If you’ve heard of trading, you’ve probably also heard of day traders. These fast-moving financial experts grow their wealth in the short-term, by making quick decisions about the value of various assets. Unlike long-term investors, who make purchases based on their speculation that the price of a security will increase over time, day traders look for minute movements in the market.
By taking advantage of small changes, based on things like economic unrest, political instability, and societal changes, the right financial expert can make a lot of money. One of the most common strategies these investors use to ensure they can make more cash, is arbitrage. Let’s take a closer look at how arbitrage works in the day trading market.
Learning how to Trade with Arbitrage
When you’re first learning how to day trade, you might come across the concept of arbitrage as a solution for making money. The idea is that you make money in this area by purchasing an asset in one environment and selling it in another exchange. The Arbitrageur in the strategy looks for an environment where they can purchase an asset at the lowest price, then they can sell that item at another price, usually on a different market.
The theory can be a little complicated for some beginners to follow, as it requires a careful evaluation of various markets. Additionally, it’s worth noting that this method only works because the markets are currently inefficient. If everything worked perfectly, there wouldn’t be discrepancies between the markets.
A long-term investor would often argue that the markets are inefficient for short-term sales, but can work perfectly in the long-run. This means that they can do their research today and ensure that they can make a profit in the longer. Traders, particularly those in the fast-paced day-to-day environment, need to make purchases based on what’s happening in the current environment.
Can You Make a Lot of Money This Way?
Ultimately, a lot of experts will agree that arbitrage shouldn’t be the only method you use to make a profit when you’re buying and selling shares in a day-trading environment. The reality is that if you expect to make money from this effort, you’ll need to pay close attention to the market at all times. If you’re only trading part-time, then you won’t be able to leverage meaningful moments in inefficiency which allow for profits to be made.
In most cases, you might choose to use moments of arbitrage as part of your day trading strategy, but focus on other efforts to ensure you can make money long-term. Because this method involves working extremely fast, it also requires some basic investments into the right technology. You need to have a fast-moving internet connection, and many professionals will often spend extra on automating their trading with specific pieces of software. If you have the skills to build your own automation software, or you’re comfortable with hiring someone to help you automate your solution for you, then you can still make a decent amount of income this way. Otherwise, you may need a more flexible strategy.