FX Binary Options Trading and Arbitrage Strategy

FX Binary Options Trading and Arbitrage Strategy

Submitted by adil on Thu, 05/15/2014 - 12:25

Arbitrage is a term used for purchasing financial securities from one exchange and selling it to another exchange for a higher price to earn profits. There is no risk involved in such a transaction because the same security is traded on both the exchanges. However, it enables investors to make profits from the difference in prices. Traders can also do arbitrage trading by selling a security from one exchange and purchasing it at a lower rate on another exchange. Arbitrage trading was very common a long time ago in the regulated exchanges that were trading the same product. Traders and investors used to execute a transaction by calling their broker in New York and then calling another broker in Boston. But with the passage of time, the trend changed. Most financial securities, nowadays, are only traded in one market or stock exchange.

But the question is why an investor or a trader should learn about devising an arbitrage strategy when the arbitrage market does not exist anymore. This is a very important question and the answer to this is very simple. The arbitrage trading opportunities still exist in the market because there are many brokers and trading applications available in the market that provide the same underlying forex pair. However, the payouts offered by them might not necessarily be the same. During a certain period of time, the price of a forex pair might fall on one exchange as compared to the other. Therefore, in order to benefit from such cases, you will need to have more than one broker.

Moreover, a clear understanding of arbitrage strategy is very important in case of strongly correlated assets. There are many currency pairs that move in correlation with the other currency pair. This opens up an arbitrage opportunity for the investors to earn potential returns from trading. For example, currency pairs USD/JPY and GBP/JPY are strongly correlated with each other.

How to Explore an Arbitrage Opportunity?

Investors can look for arbitrage opportunities in two ways:

1. They can either try to find a same currency pair on two different forex brokers exchanges, or
2. They can find currency pairs that move along together and are strongly correlated with each other.

If you carry out an online research on correlation matrix, you would definitely be able to find the similar financial instruments.

In theory, arbitrage trading is considered as a risk less trade, but investors should understand that correlation trading is not a pure arbitrage. In correlation trading, it is assumed that the existing relationship will continue to exist between two selected currency pairs in the future.

In the end, however, it can be said that arbitrage carries a minimal risk if it is executed correctly. It is comparatively easy to earn profits with arbitrage opportunities if investors are able to find them. Once you completely understand the concept of arbitrage trading strategy and learn how to execute it, you should start correlation trading. Correlation trading is not riskless, but it is still considered as one of the effective binary options trading strategies.