Triangular Arbitrage Trading: It's Definition And Processes

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Hi friends,

I am @ruthjoe, a moderator of steem4nigeria and it is an honor to come before this community again today.

Today, we will be learning about a new and interesting topic, which is triangular arbitrage trading.

WHAT IS TRIANGULAR ARBITRAGE TRADING

Triangular arbitrage trading is a cryptocurrency trading strategy that exploits price discrepancies among three pairs of cryptocurrency inorder to make profit.

This trading strategy takes advantage of the interconnectedness of different currency pairs in a decentralized exchange.

To gain a proper understanding of triangular arbitrage trading, let's understand some basis of cryptocurrency trading, arbitrage and triangular relationship.

The cryptocurrency market as we know it is always open 24/7, giving traders several opportunities to make profit from price differentials.

And arbitrage has to do with buying a commodity from a particular market and selling such commodity simultaneously at a different market, just to benefit from price difference.

The triangular arbitrage improves this step by adding 3 cryptocurrency assets to the technique.

Considering the cryptocurrency, let's examine new currencies, A, B, and C.

The concept is to identify and take advantage of price difference between AB, BC, and AC.

And if there is no allignment between AB, BC and AC, traders would take series of trade Inorder to make profits.

STEPS INVOLVE IN A SUCCESSFUL ARBITRAGE TRADING

There are series of steps a trader must pass through inorder to participate successfully in triangular arbitrage trading.

• Understanding The Basics

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One of the most important steps to a successful triangular arbitrage trading is understanding the basis of triangular arbitrage trading.

Triangular arbitrage trading is dependent on the idea that the rate of exchange amongst 3 currency should strictly follow the principle of transitivity.

This principle explains that if currency A can be exchanged for currency B, and currency B for currency, then at a specific rate currency A should be exchangeable for currency C.

• Identifying Opportunities

Another important step to a successful triangular arbitrage trading is the Identification of triangular arbitrage trading opportunities.

Here, with the use of algorithm and tools, traders scans the market for any opportunity to participate in triangular arbitrage trading .

They search vigorously for any opportunity/opportunities to in form of discrepancies in exchange rates among this three currencies, which will aid them more profit.

• Selecting The Currency Pair

Another important steps to a successful triangular arbitrage trading is selection of currency pairs fit for the triangular arbitrage trade.

Immediately a trader identifies a trading opportunity in the market, he immediately makes a selection of the three currencies pair that is involved in the arbitrage loop.

For example, if the opportunity is detected between the pair BTC, STEEM AND TRX, then it is the duty of the trader to select the pair to trade with either BTC/STEEM BTC/TRX or STEEM/TRX.

• Calculating The Expected Arbitrage Profit

Another important steps to a successful triangular arbitrage trading is the calculation of the expected arbitrage profit.

Through the use of real time market quote or historical data, traders can make the calculation of the expected profit from a particular triangular arbitrage loop.

This has to do with the estimation of the final amount of the starting currency after completing the triangular loop.

• Risk Assessment

Risk assessment is another very crucial step of engaging in a successful triangular arbitrage trading.

Here traders needs to evaluate the risks that can be encountered in a trade, considering factors such as market volatility, transaction costs and potential execution delays.

It is very important to confirm if the potential profit of the trade is worth the risk involved in such trades.

• Executing The Trades

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A trade cannot be successful if it were not executed.

Immediately the trader has assessed his risks and is confident of the potential profit from a trade, he then executes a series of trade that is capable of completing the triangular loop.

This has to do with the selling and buying of the selected currency at the calculated price inorder to profit from the discrepancies in the market

CONCLUSION

Triangular arbitrage is a very effective strategy that has to do with selling and buying of three cryptocurrency pairs just to exploit price discrepancies.

Several tools are being used by trader alongside some effective mechanism inorder to exploit price discrepancies.

As we continue our discussion, we will learn more about triangular arbitrage trading.