Arbitrage / scalping is one of the oldest trading strategies. With binary options, you can add a twist to a strategy that has been brought to many traders for decades.

What is Arbitrage?

Arbitrage, or ‘scalping’, is a classic trading strategy that has been around for hundreds of years. In short, the technique of buying an asset cheaply in place A and immediately selling it at a higher price in place B. Suppose that a stock sells for £100 in London while at the same time a dealer in New York offers £101 to buy it.

If you buy a stock for £100 and sell it for £101, you’ll make a profit of £1. That’s not much, but because both trades happen simultaneously, there’s no risk. Profits are guaranteed, which is why even small profits are worth the investment. In addition, most arbitrage traders trade larger amounts to make small profits for each individual quantity.

Since there is no risk involved, they can invest a higher percentage of their account in every single trade and score the same profit as traders with riskier strategies and smaller investments. Account To view these opportunities, traders need access to asset prices. In the binary market, this can only be achieved by having a trading account with several brokers.

Dictionary Definition of ”  Arbitrage  “.
Simultaneous buying and selling of assets or derivatives to take advantage of different prices for the same asset.

Arbitration Process

  1. Monitor the market or asset. Check values ​​at various brokers or market makers.
  2. Where values ​​differ, and cover trading costs, arbitrage opportunities are opened.
  3. Open positions at “Buy” and “Sell” prices. Set trade size to ensure profit.

 

 

Types of Arbitrage

There are various arbitrage structures, or ways they can be used. Different markets require a little difference to guarantee profit. Here, we explain some of these differences;

  • Traditional – Conventional, or most common, arbitrage is where an asset can be carried and sold at two prices. Traders can buy at a low price, sell at a higher price and – after trading costs – still lock in a risk-free profit.
  • Bet – The determination of the ‘bet’ follows the same process. From the value of the asset, the sports bettor can go back and place the same selection. Assuming the price is different enough, the trader can place at a lower price than they returned the selection at. With an adequate stake size, profits can be ensured regardless of the outcome of the sporting event.
  • Forex – Traditional arbitrage is not possible on major currency pairs. However, it is possible to convert foreign exchange in the long term using interest rates. Constant exchange rates mean this isn’t always zero risk however, and it’s not something that retail investors can easily achieve at low cost.
  • Binary – In binary options, traders need a volatile market. This can lead to different fees at different brokers. The ability to trade both sides of digital options makes arbitrage possible – at least one payout needs to be higher than 100%. In the absence of volatility, a significant market sentiment is the only other driver that might trigger an unusual payout figure.

Arbitrage Strategy

With binary options, the arbitrage strategy is very different from the classic arbitrage strategy. The classic arbitrage strategy is based on the characteristics that there are several large markets where you can buy and sell something and you can sell in one market what you buy in another. Binary options do not have such a central market, which is why you need to slightly change the arbitrage strategy. Although arbitrage opportunities are limited compared to assets such as stocks, there are some opportunities. Here’s what you can do:

  1. Compare different brokers : Each broker creates its own payout. When you compare several brokers, you may find that you can invest in rising prices for assets with one broker and falling prices with another, and get a guaranteed payment of more than 100 percent – ​​guaranteed profit.
  2. Compare similar stocks : Many news items affect more than one stock. When a country’s central bank decides what to do with the base rate, banks usually experience a strong impact. By predicting price rises for one bank and price falls for another, you
  3. Compare related currencies : Currencies are always traded in pairs. When you take three currencies, you get three pairs. Often, you can find arbitrage opportunities where you can effectively combine these pairs to guarantee a combined payout of more than 100 percent.
  4. Compare the types of linked assets : The relationship between the US Dollar and oil / gold is often inverted. When the Dollar rises, oil falls. These relationships, too, offer arbitrage opportunities. The best opportunities for this type of trade are at times of high volatility, for example right after the release of important news.
Is Arbitrage Illegal?
Nope. Arbitrage is not illegal. The opportunity will be rare, but where the same asset can be brought and sold for a guaranteed profit, it is very legitimate.

Risks Associated With Arbitrage

One important thing that makes arbitrage opportunities so rare, is the cost of trading. In general, traders can buy and sell the same asset whenever they want – but will result in a small loss. There is usually a spread, or trading margin, to form.

If the asset is carried and sold, trading costs will mean a small loss is made. This is true even if the asset is carried and sold at the same price. Any later arbitrage formula or calculation, must include these trading costs. Failure to do so will guarantee loss, not profit.

Another risk is price changes. Any difference in price will likely be corrected quickly. If this correction occurs before both sides of the trade have been placed, then the opportunity to lock in a profit is lost. Where trades are placed across brokers or trading platforms, this risk is high.

Broker Trading Software  with comparable asset prices: