MARKET MAKER VS ELECTRONIC COMMUNICATION NETWORK

The main market players in forex markets are the largest banks in the world, and they form the exclusive club in which most trading activities take place. This club is known as the interbank market. Retail traders are unable to access the interbank market because they do not have credit connections with these large players. This does not mean that retail traders are barred from trading forex; they are able to do so mainly through two types of brokers: markets makers and electronic communications networks (ECNs).

Market Maker-

Market makers are the one who "make" or set both the bid and the ask prices on their systems and display them publicly on their quote screens. They stand prepared to make any transactions at these prices with their customers, who range from banks to retail forex traders. In doing this, market makers provide some liquidity to the market.

Any exchange rates display by the market makers are based on their own best interests. The market makers make profit from the spread. Thus, spread is the difference between the bid and the ask price, and is often fixed by each market maker. Usually, spreads are kept fairly reasonable as a result of the stiff competition between numerous market makers. As counterparties, many of them will then try to hedge, or cover, your order by passing it on to someone else. There may also a times in which market makers decide to hold your order and trade against you. 

Pros:

·         The trading platform usually comes with free charting software and news feeds.

• Some of them have more user-friendly trading platforms.
• Currency price movements can be less volatile, compared to currency prices quoted on ECNs, although this can be a disadvantage to scalpers.

Cons:

• Market makers can present a clear conflict of interest in order execution, because they may trade against you.
• They may display worse bid/ask prices than what you could get from another market maker or ECN.
• It is possible for market makers to manipulate currency prices to run their customers' stops or not let customers' trades reach profit objectives. Market makers may also move their currency quotes 10 to 15 pips away from other market rates.
• A huge amount of slippage can occur when news is released. Market makers' quote display and order placing systems may also "freeze" during times of high market volatility.
• Many market makers frown on scalping practices and have a tendency to put scalpers on "manual execution," which means their orders may not get filled at the prices they want.

Electronic Communication Network (ECN)-

ECNs are the middle player between Market Maker and the customer. ECNs select and display the best bid/ask price and quotes on their trading platform and this prices are select from various market maker. ECN-type brokers also serve as counterparties to forex transactions, but they operate on a settlement, rather than pricing basis. Unlike fixed spreads, which are offered by some market makers, spreads of currency pairs vary on ECNs, depending on the pair's trading activities. 

Electronic networks make money from spread and by charging customers a fixed commission for each transaction. Authentic ECNs do not play any role in making or setting prices, therefore, the risks of price manipulation are reduced for retail traders.

Pros:

• You can usually get better bid/ask prices because they are derived from several sources.
• It is possible to trade on prices that have very little or no spread at certain times.
• Genuine ECN brokers will not trade against you, as they will pass on your orders to a bank or another customer on the opposite side of the transaction.
• Prices may be more volatile, which will be better for scalping purposes.
• Since you are able to offer a price between the bids and ask, you can take on the role as a market maker to other traders on the ECN.
• Many of them do offer integrated charting and news feeds.

Cons:

• Their trading platforms tend to be less user-friendly.
• It may be more difficult to calculate stop-loss and breakeven points in pips in advance, because of variable spreads between the bid and the ask prices.

Therefore, it is important that you carefully weigh the pros and cons of each broker before deciding which one to trade through.

How to select a Forex Broker

Most traders who trade forex use a broker. A Forex broker needs to be associated with a financial institution, such as a bank in order to provide funds for margin trading. Picking the right forex broker for you will take some work on your part. There are brokers who charge flat fee and some that charge commissions and there also some brokers who does not charge any of these but instead they charge only spreads (the difference between ask and bid price).

Choosing a forex broker is a personal decision. First, you need to make a list of what you want from a broker. If you are thinking of trading online, you could choose several online brokers and contact their help desks. Seeing how quickly they respond to your questions could be useful in how they will respond to their customer’s needs. If you don't get a speedy reply and a satisfactory answer to your question you certainly wouldn't want to trust them with your business. Just be aware that as in other types of businesses, pre sales service might be better than after sales service.

Don't forget to ask about minimum account balances and interest payments on account balances. Make sure that your funds will be secured.

There are so many factors to consider, here are some of the major ones:

·         Where is the forex broker regulated?

