Arbitrage seeks to benefit from a price inconsistency between related instruments or venues. In real markets, apparent differences may disappear before an order fills, and costs or restrictions can turn a theoretical edge into a loss.
Understand the main forms
Spatial arbitrage compares the same asset across venues; triangular currency arbitrage tests the consistency of three exchange rates; and statistical arbitrage models relationships between related assets. These approaches have different data, capital and execution requirements.
Calculate the net opportunity
Compare executable bid and ask prices rather than last-traded prices. Subtract commissions, exchange fees, funding, borrow costs and expected slippage. Consider currency conversion and settlement timing when venues use different currencies or processes.
Coordinate both sides of the trade
A hedge can fail if one leg fills and the other does not. Define order sequencing, maximum unhedged exposure and emergency exits. Fast automated systems may need low-latency data and infrastructure, but speed alone does not prove a strategy is profitable.
Watch for hidden model and venue risk
Historical relationships can break, liquidity can vanish and a broker or exchange can reject or delay orders. Test out-of-sample, use conservative assumptions and verify that the strategy is allowed under each venue’s rules.
Build a repeatable plan
Before risking capital, write down the conditions that must be present, the price or event that invalidates the idea, the maximum acceptable loss and the circumstances in which you will not trade. Test the rules on historical data and a demo account, include realistic costs, and keep records across different market conditions.
Questions to ask before using this approach
- Can the setup be defined and tested without hindsight?
- Are spread, commission, financing, slippage and liquidity included?
- Does the instrument and broker support the intended order types and holding period?
- What evidence would make the original idea invalid?
Educational information only. This guide is not personal investment advice and does not promise a profitable result. Trading and leveraged products can result in losses, including losses that may exceed expectations depending on the product and local rules.
