Dear professional traders and fellow learners of the market,
I would like to take this opportunity to share with you what I've learned over the past 17 years of trading in a brief, easy to understand, point form.
I started trading in the floor around 18, back in 2001. Now I'm 34, and doing my own prop shop.
I'm not a commercial trainer. Most of my teaching is done at various Universities in Asia, primarily for students coming from central banks and commercial banks, specializing on the topic of using FX as means of treasury management, on an institutional/national level.
As a sideline hobby, I do trade on MT4, and develop indicators and EAs for personal/friends use, typically for free.
Let's begin with what I've learned about MT4:
1. MT4 is a Russian software designed with the B-booker in mind., ie. Market Making.
2. Only in the last 10 years where a few companies started making bridges can MT4 truly reflect quotes from larger qualified liquidity providers (LPs)
3. MT4 is a very slow piece of software. It typically display 10-20 ticks at most per second, is single-core non threaded, and most calculations of indicators on MT4 are incorrect and/or misleading due to the inherent weakness of the software. Comparatively, a pro platform can support hundreds to thousands of ticks per second. So please, don't try to do HFT on MT4. Cost and internal latency will eat you up.
4. MT4 only show Top-of-the-book (TOB) quotes. To fill a larger position, the bridge provider typically need to VWAP the entire market depth for you. This means that slippage is very real, and tick scalping doesn't work beyond 6 digits of capital. Of course, if you're using a market making broker, ie. B-book, they can fill you at the artificial price but usually they don't do that. They prefer to requote, offquote, or delay execution, to prevent predatory trading.
5. Predatory trading comes in many forms - They are known as Toxic flow. Things like latency arbitrage, tick scalping, LIFO hedging etc. Typically brokers don't like them, so does liquidity providers.
6. STP or ECN brokers simply means they are A-book for larger trades which they cannot fill in time. Since LPs do not like to take trades smaller than USD 10,000 notional value, a 0.01 lot trade would need to be aggregated into a bunch in the broker's books before sending them out to the real LP. By then, usually the priced has changed, thus, the broker would have to do a Two-way or Three-way give up trade, fill your orders internally first, and then deal with the risk.
7. Somebody has to fill the other end of your trade. Doesn't matter whether its a broker, or a liquidity provider, or an aggregated pool of liquidity provider, be it light pools, dark pools or neutral pools. This naturally means stop losses, being market order, can have slippage. This also means that there is limits to how much you can make in the FX market per trade. For example, if you hit 1-2 yards per clip, you're going to have a lot of issues and you first need to call the bank for a two-way quote. Someone has to lose for you to win. Nobody likes to lose forever. Go figure what's the implication.
8. The larger your trade size, the larger the spread. Thus, if you're scalping 3-4 pips and making 100% daily on a small or cent account, doesn't mean you can do that when you hit 6-7 digits.
9. MT4 cost to traders are expensive. First you need to pay the LPs, then the bridge provider, then the broker. In some cases, especially if the broker is whitelabel or greylabel, you have to pay for the markups. Comparatively, larger fund houses pay very little commission (eg. $2 round-turn per standard lot) and/or get paid to trade. This is called Payment-for-flow, where since they contribute to liquidity, the traders are paid a little bit per million instead of having to pay commission to the broker supply chain. Therefore, a tick scalping system that works for them, will never truly work for MT4 users, in the long run.
10. VPS does not make a system more profitable. This is because, even though you may be 1ms to the Equinix Server, it does not solve the issue of the inherent lag of MT4 software, nor the lack of specifically required prices you demand from the real market. This also explains why professional hedge funds and prop shops, if they are doing short term trading, typically use limit order derivatives like Fill-or-kill (FOK), All-or-none (AON) etc etc. Typically in the market there are >20 types of orders professionals use. MT4 only has Market, stops, limits.
Some things about the real world market:
1. There is no real legal tender traded in FX. It is based upon credit, which is settled by transfer of credit from one LP to another and then from the LP to the broker, settled by BIS (Bank of international settlement) on a daily basis around 5pm EST, where swaps will be incurred.
2. Price moves primarily not due to amount of money that is traded or exchanged hand. Price moves primarily due to level of desperation. Either to buy when perceived FV > PV; and vice versa for sell.
3. Stop hunting is very real. However, it is not to hunt specific individuals. It is simply for liquidity providers to provider execution and fills to a bulk of block trades or a bulk of small orders congregated at a certain price, usually pending orders. Obviously stop orders is one type.
