Joe Ross / When Not To Trade FX

WHEN TO NOT TRADE FOREX

Because so many people bombard us with requests about forex, we teach people how to trade it. Better to teach them the right way than to let them commit financial suicide. Nevertheless, we do not advocate forex trading unless you have a particular reason as to why you need to trade during the middle of the night, or you have a specific need to trade in currency pairs that do not involve the U.S. dollar If the U.S. dollar is involved and you are able to trade during U.S. market hours (7:20am-2:00pm U.S. Central Time) you are much better off trading currencies in the Chicago currency futures markets. Here are the reasons why:

• Brokers deceive you about there being no commissions. $30 minimum/round turn (called the spread) is in reality a commission that eats up your capital at an astonishing rate. Even winning traders lose money and end up with negative results because of this outlandish overhead. Trading futures, you should never have to pay a broker more than $10/round turn, and usually quite a bit less than that.

• Guaranteed fills. True but… The only way a broker can guarantee fills is for the broker to become the buyer or seller of last resort. That means the broker is running a bucket shop. All forex brokers are the buyer and seller of last resort.

• Brokers do not tell the truth about volume. They show the volume for all forex trading, which doesn’t even come close to the volume they truly have at their own brokerage, which is where you are trading. Volume in currency futures is considerably higher than the volume traded at any single forex broker, often greater by a factor of ten.

• Leaning. Brokers say they are charging you a 3 pip spread to trade the popular currency pairs. But in reality a broker may be making as much or more than 10 pips on your trades. He does this by skewing prices. Since you are not trading at an exchange, the broker can feed you any price he wants to feed you. He can buy at the bank for perhaps 7 pips less than he sells to you. He then charges you 3 pips for the privilege of being ripped off for a total of 10 pips.

• Unregulated. Forex may sound like an exchange but it isn’t. It exists entirely in cyberspace with every broker and every bank having different prices for any particular currency. There is little or no regulation, even for brokers who register with the CFTC and the NFA. Forex brokers do not have to mark to market each day as do futures brokers. If your forex broker files for bankruptcy or absconds with your money you have zero recourse.

• No guarantee. If a forex broker does go out of business, you could lose all your money. There are no guarantees and no one standing behind it. Futures brokers are required to mark to market every day. They have to put up cash to cover every open trade on their books. Futures brokers have gone broke, but no futures customer has ever lost one cent of the money in his trading account because of a failed broker. Nor have they had to wait for their money. It is immediately available.

• You can get exactly the same action in the euro fx futures as you get in the “Euro” forex. Commissions are as low as one tenth per round turn depending on volume, through a regulated broker, trading electronically at an exchange where you know the true price of the currency.

• What is the true price? A forex broker can only give you the price of a currency as quoted to him by the bank through which he trades. Banks have differing prices for a currency. You never know what the real price is because there is no central exchange through which all prices flow. Besides not knowing the true price from the bank, you can also be deceived by “leaning” or “skewing” of the real price at the bank. Forex brokers commonly lean the prices.

• Forex brokers are not truthful. They lure people in with hype and false advertising: “No commissions!” “Guaranteed fills.” “24 hour trading:” Who in their right mind is going to trade in the middle of the night unless they have a special need. While it is true that total forex volume is greater than in the futures, futures volume at the exchange is greater than the volume at your broker for the most popularly traded currencies. The only place where the liquidity differential matters is in currencies like the Mexican peso, the Brazilian real, and somebody’s drachma. Those thinly traded currencies may be more liquid in forex. But if you trade anything but the few most liquid and popular currencies, you are going to be paying at least 5 pips, and often more. Unless you have a particular commercial need to deal in Polish zlotys, Indian rupees, or some other thinly traded currency, you don’t need forex.

• You are told by forex brokers that there is little or no stop running. This is one of their biggest and boldest fabrications. The truth is there is far more stop running in forex than in futures, and possibly as much stop running as in the stock market. I have friends who work in forex as well as many traders who of necessity have to trade forex. One of my students is a market maker in forex. These are people who should know, but in case you don’t want to believe me or them, simple observation of forex trading will reveal the vast amount of stop running that takes place there. Who is it that runs the stop? Why it is your friendly forex broker. The broker has a vested interest in seeing to it that your orders are filled. Stop running is nothing more than order filling. The broker sees to it that everybody’s order gets filled.

• Probably you have heard that if you are winning regularly in forex, you may be barred from trading. Is this true? Yes it is. The fact that it is true is just another proof that when you trade forex you are trading at a bucket shop. In the book, “Reminiscences of a Stock Operator,” we are told that Jesse Livermore was banned from trading at certain stock brokers because they couldn’t stand him beating the house. The same thing is true with many forex brokers. Since they are the ones guaranteeing you a fill, they are in effect the buyer and seller of last resort. The truth is that most forex brokers have precious little liquidity at their firms. In order to give you the impression that there is liquidity, it is the broker who gives you your fill. It is the broker who does the stop running that supposedly doesn’t exist in forex. But if you are regularly beating the socks off the broker, he will ban you from trading at his firm.

