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Introduction

Every trader who uses arbitrage strategies has thought of how to improve their trading results and enhance their strategy. There are many opinions about what affects most of the results of arbitrage trading, but unfortunately, many of them are misconceptions or are of little importance. In this article, I would like to describe my approach to arbitrage trading and those principles which should be put into an arbitrage strategy algorithm. I will also tell you what arbitrage strategy is the best one from my point of view.

Major misconceptions of an arbitrage trader

Many arbitrage traders are constantly on the hunt for the grail. They think that they can find a broker with which they can safely use latency arbitrage or hedge arbitrage for many years without any problems. Some traders, despite all our warnings, try to negotiate with the brokerage company, which is impossible by definition.  We are constantly contacted by traders who are trying to make a three-way conference with him and the broker. Please understand &#; you have a conflict of interest with the broker. Even if the broker is honest, let&#;s try to believe this assumption, although I find it very difficult, his liquidity provider will immediately warn you that his latency arbitrage software is working and will ask to transfer the trader to other terms or apply virtual dealer or will transfer the whole brokerage company to a higher execution, so there are no losses. So please remember that an agreement with a broker is a road to nowhere.

The second misconception is the idea that you can find a very fast feed and then, by entering the market earlier, you can make a profit from arbitrage trading with a broker in which arbitrage strategies do not work. First of all, we have to find out why it does not work, and to do this, we have to assess two indicators: the order execution time and the slippage.  These two indicators should be controlled during the entire time of trading. Almost every day. Then you will clearly understand when you need to stop trading and change your broker or account. If you see that your orders are executed much longer, then most likely your broker is using a virtual dealer, or some other type of active dealing against you. If you find a fast feed that is a few ms faster, 99% of the time this will not solve the problem, because the broker will just reconfigure the virtual dealer and give you a big delay.

The solution to the problem

If you read what I wrote above, you will realize that the solution to the problem lies on the surface &#; latency arbitrage software has to be masked as much as possible so that the broker didn&#;t realize what was going on. Also, let me remind you once again &#; a broker should not know what strategy you are using.

The masking of arbitrage trading can be done by many methods. Let&#;s look at the most common ones.

Using other non-toxic strategies together with latency arbitrage software. 

By the way, I would like to immediately note that when I write &#;latency arbitrage software&#; I do not mean standard one-leg arbitrage, I mean lock arbitrage types (2-legs or 3-legs), which by themselves already disguise arbitrage trading by lacquering orders. I also want to note that locking on one account can prolong the lifetime of your account until it will be marked by a broker and trading conditions will change, but still much more reliable to use locking on 2 or 3 accounts. So, if you use other robots on your accounts along with arbitrage, it will help disguise arbitrage trading. It is desirable to use robots that trade on the same currency pairs or indices on which you use the latency arbitrage robot. Also, if your latency arbitrage robot imitates manual trading, then you need your robot used for masking also imitates manual trading. This can be achieved by using account copiers that mimic manual trading on sub-accounts.

Using strategies with deep masking for arbitrage trading &#; &#;BrightDuo&#; strategy

In most cases, the latency arbitrage robot signal is the beginning of a currency movement in the direction of the arbitrage signal.

For example, if the price of the fast broker (feeder) increased by several points compared to the price of the slow broker (usually this difference is called the difference to open), then this occurrence  is an arbitrage situation to buy and the price of slow broker in a few milliseconds will also start to grow and soon will be equal to the price of a fast feed after which in most cases the prices of slow and fast brokers will continue to grow for a while.

The same happens if the slow broker price decreases by several points with respect to the slow broker, there will be an arbitrage situation to sell and the price of the slow broker in a few milliseconds will also begin to fall and soon will be the same as the price of a fast feed after which in most cases the prices of slow and fast brokers will continue to fall for a while.

Imagine that we have two accounts where we open opposite orders for the same trading instrument, with the same lot size, before the arbitrage situation. Say on account 1 we open a buy 1 lot for GBPUSD and on account 2 we open a sell 1 lot for GBPUSD.

Both orders are non-toxic from the broker&#;s point of view as they are not opened during an arbitrage situation. When an arbitrage situation occurs on GBPUSD, we close a part of the sell order on account 2, for example, , and apply a trailing stop with different levels of the minimum profit that we want to obtain. For example +20 pips for lot.  +30 pips for lot and +70 pips for lot.

• When the first trailing stop triggers, we close 1 part of the buy position of at the broker;
• when the second trailing stop triggers, we close 1 part of the buy position with the size lot;
• and when the third trailing stop triggers, we close one part of the buy position with the size

Now we have an open buy position on account 1, but it is lot, and on account 2 we also have a position of lot. I.e. we have a standby situation until the next arbitrage situation.

