Trading on the basis of exchange discrepancies: key advantages and disadvantages
The financial market attracts more and more newcomers every year. There are new mechanisms of work, trading strategies, as well as software for algorithmic trading. All this contributes to the market and players’ development. Despite this constant process of improvement, there are methods that have been used for trading in the financial market for several years. It is possible to add to the list of such methods a speculative algorithm in the form of arbitration strategy.
Arbitrage trading is a type of trading strategy that is based on exchange rate differences between the same financial asset, but on different stock exchanges. Back in the 70s, when the Internet commerce was just beginning to develop, the fix api traders could analyze the value of the same asset, but on different stock exchanges. Thus, if the price of gold futures on the London Commodity Exchange was different from the Chicago Stock Exchange, this could be played out. When this exchange rate difference was different or significantly deviated from the same range, they made two speculative transactions at different platforms and fixed only a few profit points. However, these several points of profit were obtained without any risk.
The years passed, the market developed and this approach was also transformed into new species. Moreover, it was fix api arbitrage trading that laid the foundation for the HFT https://www.investopedia.com/ask/answers/09/high-frequency-trading.asp approach on the US stock market, and according to the Bureau of Statistics, the bigger part of the trading operations volume falls precisely to this kind.
As you might have guessed, trading on the exchange rate differences has gained an algorithmic look and today, an absolute majority of exchange speculators use this strategy in order to diversify their investments, as well as to receive an additional cash flow. If we talk about arbitration in the fix api forex market, then there was a difficulty in implementing this approach for a long time. The thing is that for normal trading, a condition of the difference in value between the same asset on different stock exchanges is necessary. But in case of the currency market, forex is a single platform where, regardless of the geographical location, the value of the asset is the same.
Here, brokerage companies have already come to the aid in resolving this issue. They set mark-ups on their assets and the fix api trader gets the opportunity to use the exchange rate discrepancy between these companies. Thus, forex arbitrage is implemented as an algorithm that analyzes the value of the currency pairs between different brokerage companies, and in case of the same exchange rate differences for the same asset, a speculative trading operation is made and exactly the same profitable points are recorded absolutely without any risk
Despite the simplicity of the arbitration technique, there are both advantages and disadvantages of trading on the basis of exchange rate discrepancies.
- It allows you to fix the guaranteed percentage of the profit without any risk;
- Active trading is implemented;
- All the decisions on opening of positions and a direct analysis produces a trading algorithm;
- This approach is combined with any trading strategy;
- It is a means of diversification and obtaining a passive percentage of profitability.
- A number of brokerage companies restrict this fix api trading approach;
- Before starting the trading, you should choose the two optimal brokerage companies;
- It is necessary to allocate a separate capital for this trading style and allow the robot to trade on another trading account.
As we can see, the whole complexity of applying the arbitrage approach in the foreign exchange market is reduced to the choice of a platform, on which trading will be conducted. Given the effectiveness of trading on the basis of exchange rate discrepancies, the advantages clearly outweigh the disadvantages.