What I've learned so far

If I could go back to my twenties I know what i would do. I would become a pit trader. Yep, right there in the open outcry.

I know it was a chaos and very stressful but at least you had some professional human interaction

Electronic trading is a very lonely profession. I sit here in front of my computer for hours completely alone

I have my family and friends but professionally I have nobody to talk.

I noted a pattern. As soon as a get all exited talking about Stochastic and Bollinger bands people start to leave the room.

Well, so here I am in a forum trying to find some friends with the same interest. People that I can talk economic geek
without the conversation turning in a monolog, because the other party is snoring.

I'm gonna kick start this thread with some general info about what I've learned over the years.

But the real reason here is to find some nice people that are as fascinated about trading as i do and when the markets get
slow have a nice chat.

Hi MarginCalled,

I would suggest using IRC, there are lots of live trading rooms which are up 24/7. It's not direct human to human interaction (as in face to face), but it blows ForexFactory out of the water in terms of having live conversation.

Being stubborn can cost you money. My username is not an attempt to be ironic but the truth about my trading carrier .

I had multiple total and partial margin calls over the years.

My very first one left my 200K account with barely 5K.

But even a hard headed guy like me can learn and today I can say categorically that i will NEVER be margin called again.

Of course if my broker crashes and don't fulfill my multiple panic stop losses my account may be in danger, but if it depends
just on my trading ethics I will NEVER be margin called again. I've learned the lesson.

Pain can teach you things impossible by other means

What's up pal!

I'm gonna have to Google it , is IRC a new incarnation of MIRC ? I've used MIRC in the past I thought it was gone!

Thanks for the tip anyways.

MIRC is just an IRC client (so in fact you've got it the other way around ), but I'm pretty sure it's still around. Like anything trading, there tends to be a lot of noise and it can be hard to separate the wheat from the chaff, but if you're just looking for some conversation that would be the first place I would start.

Interesting video about the day Soros broke the BOE. Lots of forex related insights in this video

Maybe you could use the forum to find like minded traders and then use something like Skype to communicate.

Very nice documentary!

Over the years I've learned one or two things about brokers.

First, brokers are not as evil as people say they are

But also brokers are not as friendly as they try to make you believe they are.

People take for granted the service they provide. Without them it would be impossible for the small guy to trade Forex.

Now you have to understand that brokers are there to make a profit. They are in no way philanthropic organizations

Brokers make money in various ways but the main source is charging for the service they offer you.

They charge for their services in 2 main ways.

1- A fixed fee every time you trade. Lets say 5 bucks to open a position and 5 bucks to close it. If you multiply it by lets say 3000 customers,
and each of them trading around 3 times per day, that would be 90 K per day 450 per week or 1 million 800 thousand dollars in a 20 day month.

Their expenses are on IT people to take care of their servers. The servers they own or rent, technical support, accounting, advertising etc.

I'm not including the sub-pip spread these kind of brokers charge.

Of course you are the one who pays for it, but it goes directly to their liquidity providers ( or at least it is supposed to work this way) so you can't say it is a revenue or a expense to the broker.

In the real world the brokers bump that spread a little and keep it on top of the fees.

2- Spread only brokers don't change you the 5 buck each way fee.

They only make money on the gap between the price you pay, and the price their liquidity providers charge them. When you see a broker charging 1.5 pip spread, it means the banks they deal with change them, lets say 0.5 pips. And they decided that to be profitable they have to charge at least 1 pip per transaction, so the aggregated amount commonly called "spread" is 1.5 pips. Thats what you pay.

So if they have 3000 customers and all of them trade 10 dollars per pip and they trade at least 3 times per day, this kind of broker will do just like the broker above.

If their customers trade 20 buck per pip they will do better. If their customers trade 50 or 100 or 1000 dollars per pip they will thrive.

Now if their customers have small accounts and they don't trade that much the broker can go BROKE pretty fast.

In real life spread only brokers have customers with all sort of account sizes, and those customers trade differently so it is really hard to say how much a broker makes.

I guess I wrote too much already. Next time I will dive into how spread only brokers try to minimize their risk resorting to other means of revenue and also how it creates a conflict of interest when the service provider also acts as the competition.

only those who can bear loneliness will win in the end. that is what I believe!

So spread only brokers are supposed to get their spreads pay their liquidity providers and bank what is left.

But if you have a lot of small clients ( which most brokers do) they risk to not make money enough to cover costs. A bunch of micro accounts imply costs in tech support more servers etc and not much money because the dollar value per pip is low.

So why brokers let you open a 300 buck account?

Because 999 times out of 1000 those 300 bucks will be transferred to the broker.

Your broker not only gives you a platform, leverage and make it possible for you to trade on Forex. On top of that they want to buy when you are selling and sell when you are buying.

Market Maker or MM for short is another name for brokers that depend on spread only for their revenue. In the name of "liquidity" they create a market just for their customers where they buy and sell anything they can for you. They are allowed by law to do this.

So lets say you have a 1000 dollars account with a MM and you make 100 bucks in a trade. You got money from your broker.

The other way around if you lost 100 dollars that money goes to your broker.

So since 90% of traders blow their account in the first 6 months being a MM looks like a good deal!

So your broker provide a service for you, allowing to trade, providing leverage, a platform etc. But they also profit from your losses and lose when you win so it characterize a conflict of interest.

Next post I will go deeper on the mechanics of how the process of money flowing from customers to MM happens and also try to explain how their bookkeeping works

MarginCalled: I like your logic and makes for interesting reading ...... keep going

Brokers have usually 2 main accounts

One with their own money, and another with their customers money. They are not supposed to mix those accounts

Lets say you sent 10000 dollars to your broker MM to open an account.
Your money is deposited on the clients account together with all other clients money in a big bulk. Just as a example lets say the account contains 100 thousand dollars

You open your platform and it shows your 10000 dollars

Than you make a trade and lose 1000 dollars. just as an example again lets say nobody else traded at this moment just you.

