in the forex world for few months but still trying to understand things...

Recently I heard about Triangle arbitrage and wanted to test it on a Demo account .... I have been using interbankfx and her is what I found in the last 3 days....

LONG EURGBP (1 Std Lot)
LONG GBPJPY (1 Std Lot)
SHORT EURJPY (1 Std Lot)

Here are the total profit losses for this combination...

Day 1 (Night) -$150 (immedeatly after opening due to spread)
Day 2 (Morning) +$300
Day 2 (Night) +$50
Day 3 (Morning) +$150
Day 3 (Evening) -$350

amounts are rounded not exact ....

I see a clear swing which can be used to make profits...

I have searched here in FF and found couple of topics on this concept and almost every one was mentioning that this concept cannot be applied in SPOT forex with the brokers we have... and some people talk about the arbitrage calculators... I am sure I am MISSING SOME THING and I understand that there is no free money.... but what is the problem of using this with the brokers like interbankfx... is arbitrage trading not allowed by most of the brokers.... do they check for triangle trades... other than slippage and other technical reasons is there a reason for not using this strategy....

-Sud
  • #2
  • Mar 28, 2008 9:08pm Mar 28, 2008 9:08pm
You need to calculate your trade sizes differently to be properly hedged, just using one lot for each trade leaves you exposed. I suggest checking out the thread on this over at the 'krelisk' forum.
Beyond this, think about how this works on MT4 (which I assume your using in conjunction with IBFX)...you attach a EA to a chart, that EA calls start when it receives a new quote for the chart it is attached too, only at this point can you check the other quotes, arbitrage opportunities can arise with arrival of any quote in the ring, so your only really seeing a third of the picture. Basically using MT4 for this is like bringing a spoon to a knife fight.
The breaking of a wave cannot explain the whole sea.
  • #3
  • Mar 29, 2008 3:30am Mar 29, 2008 3:30am
please correct me if i'm wrong but is this pretty much a relative value trade for currencies similar to what many hedge funds do with equities within an industry group or bond arbitrage?
  • #4
  • Mar 15, 2013 2:47pm Mar 15, 2013 2:47pm
I think this has to be the oldest thread I've resurrected...

Craig, do you recall this thread? I've search krelisk and don't find anything related to triangle hedge.
  • #5
  • Mar 15, 2013 4:29pm Mar 15, 2013 4:29pm
I'm not sure, but I think I found it. It's called the FPI impeccable hedge?
  • #6
  • Mar 15, 2013 9:59pm Mar 15, 2013 9:59pm
Quoting dsrfun
I have been in the forex world for few months but still trying to understand things...

Recently I heard about Triangle arbitrage and wanted to test it on a Demo account .... I have been using interbankfx and her is what I found in the last 3 days....

LONG EURGBP (1 Std Lot)
LONG GBPJPY (1 Std Lot)
SHORT EURJPY (1 Std Lot)

Here are the total profit losses for this combination...

Day 1 (Night) -$150 (immedeatly after opening due to spread)
Day 2 (Morning) +$300
Day 2 (Night) +$50
Day 3 (Morning) +$150
Day 3 (Evening) -$350

amounts are rounded...
OP is not around anymore, but I guess that others are reading this thread.
As far as I understand arbitrage is taking advantage of pricing differences between different brokers.
Placing these 3 trades with the same broker will not work.
As Craig has already pointed out, you would need to adjust the position size for GBPJPY otherwise it will not be balanced and you will only make money if GBPJPY rises.

This is because your exposure will be
100,000 Euros of EURGBP
100,000 Euros of EURJPY
but
100,000 GBP of GBPJPY, that is approximately 114,000 Euros at todays price
You would need to multiply 100,000 by the EURGBP price
Eg. If EURGBP is 0.8600, multiply this by 100,000 and this gives 86,000 or 0.86 lots

