What is triangular arbitrage?
Triangular arbitrage is the process of converting one currency to another, then converting it again to a another currency, only to convert it back to the original currency - usually all within a matter of seconds. The aim is to make a profit when there’s a mismatch in the currency exchange rates.
Key takeaways
Triangular arbitrage involves converting one currency to another, then to a third currency, and finally back to the original currency within seconds to profit from exchange rate mismatches.
Opportunities for this forex trading method are very rare, and traders who successfully capitalize on them typically use sophisticated computer programs to automate the entire process.
While triangular arbitrage can theoretically produce risk-free profits by exploiting imbalanced currencies, traders must act extremely quickly or they risk losing out on the opportunity.
Price differences between exchange rates are tiny in triangular arbitrage, meaning traders must have large amounts of capital for this arbitrage form to be financially worthwhile.
Where have you heard about triangular arbitrage?
Opportunities for this method of forex trading are very rare, and traders who manage to capitalise on it usually have sophisticated computer programs to automate the process.
What you need to know about triangular arbitrage.
By buying and selling imbalanced currencies, you can in theory make a risk-free profit, but if you're not quick enough you can lose out.
Suppose the Japanese yen is ahead of the euro. You might carry out a triangular arbitrage to get a bigger return for the exchange. You exchange British pounds for yen at one rate, convert it again to euros, and then covert it back to the original pounds to net a profit.
Price differences between exchange rates are tiny, so you must have a large amount of capital for this form of arbitrage to be worthwhile.
Find out more about triangular arbitrage.
For background information, read our definitions of arbitrage and forex.