The triangular arbitrage strategy exploits inefficiencies between three related currency pairs by placing offsetting trades that cancel each other out for a net profit when the inefficiency is eliminated. The transaction involves three trades, exchanging the initial currency for the second currency, the second currency for the third currency, and the third currency for the initial currency. With the third trade, the arbitrageur captures profits with zero risk due to the mismatch that exists when the market cross rate does not match the implicit cross rate.
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An example of a triangular arbitrage ring is US dollars, pounds and euros. The currency pairs involved in this arbitrage opportunity are EUR/USD, GBP/USD and EUR/GBP. These pairs can be regarded as an algebraic formula with a numerator and a denominator. The numerator in EUR/USD is the euro and the denominator in this pair is the US dollar. This equation works for the euro divided by the U.S. dollar. These three currency pairs form a triple fork ring, which can be expressed as follows:
MEAN = EURUSD - EURGBP * GBPUSD
The average is roughly centered around zero, but sometimes has serious deviations from that value. An average value below zero means that profits are possible when buying EURUSD, selling EURGBP and hedging with GBPUSD. Similarly, an average value above zero means that a profit is possible when selling EURUSD, buying EURGBP and hedging with GBPUSD. If the aggregate transaction costs are less than the mismatch, a trade can be executed and a profit can be made. If the slippage is too high when placing the first two trades, the trade can still be profitable, though not hedged.
The author
Arthuro Lopez Perez is a software engineer and founder of PZ Trading Solutions.
[ Installation Guide | Upgrade Guide | Troubleshooting | Frequently Asked Questions | All Products ]
An example of a triangular arbitrage ring is US dollars, pounds and euros. The currency pairs involved in this arbitrage opportunity are EUR/USD, GBP/USD and EUR/GBP. These pairs can be regarded as an algebraic formula with a numerator and a denominator. The numerator in EUR/USD is the euro and the denominator in this pair is the US dollar. This equation works for the euro divided by the U.S. dollar. These three currency pairs form a triple fork ring, which can be expressed as follows:
MEAN = EURUSD - EURGBP * GBPUSD
The average is roughly centered around zero, but sometimes has serious deviations from that value. An average value below zero means that profits are possible when buying EURUSD, selling EURGBP and hedging with GBPUSD. Similarly, an average value above zero means that a profit is possible when selling EURUSD, buying EURGBP and hedging with GBPUSD. If the aggregate transaction costs are less than the mismatch, a trade can be executed and a profit can be made. If the slippage is too high when placing the first two trades, the trade can still be profitable, though not hedged.
Advantages of this EA
- Easy setup and control
- Trade forex, cryptocurrency and metal paired rings
- Adapt to spreads, commissions and slippage
- The strategy is timeframe independent
- Has 25 built-in paired rings.
- Theoretical zero-risk strategy
- NFA/FIFO compliance
Features
- 25 built-in pairing rings or...
- Enter the desired paired ring into the inputs
- Ability to hedge or not
- Customizable trading days and hours
- Customizable trading trigger and profit target
- Customizable leverage and risk
Tips for use
- Trade with an "instant execution" broker
- Trade from a VPS or good network point
- Backtest in M1 HLOC/Every Tick mode with or without random delays
- On netting accounts: Don't trade rings with overlapping pairs at the same time.
- On hedge accounts: trade many rings at the same time without restriction
- Changing magic number from paired ring to paired ring is not necessary.
Input parameters
- Pair Ring: select the built in paired ring to trade or select "Manual input".
- 1st character: first character of the paired ring.
- Eurodollar
- Second character: The second character of the paired ring. For example, EURGBP.
- Hedging symbol: the hedging symbol of the paired ring. E.g. GBPUSD
- Trading Trigger: Minimum Price Divergence for a trade in pips. A higher trigger will cause less frequent trades.
- Target profit: The profit target for trades in pips. A higher profit target will cause more variance in trade results.
- Hedging: Enable or disable hedging of trades. Trades can also be profitable without hedging, and transaction costs are lower.
- Business day trading: Enable or disable trading any day of the week, Monday through Sunday.
- Trading hours: Set trading hours for the EA. By default it trades from 00 to 21.
- Leverage: Choose the leverage the Expert Advisor should use when trading the pairing ring.
- Slippage: Maximum order slippage in pips.
The Expert Advisor can trade any pair ring of your choice, e.g. BTCUSD/BTCEUR/EURUSD or XAUUSD/XAUEUR/EURUSD.
Arturo Lopez Perez, private investor and speculator, software engineer and founder of PZ Trading Solutions.
The author
Arthuro Lopez Perez is a software engineer and founder of PZ Trading Solutions.
