Arbitrage trading – an Ultimate Guide Tuesday October 26th, 2021 – Posted in: Arbitrage Software, Uncategorized

Is arbitrage trading suitable for you?

Understanding if arbitrage is the right strategy for you is vital to being successful with its usage. A trader needs to understand the difference between arbitrage and other strategies, what arbitrage is excellent at, and the limitations of using arbitrage. They need to understand that they will be changing their broker, feeling down about not creating profit stability, and having a more involved role in automatic trading. However, these worries will fade away as soon as you begin to understand the concept that the broker is not your friend, and that arbitrage doesn’t bring in stable profit but creates lots of profit while minimizing loss, and your total gains are likely to be much higher than if you used another strategy.

Latency Arbitrage Explanation

Latency arbitrage is a tough concept to wrap your head around, but I will do my best to explain. Latency arbitrage creates profit by receiving information before the broker. The broker and you will receive the same information, just milliseconds apart. This difference in timing is crucial. You will place an order in the direction in which the market will go in, and it will be fulfilled milliseconds later. It is as if you are able to see very briefly into the future and choose the right direction of the market. Latency arbitrage has a source that delivers quotes to you faster than it does to certain brokers, the program then opens an order in the direction that the market will be in in the very near future, and you capitalize off of this equipment difference.

Now if this seems simple to you, it is because the concept is fairly straightforward, but the execution is exactly the opposite. Programs that are able to complete this process have many settings and fine-tuning required in order for them to work properly, and our company is a leader in the creation of such programs due to our many years of experience. This is why we are able to create a complex program to execute this flawlessly. The challenge of using latency arbitrage is camouflaging it from the broker, as you are capitalizing on the equipment differences between you and the broker, the broker will be against such arbitrage trading, and will try to stop you from profiting.

Lock Latency Arbitrage – 4 different algorithms

Lock arbitrage is similar to latency arbitrage,  lock arbitrage orders predict the direction of the market and will open two different sized orders between two brokers. On the first broker you can for example open a buy order, and on the second a sell order. If the market moves in such a direction where buying is profitable, you will close the sell order and reopen it later. This prevents the broker from seeing that the order has been opened, and only sees how it is closed. This allows the trader to work with the same broker for a longer period of time than if the trader is using latency arbitrage. Lock arbitrage comes in many forms with varying algorithms to mask your strategy from the broker, and we give detailed explanations of each of these strategies in our blog.

Hedge Arbitrage Trading

So what is the difference between hedge and lock arbitrage?  These two types of arbitrage are often confused. Hedge arbitrage differs from lock arbitrage in its main function. This type of arbitrage compares brokers and quotes between them, and when there is a slight difference due to differences in equipment, the program buys on one broker, and sells on the other. The difference is your profit. After this happens, you wait for the opposite direction of the difference, and then close your position. These small differences add up over time to create profit.

Another form of arbitrage is triangle arbitrage. In triangle arbitrage, to compare quotes, there is a set of three quotes that are used.. 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, the program finds the difference and locks in profit. Similarly to hedge arbitrage, when the direction of the market changes, the profit gets locked in by closing your position. Most recently it has become vital to use multiple brokers in order to do this kind of arbitrage, as creating artificial symbols on one broker has become very difficult.

Statistical Arbitrage Trading

Statistical arbitrage uses correlations of symbols to create profit. Gold and silver for example have a correlation, if gold goes up, so does silver and vice versa. When the prices between two symbols have a slight shift, the program buys and sells these symbols. After this, the order is closed and profit gets locked in. The advantage of this type of arbitrage is the ability to trade on either one or two, brokers. This can be done as this strategy is non-toxic. 

What is arbitrage trading in crypto?

If you are a trader who is looking to trade crypto, there are a few differences in program types. In crypto arbitrage, two variations of arbitrage are used. You can use a  latency arbitrage trading robot, and use the source of fast quotes such as Binance, which has very high volatility. Along with this, you can also use hedge arbitrage when comparing two exchanges, and using the difference between their prices in order to create profit. The difference between using crypto and other symbols is that you will need a larger starting capital as if you are trying to profit from an arbitrage situation on a cryptocurrency such as Bitcoin, you will need to own a specific dollar value of Bitcoin. The same principle applies to any other cryptocurrency. If you are using hedge arbitrage, even a larger investment is needed and compared to forex, which doesn’t have such a large shoulder, you will need to have a much higher starting capital. This is why crypto arbitrage is not as profitable as trading on the forex market.

