Triangular Arbitrage

For trading purposes, currencies come in pairs. Like pants, or turtle doves. Dollar/euro, euro/pound, pound/dollar, etc. Meanwhile, currencies also trade against each other in multiple combinations simultaneously. So while the dollar is trading against the euro, it is also trading against the pound.

The currency pairs move independent to each other, leading to the possibility that a currency might become (however briefly) more highly valued as part of one pair than as part of another. This state of affairs opens the door the triangular arbitrage.

A trader notices a market inefficiency. The dollar has moved more against the euro than it has against the pound. To take advantage, they cycle around through two currencies to end up back to the first currency again. They turn the dollars into pounds, the pounds into euros, and the euros back into dollars. Move fast enough (before the market inefficiency disappears), and the trader ends up with more dollars than they started with. Triangular arbitrage.