“Don’t
allow someone to make you feel like you’re not good enough!”
Wednesday, April 5, 2017
Forex Market Structure
For the sake of comparison, let us first examine a market that
you are probably very familiar with: the stock market. This is how the
structure of the stock market looks like:
By its very nature, the
stock market tends to be very monopolistic. There is only one entity, one
specialist that controls prices. All trades must go through this specialist.
Because of this, prices can easily be altered to benefit the specialist, and not
traders.
How does this happen?
In the stock market, the specialist is forced to fulfill the
order of its clients. Now, let’s say the number of sellers suddenly exceed the
number of buyers. The specialist, which is forced to fulfill the order of its
clients, the sellers in this case, is left with a bunch of stock that he cannot
sell-off to the buyer side.
In order to prevent this from happening, the specialist will
simply widen the spread or
increase the transaction cost to prevent sellers from entering the market. In
other words, the specialists can manipulate the quotes it is offering to
accommodate its needs.
Trading Spot FX is Decentralized
Unlike in trading stocks or futures, you don’t need to go
through a centralized exchange like the New York Stock Exchange with just one
price. In the forex market, there is no single price that for a given currency
at any time, which means quotes from different currency dealers vary.
“So
many choices! Awesome!”
This might be
overwhelming at first, but this is what makes the forex market so freakin’
awesome! The market is so huge and the competition between dealers is so fierce
that you get the best deal almost every single time. And tell me, who does not
want that?
Also, one cool thing about forex trading is that you can do it
anywhere. It’s just like trading baseball cards. You want that mint condition
Mickey Mantle rookie card, so it is up to you to find the best deal out there.
Your colleague might give up his Mickey Mantle card for just a Babe Ruth card,
but your best friend will only part with his Mickey Mantle rookie card for your
soul.
The FX Ladder
Even though the forex market is decentralized, it isn’t pure and
utter chaos! The participants in the FX market can be organized into a ladder.
To better understand what we mean, here is a neat illustration:
At the very top of the forex market ladder is the interbank
market. Composed of the largest banks of the world and some smaller banks, the
participants of this market trade directly with each other or electronically
through the Electronic
Brokering Services (EBS) or the Reuters
Dealing 3000-Spot Matching.
The competition between the two companies – the EBS and the
Reuters Dealing 3000-Spot Matching – is similar to Coke and Pepsi. They are in
constant battle for clients and continually try to one-up each other for market
share. While both companies offer most currency pairs, some currency pairs are
more liquid on one than the other.
For the EBS plaform, EUR/USD, USD/JPY, EUR/JPY, EUR/CHF, and
USD/CHF are more liquid. Meanwhile, for the Reuters platform, GBP/USD, EUR/GBP,
USD/CAD, AUD/USD, and NZD/USD are more liquid.
All the banks that are part of the interbank market can see the
rates that each other is offering, but this doesn’t necessarily mean that
anyone can make deals at those prices.
Like in real life, the rates will be largely dependent on the
established CREDIT relationship between
the trading parties. Just to name a few, there’s the “B.F.F. rate,” the
“customer rate,” and the “ex-wife-you-took-everything rate.” It’s like asking
for a loan at your local bank. The better your credit standing and reputation
with them, the better the interest rates and the larger loan you can avail.
Next on the ladder are the hedge funds,
corporations, retail market makers, and retail ECNs. Since these institutions
do not have tight credit relationships with the participants of the interbank
market, they have to do their transactions via commercial banks. This means
that their rates are slightly higher and more expensive than those who are part
of the interbank market.
At the very bottom of the ladder are the retail traders. It used
to be very hard for us little people to engage in the forex market but, thanks
to the advent of the internet, electronic trading, and retail brokers, the
difficult barriers to entry in forex trading have all been taken down. This
gave us the chance to play with those high up the ladder and poke them with a
very long and cheap stick.
Now that you know the forex market structure, let’s get to know
them forex market playaz!
#ForexTrading #Forex #ForexMarketStructure
Tuesday, April 4, 2017
Quote of the day
“Nurture
your minds with great thoughts. To
believe in the heroic makes heroes.”
– Benjamin Disraeli
Monday, April 3, 2017
Why Trade Forex: Forex vs. Futures
The forex market also boasts of a bunch of advantages over the
futures market, similar to its advantages over stocks. But wait, there’s more…
So much more!
Liquidity
In the forex market, $5.3 trillion is traded daily, making it
the largest and most liquid market in the world. This market can absorb trading
volume and transaction sizes that dwarf the capacity of any other market. The
futures market trades a puny $30 billion per day. Thirty billion? Peanuts!
The futures markets can’t compete with its relatively limited liquidity. The forex market is always liquid, meaning
positions can be liquidated and stop orders executed with little or no
slippage, with exception to extremely volatile market conditions.
24-Hour Market
At 5:00 pm EST Sunday, trading begins as markets open in Sydney.
At 7:00 pm EST the Tokyo market opens, followed by London at 3:00 am EST. And
finally, New York opens at 8:00 am EST and closes at 4:00 p.m. EST. Before New
York trading closes, the Sydney market is back open – it’s a 24-hour seamless
market!
As a trader, this allows you to react to favorable or
unfavorable news by trading immediately. If important data comes in from the United Kingdom or Japan while the
U.S. futures market is closed, the next day’s opening could be a wild ride.
Overnight markets in futures contracts do exist, and while liquidity is
improving, they are still thinly traded relative to the spot forex market.
Minimal or no commissions
With Electronic Communications Brokers becoming more
popular and prevalent over the past couple of years, there is the chance that a
broker may require you to pay commissions. But really, the commission fees are
peanuts compared to what you pay in the futures market. The competition among
spot forex brokers is so fierce that you will most likely get the best quotes
and very low transaction costs.
Price Certainty
When trading forex, you get rapid execution and price certainty
under normal market conditions. In contrast, the futures and equities markets
do not offer price certainty or instant trade execution. Even with the advent
of electronic trading and limited guarantees of execution speed, the prices for
fills for futures and equities on market orders are far from certain. The
prices quoted by brokers often represent the LAST trade, not necessarily the
price for which the contract will be filled.
Guaranteed Limited Risk
Traders must have position limits for the purpose of risk
management. This number is set relative to the money in a trader’s account.
Risk is minimized in the spot forex market because the online capabilities of
the trading platform will automatically generate a margin call if the required
margin amount exceeds the available trading capital in your account.
During normal market conditions, all open positions will be
closed immediately (during fast market conditions, your position could be
closed beyond your stop loss level).
In the futures market, your position may be liquidated at a loss
bigger than what you had in your account, and you will be liable for any
resulting deficit in the account. That sucks.
|
Advantages
|
Forex
|
Futures
|
|
24-Hour
Trading
|
YES
|
No
|
|
Minimal
or no Commission
|
YES
|
No
|
|
Up
to 500:1 Leverage
|
YES
|
No
|
|
Price
Certainty
|
YES
|
No
|
|
Guaranteed
Limited Risk
|
YES
|
No
|
Judging by the Forex vs. Futures Scorecard, Mr. Forex looks UNBEATABLE! Now meet the winners who trade the forex
market.
#Forex #Forextrading #Elliotstheory #Tradewithus
Sunday, April 2, 2017
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