Arbitrage

Being a new trader for a while, wrapping my mind around what Arbitage meant was tricky at first, I couldn’t grasp the concent simply because, well, I’m not an economics major nor do I have the capacity to purchase currencies from any bank I want with my brokers.  In Forex, Arbitrage is the purchase or sale of a currency while simultaneously taking the opposite position in a related market in an attempt to take advantage of small price differentials in the two different markets. ((Burrell, Jamaine 2007 “The Complete Guide To Currency Trading & Investing, p 119)) Burrell describes it as a trader who buys 200 Yuan from one bank for $1 and sells it to another who is willing to buy it for $1.11, take that $1.11 and buy 220 Yuan and sell it to the other bank for $1.23.  Each transaction resulting in more profit, which compounds over time (10% of each transaction from what this example shows).  So you can see how Arbitrage on a bigger scale can make $1000′s for traders, fund managers, and bankers with very little effort and almost regardless of the exchange rate.