 Is the broker regulated at all? Some aren't. Some will claim to be    "self-regulated." That means they are unregulated, but they aren’t honest enough to admit it. There are a few unregulated brokers that aren't too badly rated. The problem with this is how do you know they won't go bad later? Regulation doesn't guarantee that a broker is a good broker, but at least gives you some recourse if things go terribly wrong. Also, remember that some countries have better regulations than others.

·         Download online Demo Account

Before you choose an online broker, you must download their online    demo account. Before setting up an account with a Forex broker, you will need to do further investigation. How quickly will these brokers execute your buy/sell orders? What is their policy on slippage? What are the transaction fees? What is the spread, fixed or variable? What are the margin requirements and how are they calculated? Does the margin change with currency traded? Is it the same for mini accounts and standard accounts?

·         Does the broker permits your trading style?

This is very important if you plan to news trade or scalp. Some brokers might suspend you. Others will cancel your winning trades (but never your losing trades). Certain extremely unethical brokers will decide that your trading style has caused them "damages" and will confiscate as much of your account as they feel like.

·         Do they offer swap free Islamic Accounts?

Followers of the Islamic faith are forbidden to charge or pay interest. People who want to hedge a trade with a negative swap pair also would like to avoid paying interest. Whether for religious or hedging reasons, be careful - many "swap free” accounts have a daily fee that can cost significantly more than you would pay for swap interest.

·         How are the swap rates?

It's normal to charge a little more on negative swap than what a trader gets paid for positive swap, but some brokers use this as another way to squeeze even more money from hard working traders. Some brokers charge negative swap both ways on some or even all pairs. If you rarely leave trades open for very long and can avoid the time that swap is charged, this won't affect you. For those who trade specifically to collect interest, this could be one of the most important factors in picking a broker.

·         How you can move your funds in and out of your account?

Some brokers only do wire transfers and charge some pretty high fees for the privilege. If you plan to move several thousand dollars every time, this isn't too bad. If you want to withdraw $50 or $100 at a time, then a $25 or more wire transfer fee really cuts into profits. Look for a broker with ways to fund and withdraw that are acceptable to you. Don't wait until you've made some money and then find out that it's difficult and expensive to get your profits. When you first fund your account, put a little extra in and test the withdrawal process with the extra money just to be sure you can get money back out.

Summary

There is no single perfect forex broker for everyone. If everyone followed a broker selection system like this, then the worst brokerages would quickly go out of business, and the rest would soon realize that they need to work very hard to earn and keep the respect and business of forex traders.

Forex vs Stock and Futures Market

These days there is a wide variety of trading instruments from which a trader can choose to trade in, they have the option of choosing to trade in the stock, futures or forex market. It can be a daunting task to figure out which market would be best for a trader. While every markets has its advantages and disadvantage, here are certain factors as to why trading forex would be a better choice compared to trading in any other financial market.

Market Size

The forex market is the largest financial market in the world. It overshadows both the stock and futures market. The New York Stock Exchange is the largest stock market in the world and it trades a volume of about $22.4 billion each day. On the other hand the futures market trades a volume of about $30 billion per day, but when you compare the stock and futures market to the forex market they are easily dwarfed, as the daily traded volume of the forex market is about $4 trillion per day, making it by far the largest and most liquid market in the world.

24 Hour Market

The forex market is a 24 hour market. The market is open 24 hours a day and 5 and a half days a week. At 5:00 pm EST on Sunday the forex market opens in Sydney and if followed by the opening of the markets in Tokyo, London and finally closes at 4:00 PM EST in New York. Before the New York Market has closed the market in Sydney has opened once again, making the forex market a 24-hour seamless market. If a trader is trading in stocks or futures he can only trade during the trading hours of the exchange.

No Commissions

In forex, traders only have to pay the spread between bid and ask price. Apart from the spread, usually no other additional fees are charged by the broker. The cost of trading forex is usually lower than those of the stock and futures market.

Instant Execution

Since the forex market is a decentralized market, the order placed while trading forex do not have to go through a central exchange in order to be executed. While trading stocks or futures whenever a trade is placed it first has to go to the exchange before the order can be filled, which results in the involvement of a middleman. Having a middleman between the trader and the buyer and seller of a security can cost the trader additional fees or untimely execution of trades.

