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Forex arbitrage

Some traders have probably noticed that speed of quoting at different forex brokers often differs. The reason for this may be: feed aggregation from different liquidity providers, such as banks, or broker’s cheating, such as quote feed smoothing. The gist of arbitrage on market is as follows: buy a thing, in our case a currency pair, cheap and imediately sell it for a higher price, profit being the difference of prices. Of course, one can get profit from such arbitrage only if this difference is higher than brokers’ spreads and commissions combined. Such operations are called classical (bipedal) arbitrage. The main advantage is the absence of risk, so it has zero drawdown. If one dealer quotes are always delayed to the other, it is better to use one-leg arbitrage, where orders are only sent to the broker with its quotes lagging.

In this article, we will implement an arbitrage strategy on EURUSD symbol using Megatrader software.

For example, we will consider setting up an arbitrage trading for the CTrader trading terminal.

1. After installing Megatrader on your computer, you need to double-click on the MegaTraderExchange64.algo file to activate the installation of a trading advisor for the CTrader platform (the file is located in the folder where Megatrader is installed). The advisor will be installed in all CTrader terminals currently open on the computer. In case of adding a new terminal without an installed advisor, it is necessary to re-install the advisor by double clicking on the file.

The CTrader trading terminal with the MegaTraderExchange64 EA installed

2. Next you need to enable the adviser. To do this, click the "+" button next to the line of the adviser, select any instrument from the list (we draw your attention that all trading instruments of the terminal will be available for trading) and press the blue arrow.

CTrader trading terminal with enabled MegaTraderExchange64 advisor

Now the trading terminal is ready for work, let's consider the configuration of the Megatrader program.

3. Run the Megatrader program, select "One-legged Forex arbitrage" in the project creation wizard.

4. Select and configure the source of leading quotes.

5. Then you need to set up a trading instrument from the forex terminal (CTrader or others) that will be traded. You need to specify the terminal account number, symbol name and minimum lot size:

6. Specify the level for opening deals, the level for closing trades and the minimum time for holding deals. These parameters can be changed in the future.

7. Select the menu item "Connection"-"Connect to Forex terminal" to start data exchange with the trading terminal.

Now setup is complete. Charting will begin after first tick data loads into MegaTrader.

Megatrader program. An example of a spread chart.

Below is a live account chart, several peculiarities can be spotted:

There is an opportunity to buy at around -0.0002, and sell at 0.00005. Even if a 0,00005 slippage occurs, we will still have a 0,00015 points of profit. “1,5 pips - that’s a tiny profit, I scalp for more!” - one may say, but consider that we just made a profit with nearly zero risk, so you can ditch money management here and trade grand lot sizes for bigger gains!

A script was written to automate this trading strategy: it sells spread when Offer (red line) is less than or equal to -0.0002 and closes order when Bid (green line) is greater than or equal to 0.00005, and vice versa:

Then you can turn autotrading on, by going to “Script” - “Run the script”.

After a few days of real trade, it was found out that the profits accumulate on one account. So we decided to switch our strategy to one-legged arbitrage, where orders are sent through only one broker.

Real trading results can be found in the Statistics section. 

However, you should consider the following differences of one-legged arbitrage:

1. Your order is not hedged, and as a result drawdown can increase a bit.

2. Your broker should be loyal to scalpers and short-time deals. It is best achieved if trading on a ECN account, where brokers mostly encourage scalping.