Arbitrage Trading Questions and Answers

The experienced trader Alex Karpinski has agreed to answer all of your questions today.

 Alex, first of all, I’d like to thank you for taking the time to be with us today.

It’s my pleasure, Boris. We have known each other for more than seven years, and I could not say no to you.

 Alex, you have been involved in arbitrage trading for a number of years now and your monthly profits are in the hundreds of thousands of dollars. How difficult is it to attain steady success when trading with arbitrage systems?

 You are right. I really have been trading successfully and my performance has been steady, with a monthly trading income of more than $100,000, even though I initially started my trading with small deposits – $100-200. It’s not that difficult to achieve steady success, but you do need discipline, by which I mean the ability to come up with a plan for your trading strategy and stick to it. You also need to understand the software products that you use and master all the parameters.

I am sure you will have some other recommendations as well. We’ll get to that in a moment. The one question that my clients always ask me is if I can recommend certain brokers and certain settings in their trading systems. Can you recommend a broker and any particular settings that can enhance a trader’s success?

 Boris, I think you know the answer to that question. Even if I reveal the name of the broker that I use for my trading and mention some of my preferred settings, there is no guarantee that the same broker and settings will work for other traders as well. I will tell you something else. In my opinion, a trader who asks such questions is unlikely to be very successful.

Yes, I do know that. I opened an account with one broker for testing purposes about a year ago and have not had any issues trading with that company, but there have been complaints by many clients that the broker simply stops filling their orders. Can you explain why that is?

Well, successful arbitrage trading is about more than just the right broker and the right settings. There are a number of other factors. Arbitrage trading requires the right setup, which every trader should build based on the trader’s means.

Let me elaborate. When I first started to trade, I had about $800 to play with. I opened four accounts with four different brokers, allocating $200 to each account, and traded in a way that disguised my activity and lowered the brokers’ vigilance. I ended up making approximately $2,000 in each of the accounts. This attracted the attention of two brokers, who promptly asked me to withdraw my money and closed my accounts. The other two accounts, however, remained active for another two months. This is not a very professional approach and one that can, in many cases, lead to a situation where the broker will pay you your deposit and keep all the gains. But this approach makes sense if you have no more than $200-800 to play with.

What did you mean by “lowered the brokers’ vigilance”? Could you explain that?

 Initially, your trading activity should not suggest to the broker that you’re engaging in arbitrage trading. It is best to open orders manually or through a forex robot using the same currency as for your arbitrage trading, and continue trading that way for a bit before activating your arbitrage trading software.

You should also monitor your trading at all times. If you see that the broker has flagged your account and added it to an anti-arbitrage plugin, you should stop your trading right away. There are all sorts of anti-arbitrage plugin control slippages for different market conditions and different types of clients, such as scalpers, and news and arbitrage traders.

 If arbitrage trades represent no more than 20-30% of the total number of your trades, it will be more difficult for the dealer to identify your account as an arbitrage – toxic – account.

Would you advise using the same approach for those who have large deposits?

Yes, the approach is pretty much the same. You trade actively in your account and make sure that no more than 20-30% of your trades are made by arbitrage systems. Also, your arbitrage trading should only kick in about a month after you have started trading.

I’d like to add something as well. Some of my clients have the bad habit of switching from one broker to another after two or three unprofitable trades, losing valuable time in the process. In my opinion, it is much more sensible to get several accounts ready and engage in normal trading for the first month or so. Then, once you feel you’re ready, you can start implementing your arbitrage trading. It is better to spend a month trading quietly than to lose time closing and reopening accounts later. And by the way, once your account has been flagged by the broker, even if only once, that account will be marked accordingly in the future. At that point, it is too late – the one-month trick will no longer work.

 Do you use 1-leg or 2-legs arbitrage?

 I use both. I find that 1-leg arbitrage works well when I am trading on major news and with several currencies. At other times, I use 2-legs arbitrage.

Aside from lowering the broker’s vigilance, what other factors are important for trading success?

 There are a few additional factors that need to be taken into account. Your server should be in the same data center as your broker’s server. For 2-legs arbitrage, both brokers and the server should be in the same data center. If one of the brokers is in New York and the other in London, as is the VPS, then the broker in New York will reject your orders because, by the time the order is transmitted from London to New York, the price will have changed. For 1-leg arbitrage, the slower broker and the VPS should be in the same data center. It is also advisable for the source of faster quotes to be in the same data center as well.
Do you trade through FIX API or through MT4?

 I trade through both, actually. FIX API offers more stability, though. Also, it is easier to resolve slippage-related issues with FIX API brokers. They are more accommodating when it comes to spreads and are more flexible overall than MT4 brokers.

What do you think of our own arbitrage software? Do you find it useful?

Truth be told, I find your arbitrage software to be the best that I have used to date, bar none. I also have a lot of good things to say about your team. You are constantly seeking to improve your software products and add new functionalities, which is crucial to a trader like me.

Let me try to sum up everything you have said, Alex.

A successful setup for arbitrage trading requires a VPS that is located in the same data center as the slower broker when using 1-leg arbitrage. For 2-legs arbitrage, the VPS should be in the same data center as the two brokers used. It is advisable to open accounts with FIX API brokers and, for 1-leg arbitrage, to trade using non-arbitrage systems for the first month before implementing your arbitrage system by adding it to all the other systems. Finally, avoid switching brokers all the time.