The cycle continues until the moment when there are no open positions in accounts 1 and 2.

Then we start a new cycle, but vice versa &#; in account 1 we open a sell 1 lot for EURUSD instrument and in account 2 we open a buy 1 lot for GBPUSD instrument.

It should be noted that only the first order in the closing cycle may be considered toxic, while the rest of the orders will be non-toxic.

Of course, if you combine the masking strategy BrightDuo and the use of other non-toxic robots through an account copier imitating manual trading then you will achieve the maximum effect. One should also note that BrightDuo&#;s profitability is lower because not all arbitrage signals are impulses for a long-term movement and for this reason some entries will be false, but this only increases the masking of your arbitrage trade.

Conclusion

Latency arbitrage is the most profitable and low-risk trade but requires some knowledge and patience. The most important thing in an arbitrage trader&#;s job is masking arbitrage trading and knowledge. Please listen to our advice and read our recommendations. If something is not clear to you &#; write us your questions and we will be happy to answer them. I also recommend you subscribe to our newsletter and you won&#;t miss any interesting articles on arbitrage trading. We provide only verified information which you won&#;t get from any other resource.

Forex risk management is a strategy in which you can set rules to minimise the impacts of negative circumstances that affect forex trade into a more manageable state. This can require a lot of work and planning prior to ensuring the right risk management strategy is made. While this may seem like a lot of unnecessary work for many, especially since knowing risk can never be truly eliminated, a risk management plan is a must-have to ensure losses are minimal in the world of trading.

That said, let's delve deeper into FX risk management:

How Does FX Risk Management Work?

FX risk management allows you to set up a number of rules and measures which will help limit the negative impacts if a currency pairing goes the wrong way. This makes the move movement of currencies much more manageable. To properly manage this risk you need to set up an effective risk management strategy before starting any trades. With this being a timely process which requires broad FX trading knowledge, some companies may choose to get support from external FX platforms. Ultimately, for FX risk management to work you need a strategy. Without a strategy, you will not be able to properly minimise the risk involved in your trades. Of course, the risk management strategies can vary from one trade to another, depending on your needs and preferences.

Why Is FX Risk Management Important?

Foreign exchange (FX) risk management is crucial for businesses doing or planning on doing international business. Currency valuations are constantly fluctuating against each other, with major currencies even seeing this more currently.  With these fluctuations happening regularly it creates real uncertainty for businesses. The value of incoming and outgoing funds could see regular changes leading to unpredictable income. Businesses are becoming more aware of currency risk and are looking for FX risk management strategies as a result. Some businesses look into options, futures and averaging.

What Are The Potential Benefits Of Forex Risk Management?

Let's see exactly how risk management can help you make the most out of your forex trades.

1. Save Money

Risk management strategies can help you minimise the amount of money you lose. This way you can better management any shifts in currency pairings much easier. Many businesses are not aware that they can limit the risk they are exposed to with FX risk management strategies. The important detail is they are used to limited the currency risk you are exposed to but do not completely remove this which means you'll save on the losses you could have seen losses on.

2. Diversity Risk

Diversifying risk is commonly used within risk management strategies. Essentially diversification is a process of not putting all your funds in one currency pair. If you are only trading in one currency pair you could be vulnerable to any fluctuations in that pairing. But if you are trading in multiple currencies you are less vulnerable to currency risk as you are avoiding being exposed by one currency pair. But what does this mean for businesses? Businesses can have an internal team to manage this or use an external FX hedging business to support in reducing their risk exposure.

What Risks Are Present In Forex?

There are many risks to consider when trading in the forex market. However, most of these risks can be mitigated with the right risk management strategies.

The right risk management strategies can help limit the potential of large losses. Here are some of the most common risks in trading that you need to be aware of:

1. Liquidity Risk

This is a risk that might occur due to the unavailability of a certain currency pair. That means that there is a risk that the trade of that currency will become unavailable at the time of the trade. This is a risk that can be minimised with proper risk management.

2. Operational Risk

This is a risk that is associated with the technology and infrastructure of your trading platform. This typically includes such things as the quality of the trading software and the reliance of the trading platform on external networks. This can be mitigated by checking out the broker's safety features before you trade with them.

3. Legal Risk

This type of risk involves the violation of a country's trade laws. This can involve things such as regulation and lawmaking. As a forex trader, you need to make sure that your broker has a license to stay compliant with the country's laws. This can be mitigated by using a broker who is regulated and has the right licenses.

4. Market Risk

Market risk is the volatility of the market. This involves such things as political instability, economic issues, and international relations. Market risks can be mitigated by proper money management and risk management strategies.