So now your account shows 9000 dollars, but only you traded so the brokers big account with money from all clients still has 100 thousand dollars.

So what happens? The broker transfers 1000 dollars from the customers account to their own account

The customers account now has 99 thousand dollars and the brokers account 1000 dollars more.

If the broker gets audited they are ok because even if all clients withdraw their accounts they have money to pay everybody.

Thats a over simplified example because the broker has to pay the liquidity providers out of this money and while some traders are losing
other traders are wining but the principle is the same.

On top of the spread the broker just sits there and collect losses from their clients.

Those 300 bucks micro accounts blow up really fast with the kind of leverage provided, so 2000 micro accounts suddenly become 600K easy for the MM.

Since the big majority of traders ( over 90%) lose money there is always money being transferred from the clients account to the MM account.

The battle the MM fights is to always add more traders.

So when you trade you are participating in a Forex virtual reality via the Market Maker's platform. The only time hard cash real transactions happens is when people deposit or withdraw funds.

Next post I will explain how a MM is born.

irc has trading channels ? which ones are the best ?

As I understand it Market Makers DO NOT depend on spread only for their revenue. They will often take the other side of their client's trades and will have a team assessing current risk and will hedge positions with a bigger bank to limit their own exposure.

Brilliant Video

Thanks for sharing

How a broker MM starts.

Somebody or a group of people decide to start a business.

They start to gather some money which is the start up capital of the company. They are either a group of wealthy individuals
or they go and try to get investors to put money on the future company.

Lets say they manage to or already have 5 million dollars

So once they have the money the legal process starts. They have to apply for a broker license. Usually the owners are already licensed
as money managers etc. If not they have to get their own personal license. At this point they spend quite some money in lawyers and fees.

After or during the legal process they start to spend money on technology and human resources.

they have to lease or develop a platform. Thats where metatrader comes handy because it is a packaged solution. But some companies decide to
develop their own. Either way they have to have people in house to manage the tech part of the business or hire a company to do it.

They have to buy or rent servers hire and train people for technical support etc

so after they

1- Raise a start up capital
2- Get licensed ( individually and corporately)
3- Get a platform
4- Rent or buy a place to operate
5- rent or buy servers
6- Hire people

They are ready to advertise and get some real customers.

Advertisement is the lifeblood to MM. As explained above they need a constant stream of new trader if they want to survive.

While some of them still use traditional means like TV, radio and newspaper. Forex MM rely heavily on the internet to get their word out there.
They advertise on sites like this one we are in. They create websites of their own where they put all sort of media to help newbies.

They also have some of their stuff all over forums disguised as regular members to create a word of mouth effect.

Their advertising tactics differ slightly but 100% of them provide you with a demo account.

The intention is to hook you up. As soon as you start trading in their demo platform you are definitely hooked.

So after all those steps clients start to come and a broker MM is born.

Next post I will give a more concrete example of how a MM operates in terms of stop hunting spread widening and a lot more

Great posts MarginCalls, being in business myself I can relate to this thread very much.

Nice to see someone putting some true facts together.

I described above the general steps taken to start a MM broker.

I left one step purposely out because I want to go through in detail here.

So the broker has as we said above, 5 million dollars as a start up capital.

This money is their operating capital meaning that it is there not only to pay for their expenses
but also to clear trades done by their clients.

If they have just a couple hundred of micro accounts 5 millions will be adequate. But if you research about it you will
learn that MM have dozens of thousands of clients.

The more clients they have the more money they make but the bigger their operating capital must be.

Thats when the liquidity provider starts to play its rule.

Instead of going after more investors to raise their operating capital MM go to big banks and establish a line of credit.

It works a little different from a line of credit extended to a individual like you and me.

Since the big banks know how the process goes they offer to the broker the same service the broker offers to you.

A line of credit which is pure leverage. quotes which is the connection between the real forex market and the MM virtual world and a platform

which the broker can use if needed.

In exchange the broker has to pay a spread ( which can be as low as 0.1 pip) to the bank. And the same bank or banks get the deposit
from clients.

So as mentioned above if the client base starts to grow ( which is good ) but their operational money starts not being enough ( which is bad) they can declare
the credit line they have as their own capital and be solvent and pass any auditing they face.

Lets throw some numbers and explain it better

So our broker has 5 million and lets say 100 customers

The pic amount of transactions at any given time from their clients amounts to 3 million dollars. This broker is solvent and will pass any auditing BUT they are not profitable.
If everybody decides to close their positions and withdraw their money the broker has enough money to fulfill everybody ( hence solvent) but will not make any money hence non profitable.

Now lets say their client base sky rocket to 30 thousand customers, and their pic transactions to 50 million dollars

The MM may see their operational money growing to 10 million via spread collections and busted accounts but a auditing can show the broker owing 12 millions to their clients in case everybody decides to close positions and withdraw so the MM is in profit but not solvent.

Now if they have a 5 million dollars line of credit with their liquidity provider the scenario changes. They are now profitable and solvent they will pass a auditing.

Now the dirty secret is that in the situation described above even if they are technically solvent. if hells break lose and everybody starts to withdraw the bank may cut their line of credit and some clients don't get their full account back

Now thats a VERY hypothetical situation. Bbecause as pointed in past posts the vast majority of traders operate in losses so MM are always ahead of the game.

Every case of MM insolvency so far was due to misappropriation ( theft) or misuse of money from a individual ( or individuals) inside the broker. Not for mismatches or margin capital.

Well presented again my friend