Therefore, traders who attempt triangular arbitrage trading should also employ risk management strategies to assess and mitigate risks. From these transactions, you would receive a loss of $344,214.06 (assuming no transaction costs or taxes), so there is no triangular arbitrage opportunity. If the result had been positive, there would have been an arbitrage opportunity.

While it’s common to trade two markets in most arbitrage strategies, there is a type of arbitrage that uses the price difference of three asset classes – triangular arbitrage. Triangular arbitrage identifies price differences for trading opportunities, so it might be possible to find three cryptocurrencies that allow you to use the strategy. Triangular arbitrage is often considered risk-free because it involves exploiting temporary market inefficiencies without exposure to currency risk. However, there are other risks to consider, such as execution risk, technological risks, and market risks, which can impact profitability.

How to leverage a triangular arbitrage opportunity

The more volatile a market is, the higher the chances of catching arbitrage opportunities. When the market ranges for a long time, there may be no opportunities for price discrepancies. With triangular arbitrage, the profit-making process involves three currencies and their respective pairs. In this case, three coins are used when a price loop cannot be found on just two pairs.

Play around with waitTime as the code will execute as often as its value. We define the get_quote function to get the latest price of an asset, whose symbol is inputted on the function call. This plot shows the absolute value of the dollar amount difference between the two prices. Plotted here is the hourly price comparison between BTC/USD and the conversion price using BTC/ETH and ETH/USD.

How does triangular arbitrage work?

While that may sound like a drawback, it presents a great opportunity to those with the knowledge and willingness to arbitrage the spread by themselves to increase profitability. We have found that on average the cross-correlations of exchange rates for currencies in the triangular relationship are stronger than cross-correlations between exchange rates for currencies outside the triangular relationship. Detrended cross-correlation approach with \(\rho _q\) cross-correlation triangular arbitrage measure allows to uncover a hierarchical structure of exchange rates among set of currencies in the Forex market. To the best of our knowledge, it is the first ever application of the \(\rho _q\) cross-correlation coefficient to the agglomerative hierarchical clustering in a form of dendrograms. Such dendrograms may have important applications related to hedging, risk optimization, and diversification of the currency portfolio in the Forex market.

https://www.bigshotrading.info/blog/what-are-forex-signals-and-how-are-they-generated/ is a risk-free trading strategy aiming to exploit temporary currency exchange rate discrepancies. By taking advantage of small price differences between three currency pairs, traders can profit without any currency risk exposure. A triangular arbitrage opportunity is a trading strategy that exploits the arbitrage opportunities that exist among three currencies in a foreign currency exchange. The arbitrage is executed through the consecutive exchange of one currency to another when there are discrepancies in the quoted prices for the given currencies.

2 Detrended cross-correlation q-coefficient

Daily, Gate.io boasts a multi-million-dollar transaction volume, even up to a billion-dollar volume or more on some days. The high transaction volume on Gate.io also helps to keep swap fees low. When using an order book to trade, transactions can be executed swiftly. Triangular arbitrage is a risk-free benefit when the quoted exchange rates are not the same as the market cross rates. Hence, the exchange rate may be overvalued in one market and undervalued in another. In this regard, foreign exchange market participants, such as international banks, exploit such inefficiencies to profit.

4, it follows that the return rates for exchange rates EUR/JPY are markedly more correlated with the returns for exchange rates GBP/JPY than with the GBP/USD rate. This seems to be expected as in the former case there is a common (base) currency (JPY). In such a way, a pair of returns is intrinsically correlated by JPY currency performance due to the triangular constraint in the exchange rates. In this case, the cross-correlations are in the triangular relation (the top panel of Fig. 4). 4 illustrating a pair of returns for exchange rates EUR/JPY vs GBP/USD which includes 4 different currencies, there is no triangular relation among them.

However, some forex traders may still get it, especially those actively trading forex (high frequency). In a buy-sell-sell strategy, for this example, a trader would buy BTC at a lower price using their USDT capital, sell it at a higher price for ETH, then sell their ETH for an even higher price in exchange for USDT. Therefore, traders must have reliable trading systems and backup plans in place to mitigate these risks.

• The cross-correlations are quantified to be stronger on average between those exchange rate pairs that are bound within triangular relations.
• A mantra exists to help people remember—”left to right, divide; right to left, multiply,” referring to the direction in which you read the exchange rate.
• In this example I have used the WazirX exchange as I have a trading account in this exchange.
• With triangular arbitrage, the profit-making process involves three currencies and their respective pairs.
• Note that crypto traders often have to make trades at a high frequency to make a significant amount from the pricing mismatches.

Follow the example below to see how triangular arbitrage can generate risk-free profits by using a mix of crypto and fiat currencies on Beaxy Exchange. The quotes have the meaning of indicative bid/ask prices rather than executable prices. The indicative and executable prices differ typically by a few basis points [13, 14].

Triangular Arbitrage with Coin Pair Trading

First, we discuss the Forex data used in the present study and our methodology for the financial times series of logarithmic returns for exchange rates. Next, we discuss a degree of triangular arbitrage opportunity in a form of a convenient coefficient derived from suitable exchange rates. Then, we describe fundamental concepts of our statistical methods, which stem from multifractal formalism. We define q-dependent detrended coefficient capturing cross-correlations of two detrended time series. Multifractal detrended cross-correlation methodology is described and applied to Foreign exchange (Forex) market time series. Fluctuations of high-frequency exchange rates of eight major world currencies over 2010–2018 period are used to study cross-correlations.

• Actual crypto prices may vary depending on the market price at that particular time.
• We check the order status of each trade because each trade in a Triangular Arbitrage depends on the successful completion of the one before it.
• Compared to triangular arbitrage, cross-border arbitrage gives more significant profit margins.
• In the following, we will explore in some more details statistical properties of the Forex market data in the vicinity of these events.
• However, in reality we deal with enormous amounts of data flowing at very high rates in the Forex market and elsewhere.
• Our goal is to deliver the most understandable and comprehensive explanations of financial topics using simple writing complemented by helpful graphics and animation videos.