Now you know the truth about forex. I challenge any and all forex brokers to prove that I am wrong http://tradingeducators.com/forum/im...ilies/wink.gif . I will change or remove anything proven to be untrue in what I stated above.

Joe Ross

Just found this by chance, interesting reading.

I am not sure that I agree with his comments about bad pricing. I always watch my broker plus at least two other price feeds and usually they are the same.

I wish I would have read this before. My experience with REFCO were I may not see my money again, taught me a valuable lesson, never to trade currencies through a Forex broker. Thanks for pointing out the dangers of loosing our hard earn money.

This is actually a very interesting thread.

I am actually with a broker, and I do intend to watch, more closely, the pricing of my primary broker with a few other feeds. The reason I say this is that the other day, during a news release (can't remember which one), I actually made a huge profit BECAUSE my primary broker's price was lagging behind 2 other feeds...literally, there was a 15 pip gap between the ECN feed I had and what my primary broker was giving...my theory was that my primary broker was just "behind" the feed...as the GBPUSD raced down on my other feeds, I shorted at my primary broker almost 20 pips above where the market was...

About 20 minutes later, the primary broker feed finally "synched" with the other ECNs and in the direction of the short term trend (down), and I made a quick 40 pips. However, if I had noticed the difference in the spread about 2 minutes earlier, I would have made another 30 pips. It was wierd...like reading into the future, almost.

I wasn't sure what was happening, but it seemed to me, that my broker was almost fighting the weakness...but lost? or perhaps they were tricking people into picking the bottom as I noticed prices were trying to hover over the 1.7500 mark (until they couldn't).

It's very interesting...and very scary.

So here's my question...with all this talk about problems with brokers...what other options do Forex traders have? Are ECNs any better? Other than IB, InterbankFx and MBT, what other ECN options are out there? What FX futures brokers do people recommend?

Any help would be much appreciated.

But what is the spread on the futures market? The spread on EUR at Oanda is 1.5 pips which means you pay $15 for a standard contract. What would the spread be on the equivalent futures contract?

Do you really pay spread on FX? I don't think that I do. I place an order to buy at 1.0761 and when it is filled at this price I place an order to exit at 1.0771 and get filled at this price - I targeted 10 pips and I made 10 pips - where did I pay spread? If I don't use a market order (which I don't) then how do I pay for the spread?

Simon

Simon

If you are trading a product with a 3 pip spread, in order to make 10 pips, the product has to move 13.

If you are usually trying to make 10 pips, then 3 pips is a high percentage to over come. However if you are swing trading and trying to make 100 pips, it is better value and easier to overcome.

If you trade Futures the fee, if you are trading at a reasonable level, will be alot less than 3 pips.

The Futures market opening hours are restricted.

The Futures are less volatile. If there is a 100 pip move on Spot Euro, then the Futures move might only move 90.

The 3 missing pips are whatever you want to call them: - spread, fees or commission.

If you are playing with 1 Mil dollar level, which is the same as $100 per pip, then every round turn costs you $300.

Hagadol

I read tha document too and it's indeed scary what he sais about retain spot forex brokers. I have never dealt with futures to be honest, so would anyone be able to point me out in the right direction to find out more info? what trading/charting platform would be appropiate? how do they exactly work? etc.

Cheers.

Based on the research I've done, for the most part, The Commision + The Spread you pay for futures, (Yes, there is ALWAYS a spread being paid for in futures!), Spot forex has slightly lower transaction costs than Currency futures...

my 2 pips worth,
Dr Elders in his book "Trading for a living" talks about slippage in the Futures market being at times quite significant. Just stating what is in the book. I have yet to have a problem with my spot FX broker on slipage or steelage ; - )

I have 4 different feeds for Forex to choose from My DTN system is right from Barcley's Bank, one from MG, one from FXSol, one from Yahoo Finance. They are all within a pip or so of each other. I have never experienced any slippage and my pip spread has never changed. I have never had trouble getting fills after the news and have never felt my stops were targeted, how could they be when the 4 feeds show nearly the same price.


To make these statements is one thing. To show proof of his statements is quite another. He states that he challenges any broker to prove him wrong. That is a specious argument. It is like saying " in this court you must prove your innocence". The burden of proof always falls to the accuser not to the accused.

I am not an IB. I just am a indivdual trader. So I think some common sense and fair play is in order here.

