No Bulls-t Advice for the FX Trader

Boris Schlossberg

So you want to trade FX?
Forget strategies. Forget fancy charts. Forget listening to TV talking heads like me.
If you want to have any chance at success in trading here are five simple things you need to do.

1. Get a good execution broker.

You can trade on bid-ask spreads or on raw spreads with commission. In the end, the costs all even out. The much more important question is -- how’s your execution? If your trades get slipped and even worse rejected more than once a month. Leave. Leave the broker, because they are clearly not honest or competent and eventually one or both of those sins will cost you all your money.

Speaking of money if you broker is not Licensed with one or several of the following authorities: NFA in US
FCA in UK
ASIC in Australia
MAS in Singapore
HMA in Hong Kong

Consider your money gone.

Do a simple experiment. Ask for half your account back. If it takes more than 48 hours to get your money -- leave the broker immediately.

You need to understand that brokers don’t consider your money to be yours, the moment you make a deposit they consider it to be theirs. So unless they have a regulator that makes them act as a fiduciary, your money is their money and all that trading you are doing is strictly for entertainment value -- you are never getting it back. If you are tempted by flashy offshore brokers with high leverage and tight spreads then understand that your trading is most likely imaginary. Your money is never coming back, even if you do manage to beat the market.

2. 4x for Forex

Speaking of beating the market. I had an interesting discussion last night. I was at a party with a lot of industry people including a consultant that sets up a lot of these offshore brokers. What the gentleman told me is that contrary to popular belief most of these brokers don’t even try to scam the clients. The mathematics of the FX business almost insure that 97% of traders will lose all their money. Why? Because of leverage. In FX leverage -- the ability to borrow on your account -- is astronomical. Outside of US leverage can be as high 400:1 or even 1000:1. That means you can trade 400,000 unit position on just 1000 dollars of equity. You may think that’s great but it’s actually financial suicide. Let’s just use a simple example of 100:1 leverage. If you put on a trade that size, just 1% move against you, wipes out your account. Do you know how often currencies move 1%? About 200 times per year. Do you think you can survive 200 days of 1% moves and escape whole? Let me ask you differently. Suppose I told you to run across the race track at Le Mans 200 times while the race was in progress. How confident would you be at surviving that challenge? When you are trading at 100:1 you are doing the exact same thing except with your money rather than your body. The end result is a disaster either way.

What’s the maximum leverage per trade? Four times. That’s right. That’s not a typo. Not ten times, not twenty times, not forty times. Four times -- and that is MAXIMUM not starting position. You starting leverage should be 1 or 2 times equity. That means that if your account is 10,000 the starting trade should only be 10,000 or 20,000 units.

Go ahead and snicker. But if you don’t follow that rule, the chances of you losing all your money are virtually 100%.

3. Get a Rebate
Every single broker in FX will pay you money to trade with them. They won’t tell you that up front and they may not even be willing to give it to you on an individual basis, but every broker has a rebate program that will pay you back anywhere from 0.1 to 0.5 pips back. If you do 5000 trades a year that’s 1000 pips of profit for doing nothing. That’s why you need to connect with a good introducing broker who will advise you what FX broker would be best for you. If you want some names just email me.

4. Discover Metatrader 4.

If you are trading FX on a proprietary platform rather than MT4 -- you are already at a disadvantage. MT4 is an almost universal piece of FX software that is available from any major broker. It allows you to create software programs that can trade for you. But you do not need to be a programmer to get the full value of MT4. The platform has hundreds of thousands of trading robots (called Expert Advisors) -- including those that we develop in our chat room, that can help you place trades at the right time, at the right amount and with the proper risk control. The future of life is robots. If you are not using them for trading you are already way behind all because you are subject to massive human error. You will hit the buy button instead of sell, you will buy 10 times the size you wanted and you will miss the exit price because you were looking at something else away from the screen.

Don’t worry, that’s totally normal -- we’ve all done it. But traders who trade with MT4 -- don’t do those things often, so they have an edge on you because they are making fewer mistakes. One very simple thing to do is to trade with buy/sell scripts so that any market order you place is always automatically wrapped around with a limit and a stop and never creates a risk problem for you down the road. Robots are the future and that fact is especially true in trading.

5. Get a good education (like our BK chat room) Trade with us

Yea ok, shameless self-promotion. I gave you four pieces of good advice so I get to toot my own horn a bit. Actually, it’s not even my own horn I want to toot. Most of the time I am just the sideshow in our chat room. The true value for you comes from interacting with other like-minded traders who will very often improve and refine the trading ideas and strategies that I suggest. Trading in a team environment completely transforms the game and gives you hundreds of different and creative ways to look at the market. Trading is not a solo sport. Make it a lifetime pursuit and join a team to trade with.

In FX 10 is the Magic Number

Boris Schlossberg

Over the past few weeks, I must have made more than 1000 short term trades. Some were on demos. Most were live accounts. Some trades were done on raw spread, others used a full spread broker. Here is what I discovered.