4. Of the very few banks that are still allowed by regulation to engage in buy-side prop trading, most do not use stop losses. There are two primary reasons. First, they do not want to expose their clients' position and/or level of desperation to the market depth unnecessarily. Second, they hedge their losses with inter and intra market instruments. Think covered-call or calender spreads. Of course, in spot FX it is more difficult to do so but they can always use cross asset hedging.
5. In contrary, a retail trader should not copy them. Not only does retail trader do not have access to deep pockets - They usually do not do proper hedging. If one thinks that, for example, buying 1 lot of EURUSD and shorting 1 lot of USDCHF, given that they are historically 92% inversely correlated, is considered hedging - one really need to rethink. And rethink a lot more.
6. Some people make 100% a year. Some people make 100% a month. Some people make 100% a day. All are good. But if you want to be the top league, here are a few stats for your reference. The top performing prop shop (I am referring to those less than 50m USD capitalization); typically makes on average 150 pips (not points) a day, have a DD around 20-30% max, has an average holding period of less than 1hr, has winning probability typically around 50%, has a risk to reward ratio that is favourable (thus allowing a low winning percentage). This is not to say that if you are making 20 pips a day you are not pro. Yes you are. However, if you want to be the best of the best, you need 200 pips a day. And yes, it is possible, just very rare for retail traders.
7. Market changes every few months. Now with the trade wars situation going on, it changes every few weeks. If you're a technical trader, be prepared to curve fit a lot every month. If you're a fundamental trader, pay attention to short term news. If one wants to make it big (>10m) in FX, one should respect all types of studies, including but not limited to: Technical, Fundamental, Global Macro, Pair Micro, Correlation, Volatility, Sentiments etc etc. The list is non exhaustive.
8. If I were to summarize what the market is: I would say: "The market is a location for everyone to express their own opinions of this world". What this means, using a oversimplified example: A optimistic trader tends to buy, a pessimistic trader tends to sell, some people cut loss out of fear, some people cut loss out of discipline etc etc. This is also to say, the market never moves in a straight line because of two reasons. Number 1, everyone is expressing different opinions, thus some buy some sell. Number 2, money is made from a counter-party that made mistakes so that you, being opposite of him/her, can win. Everyone takes turns to lose and then win. If not, market is a straight line. Then everyone would be rich, thus making everyone poor. When everyone is a millionaire, a piece of bread would cost 10k.
9. Statistically speaking probably around 75-80% of traders lose money. However, there is not enough statistics to show how much they lose; nor is there sufficient data to show how much the 20% win and how long they will last. Money basically exchanges hand on a second-to-second (or even shorter) basis in the market. If you net win, you are a winner. Most traders are not happy. Because when they lose, they are obviously not happy. When they win, they feel they didn't win enough, so they're not happy. Be water my friend (Quote Bruce Lee), and be happy my friend. Happy traders make more money.
10. To win big sums of money, you really need a few things. First, you probably need a proper credit line with a Prime Broker. (Prime of Primes are just marketing terms, they are just resellers of liquidity). Or at least, the broker you use must have enough collateral with a clearing firm or clearing bank. Second, try to get non-last look, anonymous, unfiltered data. Nobody likes to lose to you forever. The least you could do is to spread out your wins from different sources, give the LPs enough time to fleece off retail money (HFT not recommended for retail), and then pass it on to you. Third, try to be well capitalized (>5 digit capital) if you want to make it big. Obviously if you are just trying to make 3-4 digits a day you might not need that. You can, sometimes, make 3-4 digits a day using a 3-4 digit account. This is conditioned upon an excellent set of money management, risk management (They are not the same), psychology management, computer algorithm management (if you're administering a robot), trading skills (general term) etc etc.
Attached is a sample of what I do on MT4. It is purely for motivational purpose. Its last years, and with a B-book broker. I do not recommend using them. You should try to use a ECN broker as much as possible, and keep cost relatively low (Nothing more than $7 per lot, round-turn). And lastly, I trade on MT4, as I stated, as a hobby to test concepts.
Hope you learned something and if I'm wrong on certain concepts, please feel free to correct me. I am a student of the market, just like most of us are. And just like in trading, we do not have to be correct all the time.
P.S. Please do not email or PM me asking me to sell you some magical technical systems. The system that I use is just renko with some moving average. It is mediocre at best, and not predictive (sorry to say), and thus, I cannot sell things that are freely available. I focus a lot of fundamental and global macro from free informative and news websites too, where FF is one of them,
Thank you and have a good trading day!