Any profit that may happen with balanced lot sizes will be unlikely to even cover the spread costs
Please Do Not PM Me With Coding Enquiries
  • #7
  • Mar 16, 2013 11:51am Mar 16, 2013 11:51am
Quoting Gumrai
Any profit that may happen with balanced lot sizes will be unlikely to even cover the spread costs
Because three pairs do not have 100% correlation there will be an oscillation between a slight negative and positive net sum of the three. The whole key to getting this triangle hedge to work and produce a significant profit is to get it out of hedge. But out of hedge in a positive net sum direction. That's where speculation on the direction of the individual pairs is important and determines the BBS or SSB position.
  • #8
  • Mar 16, 2013 12:08pm Mar 16, 2013 12:08pm
From what I understand triangular arbitrage is really out of the question for retail traders. It requires extremely fast execution, absolutely minimal spread (how do arbitragers deal with that?) and a computer program to handle it all. There's a ton of competition for this niche and unlike technical analysis it's very direct in what is done.
  • #9
  • Mar 16, 2013 12:12pm Mar 16, 2013 12:12pm

Quoting Craig
You need to calculate your trade sizes differently to be properly hedged, just using one lot for each trade leaves you exposed. I suggest checking out the thread on this over at the 'krelisk' forum.
Beyond this, think about how this works on MT4 (which I assume your using in conjunction with IBFX)...you attach a EA to a chart, that EA calls start when it receives a new quote for the chart it is attached too, only at this point can you check the other quotes, arbitrage opportunities can arise with arrival of any quote in the ring, so your...
  • #10
  • Mar 16, 2013 12:13pm Mar 16, 2013 12:13pm

Any profit that may happen with balanced lot sizes will be unlikely to even cover the spread costs
Quoting Gumrai
OP is not around anymore, but I guess that others are reading this thread.
As far as I understand arbitrage is taking advantage of pricing differences between different brokers.
Placing these 3 trades with the same broker will not work.
As Craig has already pointed out, you would need to adjust the position size for GBPJPY otherwise it will not be balanced and you will only make money if GBPJPY rises.

This is because your exposure will be
100,000 Euros of EURGBP
100,000 Euros of EURJPY
but
100,000 GBP of GBPJPY, that...
  • #11
  • Mar 16, 2013 12:13pm Mar 16, 2013 12:13pm
forget about it
tested & approved.
learn how to trade.

good luck

Quoting dsrfun
I have been in the forex world for few months but still trying to understand things...

Recently I heard about Triangle arbitrage and wanted to test it on a Demo account .... I have been using interbankfx and her is what I found in the last 3 days....

LONG EURGBP (1 Std Lot)
LONG GBPJPY (1 Std Lot)
SHORT EURJPY (1 Std Lot)

Here are the total profit losses for this combination...

Day 1 (Night) -$150 (immedeatly after opening due to spread)
Day 2 (Morning) +$300
Day 2 (Night) +$50
Day 3 (Morning) +$150
Day 3 (Evening) -$350...
  • #12
  • Edited Apr 15, 2013 9:11am Apr 14, 2013 4:44pm | Edited Apr 15, 2013 9:11am
A true "Arbitrage" opportunity, would be where the prices have moved, and the broker you are dealing with has some sort of delay and has not seen that price yet. By purchasing in the appropriate direction, your broker will eventually respond to the change in market conditions, and you profit by "knowing" where the price was going.

The margins are very thin, and unfortunately that type of trading is at a level that does not apply to retail traders such as ourselves. The spread alone knocks us out of these opportunities, followed by the brokers ability to hit us for slippage or even reverse our profits for taking advantage of the latency of their system. I saw someone a couple years ago have $30k+ in profit taken away by the broker because he was attempting to perform tight scalping on news event and the broker claimed it was a taking advantage of their latency.

Edit:

TradeMonk, you are correct. What I've always seen taught in academia is what you refer to as latency arbitrage.
  • #13
  • Last Post: Apr 14, 2013 10:28pm Apr 14, 2013 10:28pm
Quoting Freedom787
A true "Arbitrage" opportunity, would be where the prices have moved, and the broker you are dealing with has some sort of delay and has not seen that price yet.
not entirely

Arbitrage comes in many forms ~ you're describing latency arb, but you can also get into statistical arb, or cross-market arb, or interest rate arb, or many others

google around a bit, you'll see
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