Leverage

Most stock brokers offer no or minimal leverage. Even while trading in futures probably the maximum leverage that a trader can receive is until 1:50. On the other hand most forex brokers provide a trader with a much higher leverage. Most forex brokers provide around 1:200 leverage, while there are other brokers who provide an even higher leverage all the way till 1:500 and sometimes even 1:1000.

Overall it can be observed that the forex market offers far more advantages compared to the stock or futures market. Hence it would be most advisable to trade forex compared to any other financial market.

FOREX TRADING

Forex trading is trading currencies from different countries against each other.  Trading in Forexmarket means the exchange of currencies by buying and selling the currencies pairs. Earlier Forex trading was mostly limited to large banks and institutional traders. However, recent technological advancements have made it so that small traders can also take advantage of the many benefits of Forex trading just by using the various online trading platforms to trade.

The currencies of the world are on a floating exchange rate, and they are always traded in pairs. About 85% of all daily transactions involve trading of the major currencies. Four major currency pairs are usually used for investment purposes. They are: Euro against US dollar (EUR/USD), US dollar against Japanese yen (USD/JPY), British pound against US dollar (GBP/USD) and US dollar against Swiss franc (USD/CHF).

Forex trading is typically done through a broker or market maker. As a Forex trader you can choose a currency pair that you expect to change in value and place a trade accordingly. For example, if you had purchased 1,000 Euros in January of 2005, it would have cost you around $1,200 USD. Throughout 2005 the Euro’s value vs. the U.S. Dollar€™s value increased. At the end of the year 1,000 Euros was worth $1,300 U.S. Dollars. If you had chosen to end your trade at that point, you would have a $100 gain.

The FOREX market is active 24 hours a day and dealers at major institutions are working 24/7 in three different shifts. Clients may place take-profit and stop-loss orders with brokers for overnight execution. Price movements on the Forex trading are very smooth and without the gaps that you face almost every morning on the stock market. The daily turnover on the FOREX market is somewhere around $4 trillion, so a new investor can enter and exit positions without any problems.

The Forex market trading is a global decentralized market place that determines the relative values of different currencies. Unlike other markets, there is no centralized depository or exchange where transactions are conducted. Instead, these transactions are conducted by several market participants in several locations. It is rare that any two currencies will be identical to one another in value, and it’s also rare that any two currencies will maintain the same relative value for more than a short period of time.  In Forex, the exchange rate between two currencies constantly changes.

The Forex market is unique and the largest and oldest financial market in the world. It is also called the Forex market or FX market for short. It is the biggest and most liquid market in the world, and it is traded mostly through the 24 hour-a-day inter-bank currency market. Online Forex trading serves many advantages.

·         Its huge trading volume representing the largest asset class in the world leading to high liquidity;

·         Its geographical dispersion;

·         Its continuous operation: 24 hours a day except weekends, i.e., trading from 20:15 GMT on Sunday until 22:00 GMT Friday;

·         The variety of factors that affect exchange rates;

·         The low margins of relative profit compared with other markets of fixed income; and

·         The use of leverage to enhance profit and loss margins and with respect to account size.

Forex Market Trading Hours

Forex market has an advantage over the stock market – it operates 24/6; whereas the stock and commodities market operates 24/5 (Monday through Friday) normal business hours. Forex market continues its activity around the clock. If you want to trade at 2:00 am EST Monday morning, feel free to place your trade. If you would like to invest at 9:00 pm Thursday night or whenever you have the time to trade just place your trade. However, even though the market is considered a 24-hour market, it's important to know when the market is actually active and when is the best time to place a trade on the market.

Actual operating hours:

Forex market is open 24 hours a day, each financial centre (i.e. New York, London, Frankfort, Tokyo, and Australia) has its own operating hours, which are usually from 8:00 am - 4:00 pm, local time. That means if it's 8:00 am (Tokyo time) on Monday morning, the Tokyo market will be open for trading even though it's 10:00 pm EST, on Sunday night. You could therefore take advantage of trading on the Forex market late Sunday night from New York.

Overlapping of hours:

In forex market there is time when two or more markets overlap. For instance, the New York and London markets overlap from 8:00 am to 12:00 pm EST, while the London and Tokyo markets overlap from 3:00 am to 4:00 am EST. The Sydney and Tokyo markets also overlap from 7:00 pm - 2:00 am EST. These overlapping periods are the best time to trade since volume (liquidity) is at its greatest.