The most important question regarding starting to trade with arbitrage is choosing a program and broker. The arbitrage software needs to have many settings, developed by a reputable company with experience in arbitrage software programming and has good reviews. This is because this software is extremely difficult to develop, and if you do not consider everything in the development stage it will be hard to end up with a good program. It is even harder to develop a program that mimics manual trading well and allows you to work with a broker for longer. The program also needs to have fast feeds and execution speeds to be competitive.

Brokers for arbitrage trading

It is very difficult to choose a broker to use in arbitrage trading. This will take some time as the trader will encounter brokers who are not compatible, who are using plug-ins to create slippage and reverse your profit or have other issues. This is because many brokers are against arbitrage trading. They believe that arbitrage trading causes harm to a server. This is a completely fabricated story used as an excuse to limit the abilities of the traders. The broker, who claims that they are an ECN broker that is trying to make a profit, benefits from arbitrage, as thousands of people exchange currencies every second, the broker delivers this information to a liquidity provider and then a bank. The broker makes a commission on each trade and should be happy with the result. However, the broker creates more profit by putting accounts they deem fit into b-book and in this case, the trader is now trading against the broker.

When a trader makes money in such a case, this means that the broker loses money, and vice versa. This is why the broker is adamant about using plug-ins in order to halt your profitable strategies such as arbitrage. This is especially true as an arbitrage trader has no real ability to lose money, so this is extremely detrimental to a broker who puts accounts into a b-book.  When a broker claims that they are an ECN broker, this should not be believed. You should check if this is truly an ECN broker, and if you see that the execution time, as well as the slippage, are smaller, this is a broker suitable for arbitrage, however, do not trust any claims of ECN. Some brokers tell traders that arbitrage is illegal, and this is a blatant lie, arbitrage is actually extremely helpful to the market and perfectly legal which is outlined by many articles online.

How to prepare your account for arbitrage trading?

The preparation of an account for arbitrage trading is important and you should take this process seriously. You can create an account and start using it for arbitrage trading, but this can only be done if you are using a lock or hedge arbitrage. The downside of this is that although you will still be profitable, the broker will realize very quickly that your trades happen during arbitrage situations. If the broker has plug-ins they will know this instantly. This is why you should prepare each account for arbitrage trading. You can start off by using other trading strategies that the broker will not consider toxic, this will cause the broker will confirm that these are not arbitrage and stop watching your account. You can also use the pouring strategy to pour funds from your main account into another account and vice versa. This will appear as a loss, and the broker will be pleased with this. Pouring is done by using correlating currency pairs to transfer money between accounts and will appear as a loss. The DAAS arbitrage trading profit with built-in L-pouring strategies is perfect for such a task. You will suffer losses due to commission and spreads, but this can be considered an investment to increase your longevity. This is true as the broker will stop monitoring your account when they see that you have many losses.  The best thing to do is pour and also use different strategies, this will make the account seem like it is at 0. After you have done this you can begin using arbitrage and create profits. After you have made some profit, you should consider using the pouring strategy again, in order to simulate loss. Adding new strategies, mixing strategies, and pouring will allow you to increase the time spent working with one broker, which will save you so much time in the long run. You should also know that many brokers use courses for quotes on currencies and CFDs from different sources. The brokers will look for the best condition of quotes, and you should conduct tests when you are choosing a broker on each type of instrument in order to determine which broker is the most profitable and which instruments are the most profitable. If you are looking to trade exotic pairs, such as German or Dutch Crona, you should find a liquidity provider that provides you with this opportunity.

Arbitrage Trading Platform

daas arbitrage trading platform

The question which we are often asked is what platform is best to use for arbitrage, is this MT4, or MT5, or FIX API? This all depends on your starting capital. With a large capital, over 10,000 dollars, the FIX API platform will be suitable for you since you will be able to use order types such as   FOK or IOC limit orders and you will be able to control slippage.  There will be less delay on FIX API, and you will receive fewer arbitrage situations, however, if your starting capital is smaller, you should use the MT4 or MT5 platform. Our DAAS program contains many strategies that could help you get started.

Is Arbitrage trading profitable?

By using our DAAS program you will be able to use many strategies and try many arbitrage strategies by themselves as well as mixing them in order to use them all together. It will help you become more flexible with your trading. You can even start using this program with a deposit of 100 or two hundred dollars and will be able to see which strategy works best for you to create profit. Often people report 1000% gains on the internet, and this can happen once, and this profit will likely be confiscated by the broker, in one way or another. Usually, A realistic figure would be closer to 30-50% monthly profit.