I would like to take this opportunity to share with you what I've learned over the past 17 years of trading in a brief, easy to understand, point form.
I started trading in the floor around 18, back in 2001. Now I'm 34, and doing my own prop shop.
I'm not a commercial trainer. Most of my teaching is done at various Universities in Asia, primarily for students coming from central banks and commercial banks, specializing on the topic of using FX as means of treasury management, on an institutional/national level.
As a sideline hobby, I do trade on MT4, and develop indicators and EAs for personal/friends use, typically for free.
Let's begin with what I've learned about MT4:
1. MT4 is a Russian software designed with the B-booker in mind., ie. Market Making.
2. Only in the last 10 years where a few companies started making bridges can MT4 truly reflect quotes from larger qualified liquidity providers (LPs)
3. MT4 is a very slow piece of software. It typically display 10-20 ticks at most per second, is single-core non threaded, and most calculations of indicators on MT4 are incorrect and/or misleading due to the inherent weakness of the software. Comparatively, a pro platform can support hundreds to thousands of ticks per second. So please, don't try to do HFT on MT4. Cost and internal latency will eat you up.
4. MT4 only show Top-of-the-book (TOB) quotes. To fill a larger position, the bridge provider typically need to VWAP the entire market depth for you. This means that slippage is very real, and tick scalping doesn't work beyond 6 digits of capital. Of course, if you're using a market making broker, ie. B-book, they can fill you at the artificial price but usually they don't do that. They prefer to requote, offquote, or delay execution, to prevent predatory trading.
5. Predatory trading comes in many forms - They are known as Toxic flow. Things like latency arbitrage, tick scalping, LIFO hedging etc. Typically brokers don't like them, so does liquidity providers.
6. STP or ECN brokers simply means they are A-book for larger trades which they cannot fill in time. Since LPs do not like to take trades smaller than USD 10,000 notional value, a 0.01 lot trade would need to be aggregated into a bunch in the broker's books before sending them out to the real LP. By then, usually the priced has changed, thus, the broker would have to do a Two-way or Three-way give up trade, fill your orders internally first, and then deal with the risk.
7. Somebody has to fill the other end of your trade. Doesn't matter whether its a broker, or a liquidity provider, or an aggregated pool of liquidity provider, be it light pools, dark pools or neutral pools. This naturally means stop losses, being market order, can have slippage. This also means that there is limits to how much you can make in the FX market per trade. For example, if you hit 1-2 yards per clip, you're going to have a lot of issues and you first need to call the bank for a two-way quote. Someone has to lose for you to win. Nobody likes to lose forever. Go figure what's the implication.
8. The larger your trade size, the larger the spread. Thus, if you're scalping 3-4 pips and making 100% daily on a small or cent account, doesn't mean you can do that when you hit 6-7 digits.
9. MT4 cost to traders are expensive. First you need to pay the LPs, then the bridge provider, then the broker. In some cases, especially if the broker is whitelabel or greylabel, you have to pay for the markups. Comparatively, larger fund houses pay very little commission (eg. $2 round-turn per standard lot) and/or get paid to trade. This is called Payment-for-flow, where since they contribute to liquidity, the traders are paid a little bit per million instead of having to pay commission to the broker supply chain. Therefore, a tick scalping system that works for them, will never truly work for MT4 users, in the long run.
10. VPS does not make a system more profitable. This is because, even though you may be 1ms to the Equinix Server, it does not solve the issue of the inherent lag of MT4 software, nor the lack of specifically required prices you demand from the real market. This also explains why professional hedge funds and prop shops, if they are doing short term trading, typically use limit order derivatives like Fill-or-kill (FOK), All-or-none (AON) etc etc. Typically in the market there are >20 types of orders professionals use. MT4 only has Market, stops, limits.
Some things about the real world market:
1. There is no real legal tender traded in FX. It is based upon credit, which is settled by transfer of credit from one LP to another and then from the LP to the broker, settled by BIS (Bank of international settlement) on a daily basis around 5pm EST, where swaps will be incurred.
2. Price moves primarily not due to amount of money that is traded or exchanged hand. Price moves primarily due to level of desperation. Either to buy when perceived FV > PV; and vice versa for sell.
3. Stop hunting is very real. However, it is not to hunt specific individuals. It is simply for liquidity providers to provider execution and fills to a bulk of block trades or a bulk of small orders congregated at a certain price, usually pending orders. Obviously stop orders is one type.
