Understanding Triangular Arbitrage Trading part 2

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Hello everyone,

Good day to everyone in the house, it is still your favourite blogger @chiabertrand and I hope everyone is waxing well in the house.

I feel joyous to be here again and today I will be uploading the second part to our topic on triangular arbitrage trading.

In our last post which can be accessed here, we discussed about triangular arbitrage and we took a break at the mechanism of triangular arbitrage.

Today we shall continue the mechanism of triangular arbitrage trading.

MECHANISM OF TRIANGULAR ARBITRAGE

In our last post, we discussed about the mechanism of triangular arbitrage and we took a break at "execute trades", today we shall learn more.

• CURRENCY CONVERSION

The trader here ends up with more of the base currency A than they originally had after the execution of all the necessary trades, thus completing the arbitrage loop.

The main aim of triangular arbitrage is to gain more of the base currency A after the loop has been completed, thus taking advantage of price difference.

• REPEAT AS NECESSARY:

Successful triangular arbitrage trading are often short-lived and this is as a result of the high volatility in the cryptomarket.

If traders don't make decisions on time, the market can quickly correct itself and such trading opportunity is lost.

And as such, traders must continuously monitor for new opportunities in the market, and they must execute this trades as they arise.

RISK FACTOR IN TRIANGULAR ARBITRAGE

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There are several risk factors in triangular arbitrage that traders should be constantly aware of and some of them are:

• EXECUTION RISK:

The crypto market operates all the time and prices change very rapidly.

Before an effective trade or series of trade can be placed within such short time frames, a very fast and reliable order placement would be required.

Any slight challenge such as exchange issue can lead to a loss of trading opportunity.

• TRANSACTION COST:

Each trade to be initiated by a trader incurs transaction cost, cost such as withdrawal fees, trading fees and other minute fees.

This costs have a significant impact on the profitability of triangular arbitrage trading.

• MARKET VOLATILITY:

One identifying mark of cryptocurrency is its highly volatile price.

Cryptocurrency can rapidly have price flunctuation over a short period of time and any increase in price of one of the three crypto pairs can erode any potential gains and in most cases lead to loss in such trades.

• LIQUIDITY ISSUES:

Some cryptocurrency may have low trading volumes and large trades cannot be done in it, without significantly affecting it's price.

And when this happens to one of the cryptocurrency pair in the triangle, it may lead to a missed trading opportunity.

Conclusion

Having considering some risk of triangular arbitrage trading, we shall call it a day.

When next we meet, we will learn an information more spectacular, see you all soon.