Arbitrage is a trading strategy that involves buying and selling the same asset in different markets to take advantage of price discrepancies. By exploiting these price differences, traders can make a profit without taking on significant risk. For example, if a stock is trading at $100 in one market and $102 in another, an arbitrageur could buy the stock in the first market and immediately sell it in the second market, making a risk-free profit of $2.
Arbitrage is an important trading strategy because it can help traders to generate consistent profits. It is also a relatively low-risk strategy, as it does not require traders to take on significant directional risk. However, arbitrage can be a complex and time-consuming strategy to implement. Traders need to have a deep understanding of the markets in which they are trading and be able to quickly identify and exploit price discrepancies.