Triangular Arbitrage

Triangular arbitrage is a forex trading strategy that exploits discrepancies between three different currencies to make a profit. It involves converting one currency into a second, then into a third, and finally back into the original currency. The trader profits if the exchange rates between the three currencies are misaligned, creating an opportunity to buy low and sell high in a short period. Triangular arbitrage is typically performed with automated systems due to the complexity and speed required.

Example

A trader exchanges U.S. dollars (USD) for euros (EUR), then euros for British pounds (GBP), and finally pounds back into USD. If the currency rates are misaligned, the trader profits from the discrepancies.