Keep Your Friends Close, Keep Your Forex Broker Closer

I could go on letting you believe that your retail foreign exchange (Forex) broker is on your side. While I’m at it, I might as well let you believe that every infomercial salesman is out for your best interests too. The truth is your friends are not always who they say they are and not everyone you trust is going to be there to look out for you, least of all the typical broker in today’s retail currency trading industry. If you trade Forex, you’re in the largest hunting grounds of the financial markets — and in this worldwide dog-eat-dog multi-trillion dollar jungle, you trade reality so get used to facing it. On the other hand, sometimes what others believe are the worst things in the world can be used to your advantage. 코인마진거래

Read the service agreements and contracts. When a Forex broker says that they are a counter-party to your trades, and they’ve given themselves the choice whether or not to hedge your positions, what that means is that unless they choose to take action they generally win when you lose and vice versa. Under some situations, they net all their customer positions and take a trade with a tier 2 bank (their liquidity provider) to flatten their own net exposure. In most cases, however, they can actually maximize their profits by simply not doing this because the majority of their customers are consistently-losing gamblers who blow their entire accounts and might even re-deposit a few times to repeat the pattern and increase their profits further.

Does that mean you should stop trading retail Forex? Not at all. If we gave up every time we found out something wasn’t ideal in the world, most of us probably would’ve stopped playing the game of life after kindergarten. Just be aware of the real structure behind what you’re doing because there are usually ways to turn some of the market’s attributes into an edge of your own.

In fact, when I began my career as a proprietary trader, I routed many of my orders through to the human NYSE market makers to save on ECN (electronic communications networks) fees, which are charged for removing liquidity. I did this knowing full well that the market makers played the opposite hand most of the time. That was fine because my trades never depended on their good will. Plus, when the market was slow, I could take quick profits by using the market maker’s moves to my advantage — I would then route a closing order through an ECN like Archepelago (now NYSE Arca) who would in turn pay me a rebate for adding liquidity to the market. Aside from any market profits in the trade, this gave me a small profit in the commission structure alone, since the ECN rebate was larger than the market maker’s fee. With large lot sizes, these rebates amounted to large bonuses simply for placing trades. (In the order that we did this, it was perfectly legal — and still is — even in such a heavily regulated market as the NYSE.) If the logic of this technique is going over your head, don’t sweat it. It’s not important for you because the equivalent situation would never happen in the retail Forex market anyway. Just take from it that, sometimes, you can make a good thing out of an apparently unfavorable situation through a little creative maneuvering.

In the retail Forex world, there’s a few unique advantages of its own for you, the individual trader.

The first is what I like to call the multiple account edge. There is absolutely no one stopping you from opening more than one account at different retail Forex brokers at the same time. In fact, if you had $20,000 US dollars to start, I would definitely not recommend depositing the entire sum at any one single broker. You could either spread the sum between different brokers and gain the advantage of being able to route your trades through multiple market makers (a common practice for institutional traders) or simply deposit only what is needed to cover margin and drawdowns and keep the rest in a safe, insured, interest-bearing account or money market fund.

Consider the fact that most brokers in this industry are offering ridiculous levels of leverage (500:1 is fairly common these days) and some of these brokers offer a “no negative balance guarantee”, meaning you can never owe more than the amount you deposit.

So, if you’re a smart trader who knows that you should risk 2% (at most) of your total trading capital on any given trade, then instead of maximizing your leverage, use it as a way to deposit less of your real capital into your account. That way, any trade would still work out to the same effect on your overall capital, yet a disastrous event against one of your positions can only wipe out a small portion of your real trading capital (it can only touch the portion you actually deposited, as opposed to your entire notional account) thanks to the broker’s policy against negative balances.

To help you understand how to go about doing this, here are some simple calculations for this method. Re-read it a few times and take notes if you have trouble understanding the logic of it on the first time through.

For beginners, having $20,000 start may sound a little out of your league but the same calculations work for any size of account since it’s based on percentages (and will, therefore, compound as you grow your money) so let’s assume you have a starting wad of $1000. Since micro and nano lots are offered by many of these brokers, it should work out just as well as for a trader with $20,000 to start.

For this example, we’ll go with 2% risk per trade, which is actually the higher end of per-trade risk among professionals. When you’ve built up a larger amount, you might even want to go down to 1% or even less. For now though, here’s the calculation:

Author: Edna Lewis