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What is a Triangular Arbitrage Strategy?

Triangular arbitrage is a technique that tries to exploit the price discrepancy across three different assets at the same time.
For example, we can exchange BTC for USDT, BTC for ETH and ETH back to USDT. If the net worth in doing these three trades simultaneously is profitable then the 3 trades are executed simultaneously.

Example of Triangular Arbitrage (Image by Author)

In this article we will be looking into the arbitrage opportunities within the same exchange, in particular we will be deep diving into triangular arbitrage approaches. The focus is to develop and implement a trading algorithm that can identify a profit and trigger the required trade orders for it.

Arbitrage is considered as a lower risk trading method as compared to the traditional trading where the timing of the buy/sell is crucial. Also in arbitrage, the profit/loss is known immediately as all the required trades are executed simultaneously.

Approaches for Triangular Arbitrage

There are different approaches of buying/selling the 3 assets to achieve triangular arbitrage. In this article we shall be considering two approaches.

Approach 1: BUY — BUY — SELL

BUY-BUY-SELL Approach of Triangle Arbitrage(Image by Author)

In the above example, we start with USDT as the initial investment. After performing the 3 trades, we are again left with USDT at the end. Here are the trades that will be performed:

  1. Buy Bitcoin (BTC) with Tether (USDT)
  2. Buy Ethereum (ETH) with Bitcoin (BTC)
  3. Sell Ethereum (ETH) for Tether (USDT)

At the end of the third trade, we can compare the final USDT with the initial investment that we started with in step 1. If this leads to a substantial profit then the 3 trades can be initiated simultaneously.

Approach 2: BUY — SELL — SELL

BUY-SELL-SELL Approach of Triangle Arbitrage(Image by Author)

Similar to the first approach, the same assets are used to check for arbitrage opportunities in a different flow. In the above example the following 3 trades are evaluated:

  1. Buy Ethereum (ETH) with Tether (USDT)
  2. Sell Ethereum (ETH) for Bitcoin (BTC)
  3. Sell Bitcoin (BTC) for Tether (USDT)

Trading algorithm — 4-step implementation

Here is an overview of the different steps to implement a triangular arbitrage trading algorithm. We shall be looking into each of these steps in detail in the next sections.

Step 1: Get all the valid crypto combinations
Step 2: Perform triangular arbitrage
Step 3: Place the trade orders
Step 4: Bundle it together

Before moving ahead with these steps we need to initialise the exchange to do the arbitrage. Select the exchange where you have a trading account and the one that supports api based trading. In this example I have used the Binance exchange as I have a trading account in this exchange.

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