Triangular Arbitrage Trading And Steps Involved In It

Source

Hello fam,

It is your favourite blogger @mato445 and I am happy to make this interesting post in this community today.

Some time before, we learnt about arbitrage trading in the cryptospace but today, we will be understanding what triangular arbitrage is all about, please stay tuned.

Triangular arbitrage trading can be explained to be a cryptocurrency trading strategy that takes advantage of the differences in price among three different cryptocurrency asset in the cryptomarket inorder to generate profit.

The essence of this trading strategy lies in the exploiting of the inconsistency in exchange rates, thus giving traders the opportunity to make risk-free profit through the execution of a few trades.

Through the strategical navigation the interconnected web of crypto pairs, traders can take advantage of market price inefficiencies and capitalize on differences In market price.

There are several steps that is involved for the completion of a triangular arbitrage trading and we shall be examining them now.

• UNDERSTANDING TRIANGULAR ARBITRAGE AND THE SELECTION OF CURRENCY:

The first step to be taken before embarking on triangular arbitrage trading is to gain a detailed knowledge on its operation.

Triangular arbitrage has to do with the taking advantage of the price differences on three cryptocurrency pairs listed on different exchanges.

Then the trader is to proceed to select 3 different cryptocurrency and 3 exchanges where this cryptocurrency pairs can be traded.

And it is very important that exchanges with sufficient liquidity be selected, so as to facilitate an efficient trading activity.

Source

• MARKET ANALYSIS AND PROFIT CALCULATION:

The next step to be taken by triangular arbitrage traders is the conducting of market analysis on these three cryptocurrency pairs.

This market analysis is done so as to detect any potential for arbitrage trading, traders search for price differences amongst the 3 selected cryptocurrency pairs, so as to profit from it.

Then traders proceed to calculate the potential profit from a triangular arbitrage trade using exchange rates.

And this has to do with the computing of profit margin after transaction fees have been accounted for.

• RISK ASSESSMENT AND CREATING TRADING ALGORITHM:

The next step to be taken by a triangular arbitrage trader is the assessment of risks associated in executing the trade.

The risks that should be assessed includes, market volatility, transaction fees and the speed of market execution.

It's best to have a good understanding of the potential negative side of the trade.

Triangular arbitrage trading is most times automated by traders through the use of trading algorithm or bots.

Trades can be swiftly executed by this program, based on some predefined agreement or rules.

• SETTING API CONNECTION AND MONITORING MARKET CONDITION:

The next step that can be taken by a triangular arbitrage trader is to set an api connection.

By setting api connection with the exchange, they aim to enable automated trading.

With API connection, the trading bots are allowed to have access to a real-time market data and also to seamlessly execute trades.

When this is done, a trader need to go monitor the market condition constantly, as this helps a trader to identify and capitalize on potential arbitrage opportunity.

• TRADE EXECUTION AND RISK MANAGEMENT STRATEGY:

The next step to be taken by a trader is the execution of trades.

Once an opportunity is spot by the traders, it should be taken swiftly, as a little delay might readjust the market prices.

It is very important that traders execute trades very quickly as cryptocurrency prices are subject to high volatility.

Source

Then traders should implement several risk management strategies so as to maximize profit and minimize loss.

This risk management strategy has to do with the setting of stop-loss orders.

Triangular arbitrage trading needs a combination of algorithm trading, technical analysis and risk management.

It is also very important for traders to remain informed about the trends of the market, and also to refine their strategies continually inorder to fit to market movement