Pro Arbitrage EA trades based on Triangular Arbitrage. Triangular arbitrage (also referred to as cross currency arbitrage or three-point arbitrage) is the act of exploiting an arbitrage opportunity resulting from a pricing discrepancy among three different currencies in the foreign exchange market. A triangular arbitrage strategy involves three trades, exchanging the initial currency for a second, the second currency for a third, and the third currency for the initial. During the second trade, the arbitrageur locks in a zero-risk profit from the discrepancy that exists when the market cross exchange rate is not aligned with the implicit cross exchange rate. A profitable trade is only possible if there exist market imperfections.
Strategy :
Triangular arbitrage opportunities may only exist when a quoted exchange rate is not equal to the market's implicit cross exchange rate. The following equation represents the calculation of an implicit cross exchange rate, the exchange rate one would expect in the market as implied from the ratio of two currencies other than the base currency.
Consider a,b,c are currencies, thus :
Rate(a/c) = Rate(a/b) * Rate(b/c)
where
Rate(a/c) is the implicit cross exchange rate for currency c in terms of currency a
Rate(a/b) is the quoted market cross exchange rate for b in terms of currency a
Rate(b/c) is the quoted market cross exchange rate for c in terms of currency b
If the market cross exchange rate quoted by a bank is equal to the implicit cross exchange rate as implied from the exchange rates of other currencies, then a no-arbitrage condition is sustained. However, if an inequality exists between the market cross exchange rate, Rate(a/c) , and the implicit cross exchange rate, Rate(a/b) * Rate(b/c) , then there exists an opportunity for arbitrage profits on the difference between the two exchange rates.
An Example :
For example, a broker is quoting dollars at a bid price of 0.8171 €/$, and pounds at a bid price of 1.4650 $/£ and quoting pounds at ask price of 1.1910 €/£ . While the quoted market cross exchange rate is 1.1910 €/£, the trader realizes that the implicit cross exchange rate is 1.1971 €/£ (by calculating 1.4650 × 0.8171 = 1.1971). Although the market suggests the implicit cross exchange rate should be 1.1971 euros per pound, Market is selling pounds at a lower price of 1.1910 euros. Traders can hastily exercise triangular arbitrage by exchanging dollars for euros, then exchanging euros for pounds, and finally exchanging pounds for dollars. The following steps illustrate the triangular arbitrage transaction.
1. Trader sells $5,000,000 for euros, receiving €4,085,500. ($5,000,000 × 0.8171 €/$ = €4,085,500)
2. Trader sells €4,085,500 for pounds, receiving £3,430,311. (€4,085,500 ÷ 1.1910 €/£ = £3,430,311)
3. Trader sells £3,430,311 to for dollars, receiving $5,025,406. (£3,430,311 × 1.4650 $/£ = $5,025,406)
4. Trader ultimately earns an arbitrage profit of $25,406 on the $5,000,000 of capital it used to execute the strategy.
Simple view to the strategy :
For exchanging currency a to c, there are two methods :
1. Directly exchange a to c
2. Exchange a to b and then exchange again b to c
The above methods normally give the same results. But in some market conditions there are differences (in range of some points). The EA wait for such conditions and enter trades. For example if method 2 is cheaper, first exchange with method 2 and then immediately reverse exchange with method 1.
Trading Pairs :
The EA trade on 56 triangular combinations of pairs as below : (Note that this is all possible combinations on 28 major and cross Forex Pairs.)
1 AUDCAD CADJPY AUDJPY
2 AUDCAD CADCHF AUDCHF
3 AUDUSD USDCAD AUDCAD
4 AUDUSD USDCHF AUDCHF
5 AUDUSD USDJPY AUDJPY
6 EURCAD CADJPY EURJPY
7 EURCAD CADCHF EURCHF
8 EURCHF CHFJPY EURJPY
9 EURGBP GBPUSD EURUSD
10 EURGBP GBPCAD EURCAD
11 EURGBP GBPCHF EURCHF
12 EURGBP GBPAUD EURAUD
13 EURGBP GBPJPY EURJPY
14 EURGBP GBPNZD EURNZD
15 EURUSD USDCAD EURCAD
16 EURUSD USDCHF EURCHF
17 EURUSD USDJPY EURJPY
18 GBPUSD USDCAD GBPCAD
19 GBPUSD USDCHF GBPCHF
20 GBPUSD USDJPY GBPJPY
21 NZDUSD USDCAD NZDCAD
22 NZDUSD USDCHF NZDCHF
23 NZDUSD USDJPY NZDJPY
24 USDCAD CADJPY USDJPY
25 USDCAD CADCHF USDCHF
26 USDCHF CHFJPY USDJPY
27 GBPCAD CADJPY GBPJPY
28 GBPCAD CADCHF GBPCHF
29 GBPCHF CHFJPY GBPJPY
30 EURAUD AUDCAD EURCAD
31 EURAUD AUDJPY EURJPY
32 EURAUD AUDUSD EURUSD
33 EURAUD AUDCHF EURCHF
34 EURAUD AUDNZD EURNZD
35 GBPAUD AUDCAD GBPCAD
36 GBPAUD AUDJPY GBPJPY
37 GBPAUD AUDUSD GBPUSD
38 GBPAUD AUDCHF GBPCHF
39 GBPAUD AUDNZD GBPNZD
40 AUDCHF CHFJPY AUDJPY
41 CADCHF CHFJPY CADJPY
42 EURNZD NZDJPY EURJPY
43 EURNZD NZDUSD EURUSD
44 EURNZD NZDCAD EURCAD
45 EURNZD NZDCHF EURCHF
46 GBPNZD NZDJPY GBPJPY
47 GBPNZD NZDUSD GBPUSD
48 GBPNZD NZDCAD GBPCAD
49 GBPNZD NZDCHF GBPCHF
50 NZDCAD CADJPY NZDJPY
51 NZDCAD CADCHF NZDCHF
52 NZDCHF CHFJPY NZDJPY
53 AUDNZD NZDJPY AUDJPY
54 AUDNZD NZDUSD AUDUSD
55 AUDNZD NZDCAD AUDCAD
56 AUDNZD NZDCHF AUDCHF
