Understanding the Forex Market 2

Second Part from Justin Leblanc and some words about mini accounts processed by Banks: 

Having said all of that, I’d like to make a few additional points about the Forex markets, execution, and our platform. In reality, the retail Forex world is made up largely of unsophisticated traders who have not traded anything before. You can usually recognize these people because they are looking to trade at higher margin levels and expect executions that the market cannot provide. 

The Forex markets are more highly leveraged than the futures market. We offer 100 to 1 leverage. Professionals rarely use 20 to 1 leverage. Retail traders with no experience are constantly looking for higher leverage, up to 400 to 1, which shows their lack of experience. Few of these traders last long in the Forex markets. 

In addition, there are many people who think that they are “entitled” to fills because they want to buy at certain prices. This happens most commonly on “news spikes” due to economic data. People try to place market orders on the news and then are surprised if their fills arrive within a split second, but 30 or 40 or 50 pips away from where the market was before the news. Few of these people actually understand what they are trading. 

Let’s consider a few points.

In exchange rate terms, $0.01 of movement between the Euro and USD is 100 pips. That means that if news comes out and the EURUSD moves 30 pips in a second, that’s $0.003. In other words, it is not measurable in real terms. However, a trader trading at 100 to 1 margin may expect that they should be filled at a price that existed before the news hit. 

When I ask traders if they would be willing to sell the EURUSD at the price it was trading at before news hit that caused a 30 pip spike, they say no. But they expect that banks will make those prices available. In other words, they aren’t willing to accept the consequences of a “market.” Trading on economic news in the Forex world is the most dangerous type of trading that one can do. Having said that, let’s consider what the various platforms offer to protect the trader.

Traditional deal desk platforms offer very little in this regard. The trader is either buying or selling or doing nothing. Orders are largely market and stop (market) orders. However, STP and ECN platforms (which are both NDD platforms, and EFX handles BOTH of these types of orders) execute any marketable orders instantaneously. That means if you are a buyer at the market and there is a seller at a price and no one has bought from him/her ahead of you, you are filled at that price. It is a true market. There is nothing that says that you deserved to get filled 20 pips back because that would have made you money.

The Forex market has come a long way in the last two years. Traders should look for platforms that offer the following:

1) Fraud protection in the form of Fidelity bonds.

2) Segregation of client money.

3) True executions.

4) Lots of liquidity.

5) A good variety of order types, which professional traders should use to control their risk. No one should EVER place a market order when they can limit themselves to fills 5 or 10 pips above the market.

On a true STP/ECN Forex platform, no trader that understands executions should ever have issues with getting extremely bad fills (slippage). Everything should be in-line.

I have spent a lot of time watching thousands of people trade the Forex markets. Forex is a very exciting market with massive liquidity. With platforms like EFX GROUP / MBTF, which offer true STP and ECN technology, it should be a true “trader’s market,” as long as that doesn’t suggest to traders that they are entitled to fills that don’t exist in fast markets or that reckless use of market orders should always be rewarded. 

When the exchange rate between the Euro and the US Dollar moves $0.01 in a day, that’s 100 pips. This is a microscopic move that is only remotely tradable because of the leverage used in the Forex markets. 

I think a lot of people have expectations that go well beyond reason when it comes to the Forex markets. 

To summarize:

I think that things are moving closer to a centralized market place with good regulation about the limits to which a seller or buyer can price themselves away from the market but still fill a retail client. 

I think within a year or two, platforms like EFX GROUP / MBTF will have completely altered the landscape of Forex just like ISLD and ARCA did in the US stock market back in 1995-7. In the meantime, stick to the platform that safeguards your money, gives you the most options, and provides you with direct, unhindered access to the liquidity that is out there. Make sure that your funds are secure from fraud and protected from co-mingling with your platform. Make sure that your funds are held on-shore, not off-shore. 

With all of that, it’s just about your trading skills.

Justin LeBlang

EFX Group

The (common) misperception here is that banks trading on the interbank system only deal in standard lots. This is, in fact, not necessarily the case. If a platform shows enough volume and acts in a consistently professional manner toward the banks, it is possible to get sub-standard lot liquidity from the banks. Not sure who keeps saying otherwise, but this is the case. Our system handles increments of $10,000 or higher (what you consider minis) in an STP (Straight Through Processing) manner directly to the banks. At no time is a mini or standard handled by a deal-desk in our system.

Justin Leblanc

EFX Group  

I wanted to help shed some insight, if possible, on the theory about banks trading mini’s or not trading mini’s. It used to be accurate to say the banks didn’t trade in less than 100k but that is no longer the case. They do indeed trade in size far less now than that of 100k. This is in part due to lower CLS fees. It also is in part of a firm’s overall relationship with the bank(s). 

I have a few banks that will actually trade as low as $1 but the point in this is that they do not have any minimum. MBT has successfully built an Equities, Options, Futures, and now Forex business of direct access technology. We have used the same methodologies that won us the #1 rated software based brokerage firm by Barrons to apply to direct access Forex. With our technology and relationships with a multitude of banks I think you will find that direct access is the way to go if you want a true type of market to trade Forex in for speed of execution and more importantly, quality of execution. 

I know this is a fairly simple response but it really is not necessarily a complicated issue to address. I hope it helps everyone in understanding.

Regards,

Steve

MBTrading