Using Arbitrage Trading In Your Trading SystemAlso known as a "riskless profit", the trading system through arbitrage works by the simultaneous purchase and selling of a security in order to profit from a differential in the price. This trading system usually takes place on different exchanges or marketplaces. An arbitrageur banks on the difference in the prices of the stocks in two different exchanges because of the fluctuation in the exchange rates. An arbitrageur buys a stock on a foreign exchange that hasn't adjusted for the constantly changing exchange rate. He purchases undervalued stock and short sell the overvalued stock, thus profiting from the difference.How arbitrage WorksArbitrage trading , a trading system, works in this way: A trader wants to sell a share at a specific price. He places sell order on the first exchange at that price and simultaneously buys order at a higher price on the second exchange.As a result, some investors may then place a buy order on the first exchange lured by the higher price offered on the second exchange. As soon as his sell order matches a buy order on the first exchange, he cancels his buy order on the second exchange. Thus, he not only gets out of his illiquid stock but also actually makes good money out of it. For example: you buy stock in XYZ Inc. (ticker: XYZ) for $25 per share in the United States. Meanwhile, you see that it's currently selling for $25.50 per share in England. If you simultaneously buy shares in the US and sell the same number of shares in England, you would earn a profit of 50 cents per share (not counting commissions). This may not seem like much, but it adds up quickly if you're dealing with massive numbers of shares. That's why those who practice arbitrage trading are usually institutional investors with millions to invest. Day-Trading-Strategy .com, P.O. Box 89029, Houston Texas, 77289 info@Day-Trading-Strategy.com |