It doesn’t matter what strategy you use. It doesn’t matter if you trade chop. It doesn’t matter if you trade trend. It doesn’t matter if your spread is 0.2 wide or 1.4 wide. It doesn’t matter if your target is just 3 pips or even 1.5 or 5 or 6 or even 7 -- you can’t make money in FX day trading unless you target is 10 pips.

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The reason is -- to paraphrase Bob Dylan is that you got to pay somebody. It may be the Devil or it may be the Lord, but you’ve got to pay somebody. Regardless of how you make your trade your average cost per trade is 1.5 pips (either spread or 1 pip commission + raw spread). That translates to about 15% cost of doing business.

When you factor in the vagaries of the market, the risk/reward payoffs, the various news bombs that blow up your trades, that frankly is about as much cost as you can absorb. If you go down the 5 pip level, the transaction cost becomes too large at 30%. Basically, you give up a third of your gross profit right off the bat and few businesses can survive that math over the long haul.

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10 pips is also a very reasonable distance for a day-trade. The average true range for a major pair is about 100 pips (yes, yes I know that’s wishful thinking in these low volatility times -- but it is still a decent rule of thumb). That means that a 10 pip trade is about 10% of the daily move which is very achievable 2-3 times each day. Like a perfect bowl of porridge, 10 pips is not too cool, not too hot. For those of us who like to day trade -- 10 pips is juuuuuuust right:)

As to all the snarky position traders who constantly berate day traders for just churning our accounts -- feel free to ridicule all you want, but some traders in my chat room have been trading for years with drawdown profiles of less than 10% -- and that’s basically what? -- a bad week in your world :).

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Forex Trading Tip – #1 Driver of FX Flows this Week

forex blog Forex News Kathy Lien

Between an emergency Fed meeting, the Bank of England and Bank of Canada monetary policy announcements, US retail sales, Chinese GDP, Australian employment, UK consumer prices and a host of other tier 1 event risks, there are no shortages of events that could drive big moves in currencies.

However, the #1 driver of FX flows this week will be risk appetite. That could be driven by the swings in commodity prices, the volatility in equities, Chinese and/or US data. At the end of this week on Sunday there’s a production freeze meeting in Doha and we are already beginning to see headlines about some producers refusing to cut production. One of the main reasons why commodity prices are performing so well this morning is because crude oil is above $40 a barrel.

Chinese data will also be important. Consumer prices were released last night and the stronger report propelled AUD/USD above 76 cents. Tuesday evening, Wednesday morning local time Chinese trade numbers are scheduled for release and on Thursday evening / Friday morning, Chinese industrial production, retail sales and Q1 GDP numbers are due. We are beginning to see signs of stabilization in the world’s 2nd largest economy but according to China Premier Li, the downside pressure on the economy remains.

And of course there’s Wednesday’s U.S. retail sales report – the market detests dollars but a blowout report could help to turn things around.

Keep an eye on the VIX:

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In FX -Pro Traders are Dying, Retail Traders Rising

Boris Schlossberg

At the beginning of last week, Bloomberg ran a long story mourning the demise of the bank FX trader. “Take the pay cut, “ warned one veteran darkly. “Oh, and don’t wait for the phone to ring.”

The computers have taken over. The algos now do most of the market making and HFT firms like Virtu dominate flow whittling margins to a tenth of pip. Long gone are the days when you could take your mates for a beer and get preferential treatment on client flow. Or better yet when you could simply markup deals 20 pips or more for “non market” sensitive customers like corporates, pension funds and equity mutual funds. It was a great party while lasted, built on insider info, expense accounts and very little economic value.

Dealing FX still remains a cheaters game. Banks continue to pay their multi billion dollar fines for rate fixing and proceed in their tricks and treats. But the party is clearly coming to an end. Customers are much smarter, everyone has access to price information and competition has become fierce. FX will never be a totally clean market until it goes on exchange but it’s good enough at this point so that retail traders can play the game on mostly level playing field.

And therein lies the irony. The very same technology that is killing the pro trader is enabling the retail trader to compete effectively in that most unforgiving of arenas -- the FX day trading market. Right now as I sit and type this, I am looking at nine screens that give me the following services all for free:

Streaming dealable quotes as tight at 1/10th of a pip on euro and yen and 1/2 pip on cable. Just a few years ago I was paying as much as 5 pips spread for GBP/USD and now that’s often my profit on a trade.

Live Squawk box out of London that keeps me up to date on all the breaking macro and central bank news, so I can react quickly to any potential action.

An RSS feed from my buddies at ForexLive that gives me color on the market 7 days a week.

Charts, Charts, Charts -- you name it you can have it and all for either free or a few bucks per month.

A Live News Applet that gives me eco data as quickly as a Bloomberg terminal

MT4 -- my very own algo machine that lets me manage my trade inventory at the speed of light and takes all the sloppy trade entry/logic out of my fumbling hands.

Last but certainly not least -- Slack. The greatest software of the 21st century that allows me to trade in a chat room with traders from all over the world 24 hours a day 5 days a week. All of our trades are instantly uploaded into the room and we can discuss, analyse and get inspiration from each other -- just like a dealing floor but only better.

So as I observe the market changes over the past decade, I can honestly say -- it’s only getting better.