5. Country Risk

This is the risk that is inherent in trading in a specific currency in a specific country. This includes the risk of relying on a broker in a country that is facing political and economic challenges. This can be mitigated by making sure you have a proper broker in a country that you have researched and found to be politically and economically stable.

6. Social Risk

Social risk is connected to the social issues in a specific country. This includes the potential of social instability, political and economic issues, and social issues. Social risk can be mitigated by choosing a broker from a country whose reputation you are confident in and whose political and economic stability you are confident in.

What Are The Risk Management Strategies For Forex?

Now that you know the risks of forex trading, you should also be aware of the forex risk management strategies that can help you minimise the risk of your trades. These strategies can range from one trader to another, but they all have the same goal: to minimise the impacts of risk.

It is important to note that risk management strategies can be implemented to help you avoid large losses. Here are some of the most popular forex risk management strategies:

1. Use Stop Loss Orders

When you use a stop-loss order, this can help you avoid large losses that could occur when your trade goes against you. Stop-loss orders can be implemented for both long and short trades, and you can set your stop loss in such a way that it works for your personal preferences. A good stop-loss order will help you make the most out of your investments and avoid those large losses that could potentially jeopardise your trading account.

2. Use Trailing Stop Loss Orders

As a short term trader, it is very important for you to have a trailing stop-loss order. If you are planning to hold your position for a short period of time, then trailing stop-loss orders can help you make the most out of your trade and improve your income stream. Trailing stop-loss orders can be defined as a stop-loss order that is used to reduce the distance between your entry point and your stop loss. This strategy can help you minimise your losses.

3. Make Sure You Are Properly Capitalised

Remember, forex trading is a highly risky investment. However, this is not the right investment for you if you are not properly capitalised. It is very important to look into your capitalisation before you start trading. This will help you get the right capital so that you can use these strategies effectively.

4. Identify Your Trades Quickly

Identifying your trades early on can help you evaluate your risk and make the most out of your investment. Identifying your trades quickly helps ensure that you will be able to minimise your losses by planning properly.

5. Be Prepared to Lose Money

No matter how hard you work at it, there is always a risk that you can lose money when you trade in the forex market. Remember, you should have a predetermined amount of money that you are willing to lose before you actually start trading.

6. Use Stop And Limit Orders

While stop and limit orders are not exactly risk management strategies, they can be implemented to help you manage your risk. That is because if you use this type of order, you will be able to set your level of risk and manage your trades effectively. That way, you can make the most out of your trades.

7. Use Margin For Long Positions

When you take positions that are longer, you will need a way to manage the risks. Margin is a feature that is always present in most forex trading platforms. This is a great way for you to manage your risks, especially if you really believe in your trade. This can help you make the most out of your investment.

8. Combine Different Strategies

You may have a few different strategies that you can implement, and it is very important to combine them to get the most out of your trades. You have to make sure that the strategies you implement are the right ones for you.

9. Use A System That Works For You

Creating your own system that works for you is very important when it comes to coming up with the right risk management strategy. If you are just starting out, it is very important to get the right information and use the right tools first before you actually start building your own strategy.

Conclusion

There are many different risks that come with FX, and it is very important to be properly informed about them. This will help you avoid those risks and make a lot of money. Remember, you have to know what you are doing before you start, especially if you want to manage the risks effectively.

However, keep in mind that no matter how much you do your research and how much you prepare yourself, the risk is always a part of forex. However, if you understand the risks, you can minimise the impact of risk. In other words, you can make the most out of your trades and make sure that you are making the most out of your investment despite any loss you may be incurred in the process!

All in all, you have to remember that risk is something that is inherent in every trading strategy. It is very important that you understand the risks so that you can make the most out of your trading.

Bound offers auto-hedging that helps businesses minimise losses and maximise gains. Use our platform today and enjoy better currency protection!

The spread in forex trading refers to the difference between the sell (bid) and buy (ask) prices of a currency pair. Forex traders typically earn gains from spread fluctuations in different market conditions. The attempt to profit from a change in the spread (i.e., when the spread widens or narrows) is called spread trading.

What types of spreads are there?

There are two types of spreads, fixed and variable.

Fixed spreads stay the same, regardless of market conditions. They typically have smaller capital requirements, making them ideal for beginner traders or for those with a limited budget. Transaction costs are also more predictable. Requotes can however occur more frequently, and the risk for slippage is high.

In contrast, variable spreads are always changing &#; widening or tightening based on market volatility and supply or demand of certain currencies. They are typically more suited to experienced traders. With variable spreads, there is no risk of requotes and pricing is usually more transparent. They can however turn unprofitable very quickly.

How is spread measured?

