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How to arbitrage foreign exchange

In the past decade, the trading volume of the international foreign exchange market has grown rapidly, with a daily trading volume of US$6 trillion . An important reason that cannot be ignored is arbitrage trading.

Arbitrage trading uses a large number of trading models to create arbitrage space through algorithmic trading, which also makes foreign exchange operations more difficult for ordinary investors. However, if we can understand some basic ideas of carry trade, it will also be of great help to foreign exchange investment .

How to use arbitrage in leveraged forex trading ? Carry trading strategies are very effective in leveraged trading. Generally speaking, with a leverage of 1:100 (available from most ECN forex brokers ), a carry trade strategy will earn 200% in a year from a 2% spread. However, it should not be overlooked that carry trading strategies still have many shortcomings. This strategy is mainly applicable to the stability of the market, and there are no prerequisites for large changes in interest rates .

The truth is that if the price of the high-yielding currency falls, the foreign exchange losses on the swaps will outweigh the profits. Furthermore, even if the overall economic sentiment is positive, there is no guarantee that the situation in the country issuing the currency will be favorable for growth.
Also, carry trades are not available for scalpers and intraday traders. It is best for swing traders. Most notably, the ” renminbi -to- dollar , then yen ” model is difficult for retailers, given the rapid changes in transaction costs and spreads.

But don’t be discouraged, you can profit in another way – warehouse arbitrage. In this case, you just need to find the right Forex dealer . The so-called “holding interest” refers to the overnight interest generated when holding the trading currency for settlement. Taking the position arbitrage foreign exchange currency pair AUDUSD ( Australian dollar US$) commonly used by ordinary traders as an example, on the dealer platform, the overnight interest rate for buying one lot of AUD and USD is +6.4 USD, that is, the dealer pays you USD 6.4; Selling AUDUSD overnight is -$8.8, i.e. you pay the dealer $8.8. The standard contract for one-lot Forex trading is 100,000 base currency . For example, in the Australian dollar USD, one lot is a contract of 100,000 Australian dollars.

Yes, now the front currency is AUD AUD which is the base currency. If you want to earn interest, you need to find a dealer who:

  1. The AUD/USD spread of 15 pips is very low. Typically, the AUD/USD spread is around 20 pips. It should also be noted that point extension is generally divided into fixed point extension and floating point extension. Fixed-point expansion means that the point-extension value is fixed, while floating-point expansion means that the point-extension value changes within a region. It is recommended to choose a dealer account with fixed spreads.
  2. The highest possible leverage: The so-called leverage is the amplification of funds. Traders will offer leverage ranging from 100 to 1000 times. 1 lot USD contract. If you don’t use leverage, you need AUD 100,000 (usually converted to USD). If you use 100 times leverage, you only need 1000 AUD as margin; if you use 300 times leverage, you only need 333 AUD as margin. Note: The amount of leverage has little to do with risk as long as leverage is not abused and positions can be opened with a significant percentage of leverage.
  3. The forced closing rate should be as low as possible: the so-called forced closing rate means that the margin rate is lower than the minimum value. If it is lower than this value, the dealer will not force liquidation of the contract due to insufficient margin. Common forced close rates are 100% and 20%, of course 80%, 30% and 0%, depending on the dealer.
  4. Ease of capital mobilization: This not only affects profit margins, but also capital security.
  5. The difference between platform gold and foreign exchange is smaller: This also affects the profit margin.