Of course the odds are stacked against us when we place a trade. We must pay spreads, we must over come differential in conversion rates. This is all a part of being in this business. However, from my own empirical observation, I have not experienced these claims that are made...

I would sure like to see un-refutable proof before I am willing to jump on any band wagon.

SMJ

why is the burden of proof on the brokers to 'prove' that joe is 'wrong'? joe has made some huge accusation here, shouldnt he be the one to prove that he is right? this is a classic sign of a conspiracy theorist, always laying the 'burden of proof' on someone else (ie 'prove that i am wrong') instead of backing up their claims with data (ie 'here is proof that i am right').

joe ross' views on the forex market are mightily twisted. i trade both currency futures and forex and i see no such discrepancies in the level of honesty or quality in the brokers. look no further than refco disaster to make this point. can anyone say they lost money in thier FXCM, ACM or other refco-forex-related accounts? nope! but are there futures traders out there complaining that they lost money with refco? yup! there is a time and place for every market, you should always make your trade in the market that offers the most favorable conditions. and many times that market is forex!

Well, at marketiva i've got that problem. In times of fast moves, my orders can't be fullfilled - i often eaven can't close open positions.
The reason is, because of to many requests of my client - even if i didn't any
one at all bevor in hours.

The second one, he definatly is right with i would say, is, that Forex Brokers
aren't regulated like Future-Brokers.


So, you might not take it as a proof, but there is some ugly smell at least with
some forex brokers.

regards

BTW, if they offer real good products, why do they have to advertise them
so aggresivly? Like no commission, it's easy etc.?

And, second one, how can they pay high referalbonus, if they do realy
cover them with dollars and euros themselves? They would need like an
1 pip spread themself to offer a 3 pip spread

With all due respect, the burdon of proof lies solidly with the accuser. Until you show me proof of wrong doing what you are saying is only a rumor. Perhaps we trade on rumors, but I do Not pass judgement with them.

To quote a 70 commercial... "Where's the Beef."
SMJ

yes i agree, but my point is more that there are some ugly smells in the commodities market as well. there is good and bad in both markets, in all markets for that matter! youve got to be smart enough to avoid the bad and take advantage of the good. but keep in mind this opinion is coming from a super- capitalist!

I am convinced that almost every market has its' own unique rules....If the rules of a certain market suits you, then go ahead and trade it, if it doesn't, then stay away from it and find another market to trade...

I don't have any problem with the rules of any market till now, that's why I trade any market, stocks, options, futures and retail forex...Although I am still on the sidelines in the forex market, this is mainly because I am digesting the rules so that I can compete effectively....

I am also convinced that in many times, the retail trader is usually against the market maker or the broker, this is part of the game, it's either you or him, but even this rule can be used to the favour of the retail trader....Let's say that you are long the Euro and your market maker is short against your position, so it's either you or him to profit....Now, neither you, nor the market maker knows the future, so actually speaking, you are both at risk, so when prices of the Euro start to go up everywhere and other market makers, brokers and banks start quoting the Euro up, he will have to give up with you and take a small loss to avoid a future large loss....

I believe that as a retail trader, I need to have an edge to be able to beat anyone on the market who is against me, that's the first thing to search for, that's it...


Thanks,

Nader

I empathize with on Marketiva, if you are having these problems. You should consider changing to someone else. None the less. your expierences with Marektiva cannot be considered proof of wrong doing, because We just have your statement. I feel for you, but you really should be able to back up your claim... I do not do business with Marketiva. I have never even visited their web site... But fair is fair...

Scott

Merlin,

I am not sure what you mean when you say that RefcoFX clients haven't lost any of their money. I have a refco account and for me to recover my funds I have to line up with all the other account holders and creditors of the business. The relevant form for me to make a proof of claim isn't due until July this year which means not only may I not get my funds out, they are tied up until mid year.

I was under the impression that the futures side of the refco business went through relatively unscathed.

Simon

oh i didnt realize that the futures guys got their money back. i was under the impression that they havent yet. if they did get their money back then i just put my foot in my mouth

There was another time I remember (regarding Refco):
"i think this whole thing is overblown. one little secret loan isnt going to bring the whole company down i just bought some butterflies on the stock, the volatility is crazy overblown right now.
__________________
Merlin"

In Kathy Lien's (of FXCM) book, Day Trading the Currency Market, she wrote: ... the initial movement at the London open may not always be the real one. Since U.K. and European dealers are the primary market makers for the GBP/USD, they have tremendous insight into the extent of actual supply and demand for the pair. The trading strategy of waiting for the real deal first sets up when interbank dealing desks survey their books at the onset of trading and use their client data to trigger close stops on both sides of the markets to gain the pip differential.

So here is part of the proof of shady practices by dealers, straight from the horses' mouth.