Spread is typically measured in pips. This is the smallest unit of the price movement of a specific currency pair. One pip is usually equal to The spread may vary from broker to broker. It is however also influenced by volatility and the volumes traded on a particular instrument. The most popular currency pair in forex trading is the EUR/USD, and usually offers the lowest spreads.

What drives forex spreads?

Forex spread can widen or narrow due to a variety of factors. For one, the time of day a trade is executed can largely impact spreads. In other words, if a currency is traded outside of its usual trading hours (e.g., euro trade opened during the Asia trading session), the forex spread on that trade may be wider due to lack of liquidity bought about by lack of trading activity. Other factors impacting forex spreads include economic and geopolitical news, events, or announcements. These may cause the forex market to become incredibly volatile with extreme exchange rate fluctuations. This typically results in forex spreads becoming extremely wide.

Forex spread trading strategy

Considering the factors impacting forex spreads, using an event or news-driven strategy for spread trading could be beneficial.

What is an event or news-driven strategy?

This approach focuses on making trading decisions based on specific news, events, or economic indicators. It involves identifying key events that could result in currency price fluctuations and executing trades based on anticipated outcomes of those events.

How does the trader identify key events?

To do this, a trader will typically monitor economic calendars, news publications and other sources of financial information. They will seek to identify factors like geopolitical developments, economic data releases, central bank announcements, environmental concerns, etc.

What does the trader do once market-moving events are identified?

Once possible market-moving events are identified, a trader will assess the potential impact of the events on currency pairs. They will also analyse how the news will affect inflation, interest rates, economic growth, and other factors influencing specific currencies. Based on their assessment, the trader will then decide whether to take a long or short position in a particular currency pair before the event occurs.

What happens as the event or news unfolds?

As the event or news occurs and the market reacts, the trader will typically execute their positions based on the actual outcome. The decision to execute the trade will also depend on how it aligns with the trader’s initial analysis. A trader must respond quickly however to be able to capture potential trading opportunities.

How important is a risk management plan?

Having an effective risk management plan in place is one of the most important aspects of forex trading. This applies regardless of the trading strategy you choose to implement. The forex market is after all the most active financial market in the world, also making it one of the most volatile. Add to this the use of leverage, and that volatility is amplified substantially. This means that unless your trading is properly managed, you stand the risk of being exposed to large, unanticipated losses.

In order to mitigate the risks involved in forex or spread trading, the use of risk management techniques is key. Let’s take a closer look at what these are:

• Stop-loss order. A stop-loss order is an instruction to close a trade at a specific price level to limit losses. A trader does this by setting the maximum amount they’re willing to lose on a trade before it automatically closes.
• Take-profit order. Like a stop-loss order, a take-profit order enables a trader to lock in profits when the trade reaches a specific level. This ensures the trader exits the trade before the market reverses adversely.
• Position sizing. This involves establishing an appropriate position size for each trade that aligns with your tolerance for risk and account balance.
• Portfolio diversification: Diversifying one’s portfolio ensures that risk is spread across several assets. This minimises the impact of losses on your overall trading portfolio. Diversification entails not putting all your funds into a single currency pair or trade.
• Managing leverage. เลเวอเรจ can amplify gains but also magnify losses. The requires that you remain vigilant when using leverage to ensure you don’t become overly ambitious, leading to adverse trading outcomes.
• Getting a handle on your emotions. Forex trading, irrespective of the strategy, can be very taxing on one’s emotional state of mind. It is a highly stressful and emotive activity. One that involves knowing how to get a handle on feelings of greed, fear, impulsion, etc. Be mindful of emotions to ensure they don’t impact your trading decisions negatively.
• Continuously monitor your trades. One of the most effective risk management techniques is to keep a trading journal. This provides you with a historical reference of your trades and can help you identify patterns in your trading activity. It also enables you to identify your strengths and weaknesses and to learn from your mistakes.

Open a demo account to practice your Forex trading strategy

One of the best ways to test your forex trading strategy is to practice it on a demo trading account. You can open a demo account with a CFD forex broker like IronFX which will give you access to a simulated trading environment in which to practice your trades, strategy, and techniques. Using virtual funds, you can implement all manner of trades, using technical or fundamental analysis, without putting your own money at risk.

IronFX also gives you access to extensive educational resources to help you boost your trading skills and knowledge. This includes podcasts, webinars, blogs, glossaries, videos-on-demand, and much more. Through these resources, you can acquire all the information, tips and ideas for trading forex. Equipping yourself with these crucial insights will also help you build enough confidence and expertise to move on to live trading.

Disclaimer:

This information is not considered investment advice or an investment recommendation, but instead a marketing communication. IronFX is not responsible for any data or information provided by third parties referenced or hyperlinked, in this communication.

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