Other good times to trade:

Besides the overlapping periods, it's best to trade at the following times:

·         During the middle of the week (shows most movement)

·         During trading hours of the three largest markets - London, New York, and Tokyo.

Times to avoid:

It's best to avoid the following times/days:

·         Sundays (limited volume)

·         Fridays (unpredictable)

·         Holidays (limited volume)

·         Release of economic reports (volatility)

·         4:00 pm - 6:00 pm EST (low market volume).

Forex Demo :You can Try Before You Buy

Forex market is a huge decentralised market. It is a 24 hour market where you can trade from anywhere, anytime unlike the equity market. There are huge number of brokers who offer different platforms for Forex trading. Before choosing a broker it is crucial to learn to the software and the features of each type of trading software before investing your real money. Hence Forex Demo trading gives the real picture and idea about Forex Trading. We at Fidelis Capital Markets, encourage our customers to try Forex Demo Trading first before opening a Forex Live account. Here are a few things to look for before choosing a Forex Broker:

Low Spreads: Spread is the difference between Bid and the Ask Price. Forex Brokers earn through these spreads, hence higher the spread lower is your profit and lower the spread, higher is the profit. Forex Demo Trading gives an idea about the kind of spread you will be charged, if you register with a specific broker.

Liquidity Provider:Forex broker usually require large amount of capital as they provide high Leverage. They are tied to large banks or lending institutions for liquidity. Fidelis has a number of established direct banking relationships. Our bank partners enable our Direct Market Access Model (DMA) to provide market transparency, best pricing, and instantaneous trade execution based on the real interbank foreign exchange environment. Some of our partners are:

ü  Barclays Capital

ü  Citi

ü  Deutsche Bank

ü  Goldman Sachs

ü  J.P Morgan

ü  Bank of America

ü  UBS

ü  Morgan Stanley

ü  HSBC

ü  Bank BNP

ü  Nomura

Regulations and Licencing: Forex Broker should be registered and regulated to avoid any kind of fraud with your money. Fidelis Capital Markets Limited (Company No. 3388151) is a New Zealand registered company and is registered as a Financial Service Providers and listed in the Financial Service Providers Register (FSPR), FSP145164. Fidelis is part of a Dispute Resolution Scheme.

Leverage: Leverage isnecessary in Forex market because the price movement is in fraction of cents. Generally Leverage is expressed as a ratio between total capital available to actual capital. At Fidelis we provide our customers with 200:1 Leverage which means our customers can buy 200 times more with the amount they invest.

Tools and Forex Signals: Forex brokers offer different types of platforms for their clients. These platforms have charts, technical analysis tools, real time news, signals for trading. Forex Demo Trading helps to learn all these beforehand and makes you expert before you open a Live account. Fidelis offer two types of platforms MT4 and cTrader and our clients receive free Forex signals from Trading Central .

Account Types: Forex Brokers offer two or more types of account. Fidelis offers two types of account. One is the commission based account and the other is spread based account. Clients have the privilege to try both the accounts in Forex Demo trading and then open the Live account with the type they wish to.

Therefore Forex Demo Trading is essential these days so that you are well aware of the difference between what your broker is offering you and what you are looking for. Hence you need to try before you buy.

Forex Analysis

Forex analysis is a tool which helps or guide trader to trade efficiently. Forex market is a big market in terms of money and where money is involved one has to be very careful before and after entering into the trade. Forex analysis is a combination of two types of analysis Fundamental Analysis and Technical Analysis.

Fundamental Analysis is based on the study of economic, political, interest rates and other external factors of a country which influence the value of currencies in the financial market. Fundamental analysis is mainly considered for the long term investment purposes. Fundamental analysis depends on the various economic and financial data released by government or non-government agencies of a country monitor the financial stability or financial health of a country. Fundamental analysis is an effective resource to monitor the overall conditions of a country not the exact.

Technical Analysis is the study of price and time of the currency or the currency pair with the help of other different studies to know or analyse the probable price direction. Technical analysis is based on chart patterns of the market. Technical analysis involves study different types of charts and other tools which include trend, range, technical indicators, support and resistance.

