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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 a day
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 foreign exchange.
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.
Furthermore the vast majority of this daily volume is generated by extremely large investment banks and multinational corporations. 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.
You can command a $100 000 position with just $1 000 down
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!
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 havent 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.
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
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.
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).#p#???????#e#
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 unaccurate.
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.
You can achieve anywhere from 400 to 100 pips per month with this powerful strategy
We have so many bones to pick with statements like the one above we dont 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.
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.
In almost every case you will find that performance figures are based on hypothetical results. What this means is that the system owner hasnt 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 differences in price between 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 be 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 doesnt 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
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.#p#???????#e#
We offer instant fills*, 2 pips spread* on majors and $100 start up capital*
Be aware of the broker asterisk! The retail forex market is still relatively young and is becoming increasingly competitive. 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.
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.
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.
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 brokers 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.
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.