The best strategy for Arbitrage Trading Monday October 31st, 2022 – Posted in: Arbitrage Software, cryptoarbitrage software – Tags: forex arbitrage, forex latency arbitrage, latency arbitrage software, latency arbitrage strategy
Every trader who uses arbitrage strategies has thought of how to improve their trading results and enhance their strategy. There are many opinions about what affects most of the results of arbitrage trading, but unfortunately, many of them are misconceptions or are of little importance. In this article, I would like to describe my approach to arbitrage trading and those principles which should be put into an arbitrage strategy algorithm. I will also tell you what arbitrage strategy is the best one from my point of view.
Major misconceptions of an arbitrage trader
Many arbitrage traders are constantly on the hunt for the grail. They think that they can find a broker with which they can safely use latency arbitrage or hedge arbitrage for many years without any problems. Some traders, despite all our warnings, try to negotiate with the brokerage company, which is impossible by definition. We are constantly contacted by traders who are trying to make a three-way conference with him and the broker. Please understand – you have a conflict of interest with the broker. Even if the broker is honest, let’s try to believe this assumption, although I find it very difficult, his liquidity provider will immediately warn you that his latency arbitrage software is working and will ask to transfer the trader to other terms or apply virtual dealer or will transfer the whole brokerage company to a higher execution, so there are no losses. So please remember that an agreement with a broker is a road to nowhere.
The second misconception is the idea that you can find a very fast feed and then, by entering the market earlier, you can make a profit from arbitrage trading with a broker in which arbitrage strategies do not work. First of all, we have to find out why it does not work, and to do this, we have to assess two indicators: the order execution time and the slippage. These two indicators should be controlled during the entire time of trading. Almost every day. Then you will clearly understand when you need to stop trading and change your broker or account. If you see that your orders are executed much longer, then most likely your broker is using a virtual dealer, or some other type of active dealing against you. If you find a fast feed that is a few ms faster, 99% of the time this will not solve the problem, because the broker will just reconfigure the virtual dealer and give you a big delay.
The solution to the problem
If you read what I wrote above, you will realize that the solution to the problem lies on the surface – latency arbitrage software has to be masked as much as possible so that the broker didn’t realize what was going on. Also, let me remind you once again – a broker should not know what strategy you are using.
The masking of arbitrage trading can be done by many methods. Let’s look at the most common ones.
Using other non-toxic strategies together with latency arbitrage software.
By the way, I would like to immediately note that when I write “latency arbitrage software” I do not mean standard one-leg arbitrage, I mean lock arbitrage types (2-legs or 3-legs), which by themselves already disguise arbitrage trading by lacquering orders. I also want to note that locking on one account can prolong the lifetime of your account until it will be marked by a broker and trading conditions will change, but still much more reliable to use locking on 2 or 3 accounts. So, if you use other robots on your accounts along with arbitrage, it will help disguise arbitrage trading. It is desirable to use robots that trade on the same currency pairs or indices on which you use the latency arbitrage robot. Also, if your latency arbitrage robot imitates manual trading, then you need your robot used for masking also imitates manual trading. This can be achieved by using account copiers that mimic manual trading on sub-accounts.
Using strategies with deep masking for arbitrage trading – “BrightDuo” strategy
In most cases, the latency arbitrage robot signal is the beginning of a currency movement in the direction of the arbitrage signal.
For example, if the price of the fast broker (feeder) increased by several points compared to the price of the slow broker (usually this difference is called the difference to open), then this occurrence is an arbitrage situation to buy and the price of slow broker in a few milliseconds will also start to grow and soon will be equal to the price of a fast feed after which in most cases the prices of slow and fast brokers will continue to grow for a while.
The same happens if the slow broker price decreases by several points with respect to the slow broker, there will be an arbitrage situation to sell and the price of the slow broker in a few milliseconds will also begin to fall and soon will be the same as the price of a fast feed after which in most cases the prices of slow and fast brokers will continue to fall for a while.
Imagine that we have two accounts where we open opposite orders for the same trading instrument, with the same lot size, before the arbitrage situation. Say on account 1 we open a buy 1 lot for GBPUSD and on account 2 we open a sell 1 lot for GBPUSD.
Both orders are non-toxic from the broker’s point of view as they are not opened during an arbitrage situation. When an arbitrage situation occurs on GBPUSD, we close a part of the sell order on account 2, for example, 0.2, and apply a trailing stop with different levels of the minimum profit that we want to obtain. For example +20 pips for 0.01 lot. +30 pips for 0.03 lot and +70 pips for 0.06 lot.
- When the first trailing stop triggers, we close 1 part of the buy position of 0.01 at the broker;
- when the second trailing stop triggers, we close 1 part of the buy position with the size 0.03 lot;
- and when the third trailing stop triggers, we close one part of the buy position with the size 0.06
Now we have an open buy position on account 1, but it is 0.9 lot, and on account 2 we also have a position of 0.9 lot. I.e. we have a standby situation until the next arbitrage situation.
The cycle continues until the moment when there are no open positions in accounts 1 and 2.
Then we start a new cycle, but vice versa – in account 1 we open a sell 1 lot for EURUSD instrument and in account 2 we open a buy 1 lot for GBPUSD instrument.
It should be noted that only the first order in the closing cycle may be considered toxic, while the rest of the orders will be non-toxic.
Of course, if you combine the masking strategy BrightDuo and the use of other non-toxic robots through an account copier imitating manual trading then you will achieve the maximum effect. One should also note that BrightDuo’s profitability is lower because not all arbitrage signals are impulses for a long-term movement and for this reason some entries will be false, but this only increases the masking of your arbitrage trade.
Latency arbitrage is the most profitable and low-risk trade but requires some knowledge and patience. The most important thing in an arbitrage trader’s job is masking arbitrage trading and knowledge. Please listen to our advice and read our recommendations. If something is not clear to you – write us your questions and we will be happy to answer them. I also recommend you subscribe to our newsletter and you won’t miss any interesting articles on arbitrage trading. We provide only verified information which you won’t get from any other resource.