New to Forex? Here’s What They Don’t
Tell You
If you are new to the foreign exchange market then we strongly
recommend that you take the time to read our introduction
to forex and our article on the unique
interbank structure of FX.
This page has been designed to help you navigate through the barrage
of multi-million dollar marketing that is designed to make forex
seem extremely attractive to you. In our opinion, a large amount
of this marketing makes fx trading sound easy (which it is not)
and thrilling (which encourages you to involve
your emotions, much
like gambling). While it is well within the rights of the retail
forex industry to attract customers we believe that this type of
marketing is less than truthful and contributes heavily to the
large percentage of traders who fail (ultimately lose more money
than they earn). Below you will find examples of the kind of statements
you might read throughout the web and our translation of them.
We aim to tell you what the retail forex marketers do not.
Forex is the largest market in the world, with an average
daily volume of roughly $2 trillion
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So
What?
True, the forex
market does boast the largest average daily volume of the
worlds financial markets but what does this actually mean
for you? There are no official volume figures because forex
does not operate from one central
exchange but you will hear
figures ranging from 2-3 trillion US Dollars depending on
your source. The important thing is not to take this as a
sign that there is a larger amount of money available for
the taking than in other markets. The amount of money you
are able to make depends on your ratio of winning trades
to losing ones and your risk-reward parameters, not the amount
of business done in the market
Liquidity
The true benefit of high daily volume is liquidity. The forex
market is liquid 24/5 which should provide trading opportunities
for speculators in all
world time zones. However it should
be noted that this added liquidity does not completely
eradicate slippage, especially immediately before and after
economic data
releases..
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Market Dominated by Investment Banks
Furthermore extremely large investment banks and multinational
corporations generate the vast majority of this daily volume. A
large proportion of their business does not have anything to do
with technical or fundamental
analysis and is conducted to meet
general business needs. This means that there is a strong argument
against the reliability of short-term technical
levels because
general business is conducted when needed, not when a chart
level suggests it would be a good idea.
No
Allowance for Risk
Retail brokers are quick to advertise the massive leverage they offer. It
is typically 100:1 (for every $100 dollars of currency you
buy/ sell you need just $1 in margin) and can be as high
as 500:1. However, what this statement does not acknowledge
is the need to cover your risk. If you open a $100 000 position
(the size of one standard lot) with a stop loss of 20pips
it will cost you $1 000 in margin. However you will need
an additional $200 (20 pips multiplied by $10 a pip incurred
when trading 1 standard lot) to cover your stop
loss and
prevent your position from being liquidated early which takes
the total to $1 200. This is an additional 20% requirement
on top of the original statement. Of course if your stop
loss is larger, or smaller, than the one used in this example
this figure will change. However the point is that much more
than $1 000 will be required in real terms to trade $100
000, especially if you want to make more than one trade! |
You can command a $100 000 position with just $1
000 down
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What About Spread?
As a side note it should be mentioned that almost every broker
would liquidate (close) any open positions should your account
show a debit balance. So, if you have $1 000 in your account and
you open a trade for 1 lot your balance will read $0. You haven’t
lost the money, it is being used as margin for the trade but it
does not count towards the balance of your account. So if the trade
moves 1 pip against you your balance will show $-10 and the trade
will be closed. In actual fact $1 000 would not even allow you
to open a $100 000 trade because of the spread. If you go long
with a spread of 3 pips you are automatically down $30 because
the offer is 3 pips higher than the price that you can close out
(the bid). Therefore $1 030 would be the absolute minimum needed
to open the trade.
Beware of Some Reported Percentage
Gains
Certain services will often use the figures we
have mentioned to over inflate their profit performance without
any allowance for the size of their account. For example, making
30 pips profit ($300) on a 1 lot trade is not a true 30% gain.
The size of the gain is dependant on the size of your account.
As you can see from our performance
table, we average over 400 pips per month
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When is a pip
not a pip?
When it is half a pip. It seems that most signal/
system
services are over generous with the truth when reporting
their performance. To illustrate this fact we will use an
example.
