Now, most of us don’t have the money to invest in arbitrage and even fewer have the stomach to be successful scalpers. Still, it’s important that anyone participating in financial markets understand what these two techniques are.

Let’s begin with the les likely of the two – arbitrage. Despite what I said a moment ago, there IS a good chance that personal computers will enable us to invest in arbitrage. Remember your first computer? Compare it to what you have today in your pocket. The method was first tried out in France in the 18th century by a French mathematician, Mathieu de la Porte. Coming from a maritime family, he realized, one day, that he could make money off of the exchange rate differentials by issuing a bill of exchange in one place and settling it in another – an early kind of forex exchange.

Back in his day, reports of exchange rates had to be transported by horse. Today, though, they’re reported at the speed of light, so you have to have a pretty fast computer to discover a discrepancy between markets, place and close an order. For arbitrage to work, we need to have identical assets being dealt in different exchanges – a commodity, a dual-listed company, and so forth. But we can also look for market imbalances: where the asset is over or undervalued in one market but already adjusted in another. In mergers and acquisitions, the buying company’s shares will usually be above fair value and the bought company’s below. After the sale, shares will adjust. In short, we’re waiting for an imbalance to adjust and hope we can ride the movement.

Scalping is something that’s more accessible. It comes from the concept of skimming, and it’s what we do with the spread. Simply place short and quick positions that rise or drop just beyond the spread and close them. Lots of really small profits throughout the day instead of few large ones. The asset needs to fulfil two main conditions: a low spread so that there won’t be much room for surprise and liquidity, which means that movements will be less volatile, more clear-cut. Of course, the asset class that best FULFILS these is forex. And to make it even MORE certain, we’ll go for the majors and wait for maximum liquidity – time spans where two major markets are open at the same time, say London and New York.

Let’s look at the Eurodollar, here. The spread is about 3 pips and we’ll put our stop loss just below our entry level – that way the order won’t close on the spread the moment we open it.

Exit order here are crucial and so are nerves of steel. In both cases, it’s not surprising to see the number of trading bots that are available. Even THEN, scalping is a perfect fit for adrenaline junkies. You’ll find yourself glued to the screen, so a certain level of self-control should be cultivated.