Understanding Triangular Arbitrage Trading

Source

Hello friends,

I am @chiabertrand by username and this is my first time publishing in this great community.

I am a moderator of steem4bloggers community and I am here to share quality posts with you all.

The first on my calendar is triangular arbitrage, to some this is a common topic while to others, it is something new.

Nonetheless, we shall be gaining understanding on triangular arbitrage and how it differs from normal arbitrage.

WHAT IS TRIANGULAR ARBITRAGE

Triangular arbitrage can be explained to be a potentially profitable but complex trading strategy that takes advantage of price disparities in a decentralized market, between cryptocurrency pairs.

In recent years, cryptocurrency has gained significant attention and popularity which has led to surge increment in it's trading volume across various digital assets.

And as a result of this, cryptocurrency has become very fragmented, thus having different exchanges offering different prices for the same cryptocurrency asset.

Triangular arbitrage is a trading strategy that is designed to exploit these differences in asset price for the generation of profit.

Triangular arbitrage, just as the name, involves trading three cryptocurrency pairs in the following manner:

• Base currency (A) to intermediary currency (B)
• Intermediary currency (B) to final currency (C)
• Final currency (C) back to base currency (A)

For profits to be made using this strategy, there must be price differences between the starting and ending points.

For more understanding, if you begin with a specific number of cryptocurrency A, then executes some trades through B and C, on converting back to cryptocurrency A, you should have more number of cryptocurrency A, and this is only possible with price discrepancies along the way.

MECHANICS OF TRIANGULAR ARBITRAGE

Source

To fully understand the mechanics of triangular arbitrage, I will take you through a step by step process.

• IDENTITY OPPORTUNITIES:

The first step to engage in triangular arbitrage is to identify trading opportunity.

As a trader, you should spot the price differences between three cryptocurrency pairs you at going to use.

This price differences is most oftentimes caused by latency in information propagation, differences in supply and demand on different exchanges and other inefficiencies in the market.

• CALCULATE ARBITRAGE PROFIT:

After a trader has detected the price difference on three crypto pairs, his next duty is to calculate the profit that will come forth from executing the triangular arbitrage trade.

This calculation often involves transactions fees, bid-ask spread, transfer costs etc.

• EXECUTES TRADE:

To make profits from triangular arbitrage trading, the trader has to place a series of sell and buy orders.

This sequence must be very fast inorder to maximize profits and minimize loss as cryptocurrency price are very volatile.

CONCLUSION

Triangular arbitrage trade is a very effective strategy of making profit in the cryptomarket.

It involves taking advantage of three cryptocurrency pairs in the market and we will definitely learn more about triangular arbitrage.