Here Comes the Maths
Suppose I am trading in a chat room and I receive live calls
from the service provider. Now he/ she has taught me to scale
my exits when I am in profit. So I trade 2 lots and exit
1 lot at the first profit target and 1 lot at the second.
The first call of the day comes out to short EUR
USD at 1.3500
with target 1 at 1.3490 and target 2 at 1.3480, both including
spread. This trade goes well and I exit 1 lot at 1.3490 and
my second lot at 1.2480 as planned. For reporting purposes
this trade is listed as a 30 pip profit
(3500 - 3490
= 10 pips) + (3500 - 3480 = 20 pips).
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The second trade of the day comes
out after a market retrace and we are again advised to short EUR
USD at 1.3500. The same targets are used as the first call and
I think the trade looks good so I short 2 more lots at 3500. However,
this time the trade moves against us and we are instructed to exit
our trade at 1.3520, including spread. This equates to a loss of
20 pips (3520 - 3500 = 20). No further trades are made and
the end of day performance is noted down as + 10 pips (our 1st
trade of +30 minus our 2nd trade of -20). The problem here
is that my account does not reflect a profit of 10 pips, in reality
it reflects a losing day. But how can this be? It can be explained
as follows:
My first trade was entered at 1.3500
on 2 lots or $200 000. It was closed out 50% at 1.3490 and 50%
at 1.3480. 1.3500 - 1.3490
= 0.0010* 100 000 (1 lot, half of my position) = $100. 1.3500 -
1.3480 = 0.0020* 100 000 (the 2nd half of my position) = $200.
Total profit $300.
My second trade was entered at 1.3500
on 2 lots. It was closed out, 100% at 1.3520. 1.3520 - 1.3500
= 0.0020* 200 000 = $400. If we subtract my winnings from my loss
I am left $100 dollars out of pocket. This example assumes the
best-case scenario and does not account for the slippage that can
occur that can occur when opening and closing trades. In almost
every case published results will not account for slippage making
them even more inaccurate.
Inacurate Reports are Commonplace
Unfortunately it is common practice to report results in terms
of pips without any weighting for the number of lots played. It
is explained away with the excuse “everyone plays
a different number of lots depending on their account size” but
if scale outs are encouraged then results should be adjusted accordingly.
Pure
Hype
We have so
many bones to pick with statements like this one we
don’t know where to begin! Most poignantly, trading
strategies are discretionary in their very nature. The best
traders operate with a strict set of rules but they have
the experience that enables them to read the market and apply
the correct set of rules at the correct time. There is no
market holy grail. A trading
strategy may well be very profitable if employed at the optimum
moments. Therefore the statement should read “By taking the very best trades you can
achieve anywhere from 400 to 100 pips per month with this
powerful strategy”. If you have not developed the experience
required to apply discretion to your trading then it is impossible
to take the “best” trades. Any way we are all
different so who is to say what the “best” trades
are in the first place.
Guaranteed Pips?
The statement also implies that you are guaranteed at least
400 pips per month just by ‘turning up for work’ so
to speak. That is an extremely favourable minimum implied
return to say the least. The reader automatically thinks
that the harder they work the higher up the ‘400 to
1000’ scale they will come. However missing an opportunity
because you were out at the store or getting some well deserved
rest is not factored into the results and the minimum figure
may seem like dream territory after a few weeks. The concept
that trading is about 'working smart' and not 'working hard'
is sadly lost in these situations.
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You can achieve anywhere
from 400 to 100 pips per
month with this powerful strategy
|
Hypothetical Results
In almost every case you will find
that performance figures are based on ‘hypothetical results’.
What this means is that the system owner hasn’t actually
carried out a trade but they have looked at their chart and noted
down the results. The problem with this is that slippage and re-quotes
(both of these are rife during times of important
economic releases)
are not accounted for, neither are the slight variations in the
prices quoted by different brokers. For example, if broker ABC
quotes the EURUSD and 1 pip higher than XYZ at any given moment
in time it could mean the difference between a limit
order not
being filled or a stop order being hit before a trade goes on to
become a winner. Although it doesn’t sound like much the
odd trade here and there can make a great deal of difference. You
will find that publishers are required to add a disclaimer to their
hypothetical results page. You should read this statement very
carefully and be aware that live trading conditions can and will
make a large difference to reported results.