Trend: In forex analysis trend is defined as a tendency of the currency pair to move in a particular direction. It is advisable to trade with a trend. Trend is a line drawn by joining two or more data points on the chart.

Range: While doingforex analysis range refers to the area between high price and low price where a currency pair tends to trade between during a given period of time.

Support and Resistance:It very important tool of forex analysis, it is a price level where price tend to stop and reverse. Support is the price level on the chart where the price bounces back in the down moving market and Resistance is the price level on the chart where the price bounces back in the up moving market.

Technical Indicators:This is the most important tool of the forex analysis; technical indicators are the statistical driven studies used on the charts to predict the future price of the currency pair. There are many technical indicators available in the trading platforms. Moving average, MACD, RSI, Bollinger Band etc. are the most widely used technical indicators. These indicators are very easy to draw with a click of a button.

Summary:

All these are the tools which helps trader while doing forex analysis for a forex market or a particular currency pair to trade. Where fundamental analysis help you to understand the external factors which may or may not affect the price or market on the other hand technical analysis helps to create your own strategy to study the market or the price internally by using above mentioned tools under technical analysis.

Fancy Indicators and Why They Don't Work

With countless number of indicators available today, many traders are on the constant lookout for that one Holy Grail Indicator, which can predict the market movement 100% of the time. Sadly, there is no such indicator and there will never be one. The sooner we can accept this universal fact, the better our chances of winning in this competitive game of forex trading.

In our search for the Holy Grail, we tend to forget the essential constituent of these markets –buyers and sellers. It is the interaction amongst these buyers and seller which determines market prices. ‘Interaction’ is nothing but the price at which both these buyers and sellers are willing to transact.  This ‘Interaction’ Price is a factor of the perception that these individuals have for a particular forex pair. Let me explain this with an example. Jack thinks Euro will rise going forward and Betty thinks it will fall. They both enter their orders for buying and selling respectively. Ideally both followed their perception and believed that the price will move in their favor in the near or distant future.

Now picture this - the forex markets are the most liquid markets in the world with $4 trillion in daily traded volume with millions of transactions each day. These transactions represent the perception and beliefs that thousands of individuals have about the price of a particular forex pair.

My question to you – How can any indicator in the world measure the perception and beliefs of these thousands of individuals with 100% accuracy? That said, this does not mean one should disregard indicators such as Moving Averages, RSI, Stocs and other popular indicators.  All these indicators also have an average success probability of 50% but the fact that many people use them makes them stand out from the crowd. We will talk about these later in some other post.

If you are one of those who is on the constant lookout for Indicators I would recommend you to stop doing that because it is an endless goose chance which will lead you nowhere. Start sticking with the popular ones and drop the fancy one’s out there, your trading will be much more profitable and simpler.

Probability & The Markets

By virtue the financials markets are a zero sum game. Someone has to loose in order for the other to win and this is one of the most fundamental aspects of any financial market any where in the world. It is certainly true in the case of forex markets as well.

If we say that forex is a zero-sum game, this essentially means that the probability for either side to win is 50% at any given point of time. It would not be wrong to say that as a trader your task is to increase this probability from the 50% that is already available with you. Hence all the countless hours spent trying to understand charts, reading books, following gurus and blogs like this one :) will go in vain if you end up decreasing this probability instead of increasing it.

Sadly only one in twenty people win over the long term in these markets and evolve themselves into successful traders. Each one of these traders, have over a period of time learnt the art of looking at probability as one of the essential constituents of any successful trade.

If we blindly initiate a trade, we have a 50% chance of winning it. The more confirmations we seek in a trade setup eg. PinBar, Support & Resistance Levels, Pivots etc. the healthier our probability gets for that particular trade.

But an interesting point to note based on the stats in the above two paragraphs is that 19/20 of us end up decreasing rather than increasing this probability. So, Is it safe to say that coin tossing has better odds rather than forex trading? Absolute, no. It is our poor trade management practices and psychology which eventually
cripple this probability and make us loose a winning trade.

From next time onwards, whenever you enter a trade 1) Try and always look at the multiple confirmations to increase the probability of your trade setup 2) Trade Management and Trade Psychology is much more important (we will talk about this in a later post) than entering and exiting a trade.

Till then, Happy Trading!!

Fidelis Capital Markets : https://www.fideliscm.com