Using Arbitrage in Binary Options
Arbitrage in Binary Options commodity chart
Although its hard for retail traders to get involved in arbitrage, that doesnt mean its principles cant be used in a way to get more of our trades to expire in the money. This isnt so much a strategy but more of a technique to glean more information out of the market than technical indicators will show.
Arbitrage is not an exclusive domain of currencies, but realistically it only be applied with an acceptable amount of simplicity to binary options using currency pairs. To better understand how we can use this with binary options, lets go over the basics of currency arbitrage.
The Bare Bones of Using Arbitrage in Binary Options
Currencies are traded in pairs, and move in price relative to one another. As demand for one currency increases, its value goes up. Sometimes, there will be a lot of demand for a currency and its price will go up relative to just one other currency. This causes a gap between the prices of currencies, where a savvy trader can buy with one currency and sell with another at a significantly higher price.
In the real worlds, with computers and instant communication, those price differences are relatively rare, because whenever one happens, major trading institutions come in and balance the price.
However, this has a practical effect on most currency pairs, and keeps them trading at a relatively stable rate amongst each other. So if, for example, the Euro were to drop in value versus the Dollar, it will almost instantaneously lose value against the Yen. Using the relative value of currencies between their pairs can give you some insight into where the market might be going.
An example of using arbitrage in binary options
For example, if you are tracking the Euro, and your analysis shows that the Euro will be higher against the dollar, but stay the same against the Yen, you can estimate that the Dollar is getting weaker. This allows you to collect extra data points to generate trade opportunities, and confirm trends. In this case, you can apply your analysis between the Dollar and Yen and confirm that the greenback is getting weaker. Now, if you place a call on the EURUSD, you have two independent signals telling you that the pair will go up.
Conversely, if you have the Euro gaining against the Dollar, but not the Yen; and then you dont find any weakness in the dollar, you have the chance to escape from a potentially losing trade. No strategy is perfect, and using this arbitrage trick you can help you identify when a strategy is giving you false signals.
In summary, when you get a signal for a pair, you can triangulate the signal by analysing a third pair and confirming the market move.