Stocks are going down - make
money in both directions when you trade FX
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Don't be Afraid of a Bear Market
It is true that you can make money whether the price of
a currency pair is moving higher or lower because in each
transaction you are simultaneously
buying one currency and selling another one. If you believe the value of the US
Dollar will increase against the Euro you can go short EURUSD (selling
Euros and buying Dollars) and vice versa if you believe the
US Dollar to be weak.
However, the statement implies that you
cannot make money when the stock market is falling. This is
not true. It is possible, and frequently exercised, to short shares. In fact some of the most famous
traders of all time have made most of their money during bear
markets. The idea
that falling shares means losing, or certainly not gaining,
money comes from the old ‘buy
and hold’ or traditional investment stereotype. |
Be aware of the broker asterisk!
The retail forex market is still relatively young and is
becoming increasingly competitive.
Retail brokers are fighting
for your business and offering the most attractive spreads,
instant fills and even some start up capital are their main
marketing weapons. However you should be aware of the small
print when considering these offers rather than taking them
at face value.
Instant Fills?
There is no such thing as a guaranteed instant fill and
the small print will tell you as much. Expect to read that
during times of ‘increased market volatility’ the
sheer volume of orders and speed of price fluctuations make
it impossible to guarantee fills. Simply put this means that
you are likely to experience slippage. This is part and parcel
of trading so it is very important not to expect perfect
fills, especially at times of high volatility. By altering
expectations new traders can avoid unpleasant experiences
and reduce the chance of getting burned by the market.
Fixed Spreads
Offering a fixed spread of say 2 pips is subject to the
same restraints as instant fills. During times of high volatility
such as news announcements,
market dynamics can cause the spread at the interbank level
to widen naturally. If a retail broker offers a fixed spread
then they are not able to reflect this in their quotes. The
result would be multiple re-quotes for their clients because
the prices they are displaying do not exist in the market.
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We offer instant fills*,
2 pips spread* on majors and $100
start up capital*
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Alternatively a retail broker can
abandon a fixed spread structure during news times. This gives
them more leeway to execute client orders. However, the degree
to which the spread is widened is often much greater than natural
widening at interbank level. This has the effect of dissuading
some traders from entering the market and at the same time the
extra premium makes it harder for those that do enter to book a
profit.
A fixed spread is a broker’s
means of collecting some profit on every trade without having to
charge commission. In recent times retail clients have begun to
recognise the limitations of the fixed spread model and have switched
to ECN style brokers who claim to offer direct access to interbank
prices. ECN brokers charge commission per trade based on the size
and frequency of trades.
Free $100?
Start up capital is a relatively
new offering and as you may expect it is not as easy as opening
an account, making a deposit and receiving a free $100. The start
up bonus is not available for withdrawal, (for at least the first
three months if at all) rather it can be used as margin or to subsidise
client losses. There are usually some qualification criteria such
as minimum initial deposit and number of trades per month. These
factors guarantee the broker a certain amount of business from
the client making the proposition financially viable and very profitable
(statistically 90%+ of all traders lose money and it is common
practice for brokers to take the other side of client positions).
Also be aware of…
There are certain statements
that should not be used in context with forex trading. Anything
that uses the word “easy” or
attempts to bring your emotions into play by compelling you to join
the “thrill” or experience the “rush” should
raise little red flags. No form of trading is easy and the foreign
exchange market is no exception. Without going into too much
depth regarding trading psychology, emotions should be checked at the
door every morning before trading begins.
If you are new to forex trading it is very important that you
conduct your due
diligence and we have provided some resources
to help you do just that. Please take the time to browse through
the various sections and if you can make
a contribution then doing so will help
our other users.
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