Triangular arbitrage is a form of arbitrage that involves exploiting price discrepancies among three different currencies in the foreign exchange market or other financial markets. The concept is based on the idea that exchange rates between three currencies should result in a consistent cross rate, and any deviation from this equilibrium creates an opportunity for profit.

Here's a step-by-step explanation of triangular arbitrage:

Identify Opportunities:
- Look for inconsistencies or pricing discrepancies in the exchange rates among three currencies (A, B, and C).
Check Cross Rate:
- Calculate the implied cross rate between currencies A and C based on the exchange rates of A to B and B to C. The cross rate should ideally match the actual exchange rate between A and C.
Evaluate Discrepancy:
- If the calculated cross rate is different from the actual market rate, a triangular arbitrage opportunity exists.
Execute Trades:
- Execute a series of trades to take advantage of the pricing discrepancy and make a profit. The trader buys and sells the three currencies in a triangular sequence to exploit the inefficiency.
Complete the Loop:
- The trader starts and ends with the same currency, completing the triangular loop. The goal is to end up with more of the starting currency than initially held.
Profit:
- If executed correctly, the trader makes a profit from the price difference in the triangular arbitrage loop.

It's crucial to note that triangular arbitrage opportunities are often short-lived and quickly corrected by market participants. The efficiency of modern financial markets, along with automated trading systems, makes it challenging for traders to exploit these opportunities consistently.

Additionally, triangular arbitrage is more common in decentralized markets or less liquid currency pairs. In major currency markets with high liquidity, any pricing discrepancies are quickly corrected due to the large number of participants and the speed of information dissemination. Traders engaging in triangular arbitrage need to act swiftly to capitalize on the fleeting opportunities.