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Currency Arbitrage
Currency arbitrage is a forex trading strategy where traders exploit differences in exchange rates or spreads offered by different brokers or financial institutions for the same currency pair. These discrepancies typically occur in the bid (buy) and ask (sell) prices across platforms, allowing traders to buy low from one source and sell high at another—locking in a risk-free profit.
Example:
Suppose Bank A quotes 3/2 USD per EUR and Bank B quotes 4/3 USD per EUR.
A trader exchanges 1 EUR to USD at Bank A:
1 EUR × (3 USD / 2 EUR) = 1.5 USDThen exchanges 1.5 USD back to EUR at Bank B:
1.5 USD × (1 EUR / 1.3333 USD) = 1.125 EUR
The trader ends up with 1.125 EUR, realizing a 0.125 EUR profit (before fees), through this arbitrage loop.