4. Of the very few banks that are still allowed by regulation to engage in buy-side prop trading, most do not use stop losses. There are two primary reasons. First, they do not want to expose their clients' position and/or level of desperation to the market depth unnecessarily. Second, they hedge their losses with inter and intra market instruments. Think covered-call or calender spreads. Of course, in spot FX it is more difficult to do so but they can always use cross asset hedging.
5. In contrary, a retail trader should not copy them. Not only does retail trader do not have access to deep pockets - They usually do not do proper hedging. If one thinks that, for example, buying 1 lot of EURUSD and shorting 1 lot of USDCHF, given that they are historically 92% inversely correlated, is considered hedging - one really need to rethink. And rethink a lot more.
6. Some people make 100% a year. Some people make 100% a month. Some people make 100% a day. All are good. But if you want to be the top league, here are a few stats for your reference. The top performing prop shop (I am referring to those less than 50m USD capitalization); typically makes on average 150 pips (not points) a day, have a DD around 20-30% max, has an average holding period of less than 1hr, has winning probability typically around 50%, has a risk to reward ratio that is favourable (thus allowing a low winning percentage). This is not to say that if you are making 20 pips a day you are not pro. Yes you are. However, if you want to be the best of the best, you need 200 pips a day. And yes, it is possible, just very rare for retail traders.
7. Market changes every few months. Now with the trade wars situation going on, it changes every few weeks. If you're a technical trader, be prepared to curve fit a lot every month. If you're a fundamental trader, pay attention to short term news. If one wants to make it big (>10m) in FX, one should respect all types of studies, including but not limited to: Technical, Fundamental, Global Macro, Pair Micro, Correlation, Volatility, Sentiments etc etc. The list is non exhaustive.
8. If I were to summarize what the market is: I would say: "The market is a location for everyone to express their own opinions of this world". What this means, using a oversimplified example: A optimistic trader tends to buy, a pessimistic trader tends to sell, some people cut loss out of fear, some people cut loss out of discipline etc etc. This is also to say, the market never moves in a straight line because of two reasons. Number 1, everyone is expressing different opinions, thus some buy some sell. Number 2, money is made from a counter-party that made mistakes so that you, being opposite of him/her, can win. Everyone takes turns to lose and then win. If not, market is a straight line. Then everyone would be rich, thus making everyone poor. When everyone is a millionaire, a piece of bread would cost 10k.
9. Statistically speaking probably around 75-80% of traders lose money. However, there is not enough statistics to show how much they lose; nor is there sufficient data to show how much the 20% win and how long they will last. Money basically exchanges hand on a second-to-second (or even shorter) basis in the market. If you net win, you are a winner. Most traders are not happy. Because when they lose, they are obviously not happy. When they win, they feel they didn't win enough, so they're not happy. Be water my friend (Quote Bruce Lee), and be happy my friend. Happy traders make more money.
10. To win big sums of money, you really need a few things. First, you probably need a proper credit line with a Prime Broker. (Prime of Primes are just marketing terms, they are just resellers of liquidity). Or at least, the broker you use must have enough collateral with a clearing firm or clearing bank. Second, try to get non-last look, anonymous, unfiltered data. Nobody likes to lose to you forever. The least you could do is to spread out your wins from different sources, give the LPs enough time to fleece off retail money (HFT not recommended for retail), and then pass it on to you. Third, try to be well capitalized (>5 digit capital) if you want to make it big. Obviously if you are just trying to make 3-4 digits a day you might not need that. You can, sometimes, make 3-4 digits a day using a 3-4 digit account. This is conditioned upon an excellent set of money management, risk management (They are not the same), psychology management, computer algorithm management (if you're administering a robot), trading skills (general term) etc etc.
Attached is a sample of what I do on MT4. It is purely for motivational purpose. Its last years, and with a B-book broker. I do not recommend using them. You should try to use a ECN broker as much as possible, and keep cost relatively low (Nothing more than $7 per lot, round-turn). And lastly, I trade on MT4, as I stated, as a hobby to test concepts.
Hope you learned something and if I'm wrong on certain concepts, please feel free to correct me. I am a student of the market, just like most of us are. And just like in trading, we do not have to be correct all the time.
P.S. Please do not email or PM me asking me to sell you some magical technical systems. The system that I use is just renko with some moving average. It is mediocre at best, and not predictive (sorry to say), and thus, I cannot sell things that are freely available. I focus a lot of fundamental and global macro from free informative and news websites too, where FF is one of them,
Thank you and have a good trading day!
Attached File(s)
