Currency Secrets

As most of you know Oanda is one of my preferred forex brokers. Sure, I understand that they’re not perfect, no forex broker is, but they suit my needs.

One area of Oanda’s site that I particularly like to frequent is their FXLabs site.

Here you’ll see innovations that Oanda are working on to help improve customer experience, which will no doubt help their bottom line.

Several things that interest me at the moment are:

• FXDesktop - Finally! An easier way to access your account by clicking on a shortcut on your desktop! No need to have the trading station open up in a browser.
• FXNewsEffects - Here you can view the effect an economic announcements has on a currency. Quite insightful if you’re starting out with trading the news.
• FXTicks - Want some free tick data? Just simply put USD$1,000 into your Oanda account (unless you wish to apply for academic exemption in which case you don’t need US$1,000 in your account, but you’ll still need an FXTrade account nonetheless) and subscribe to receive free tick data going back since 1st January 2004. Currently you can only order one currency’s tick history at a time, and you can only download data on: EUR/USD, GBP/USD, USD/CAD, USD/CHF & USD/JPY. Also note the following notice on their site:
  NOTICE: Once again the FXTicks service is experiencing overwhelming demand. We have scheduled a major infrastructure upgrade for the weekend of April 21, which will allow us to service this large volume of orders in a timely manner. Order processing will effectively be suspended until the upgrade is complete. Thank you for your patience and for your continued interest in the OANDA FXTicks product!
• FXTradeTicker - If you have Google desktop or Yahoo widgets then you can’t go past Oanda’s Google gadget and Yahoo widget that shows prices for popular currency pairs plus your account balances (including sub-accounts).

Hopefully there’ll be more innovations that Oanda will bring out over the coming years, but for the time being I applaud their creativity and effort at publishing some of these useful tools (I’ll be particularly interested to see how FXTicks develops and keeps up with demand throughout the year).

It’s been awhile since I’ve perused Dukascopy’s website, as back in the good ‘ol days they were pretty much only known for their free forex data (which was indicative).

Since then I never really gave Dukascopy a second glance, however, as I soon found out a lot can happen in a space of a couple of years and I was impressed by what I saw when I checked out their forex platform the other day.

Probably the most prominent feature that blew me away was the Level II market depth screen! You could see quantities (in millions) of people who had placed limit entry orders.

Who cares? some of you may be thinking, HotspotFX has had Level II type screens since inception.

And that’s true, but the liquidity Dukascopy had far surpassed that of HotspotFX.

In fact, liquidity was so good that the spreads of the major currencies were often 1 pip (in fact I saw instances of 0.5 pip spreads on the EUR/USD)! Yeah, that’s right, that includes 1 pip spreads for the volatile GBP/USD!

Other things I enjoyed were:

• One click trading

• Economic, Event, and Equity Announcement Calendars (oh, and holiday calendars too)
• Swiss based - now I don’t really feel too much at ease with Swiss brokers (just look at some of the complaints I get about ACM here!), but I will give them (and Switzerland) the benefit of the doubt and add it as a positive.

Unfortunately though there were a couple of things I thought could’ve been better.

For one, they only allow accounts to be denominated in either USD, EUR, GBP, CHF, or JPY - if you live those countries you’ll think this to be fantastic, but for those living in countries such as New Zealand, Australia, and Canada we’re not too overly pleased. Also I haven’t opened

The charting was standard. I’ve seen worse (such as the charting plugin from FXCM), and I’ve seen much better (such as MetaTrader), but it’s good that they’ve at least provided something.

I also noticed that they charged commission on their trades. My initial reaction was “how dare they” (as it has always been with forex brokers that charge commissions), but considering they offered such a great platform and such awesome spreads I really didn’t mind. The commission rates they charge can range from anywhere between US$10 per 1 million traded, to US$30 per 1 million traded - it all depends on how much trading you do throughout the month.

After salivating so much on everything Dukascopy had to offer I was keen to fill out some forms and begin a live trading account.

It was then that it hit me.

Upon clicking on the open a live account I saw at the bottom that you needed a minimum of US$50,000 (or its equivalent in another currency) to open an account.

*sigh*

Oh well, at least there demo account was free and fun to play with. If you would like to have a play of Dukascopy’s demo click here.

Some time ago I wrote an article on forex broker price manipulation, and in that article I came to the conclusion that I thought it was extremely difficult for forex broker’s to manipulate price as there were just too many variables that worked against the forex broker. Some of these being the fact that the manipulating forex broker would need to assume that you keep your stop order(s) at the price you’ve set, and that there are likely to be no other forex traders taking advantage on the manipulated price.

Now Hans correctly added an insightful comment on that article, by stating that I am acting on the assumption that spiking was done on a global basis - which is correct - and would therefore beg the question: can forex brokers manipulate price on an individual basis?

This is definitely a valid point, and one that I’d to think out loudly on…

Ok, let us assume that we are trading with a forex broker that has spiked us either into or out of a trade.

How would I be able to prove that the spike occurred on my account only?

Just look at a forex chart, right? Well… which one? You wouldn’t be able to check the chart your forex broker offers as they could very well be providing you with data that shows the spike so you wouldn’t be able to use that as proof. To prove individual account manipulation you’d need to check either someone else’s account with the same broker, or a reliable third party forex chart.

The easiest way in proving forex broker manipulation would be to find someone who had a trade that didn’t get transacted when it should’ve where you did. Using a third party chart as verification doesn’t really offer that much in the way of proof. I mean, everybody knows that all forex charts are different and can vary by as much as 5-10 pips during volatile periods… and what would happen if you did find that your broker was manipulating price by using a third party forex data vendor and your forex broker used another third party forex data vendor proving their case too?

Ah, it’s a difficult thing to prove dear friends, and I’m not saying that it doesn’t happen it’s just where does one start when they think they’ve had it happen to them?

And don’t forget one other important aspect dear folks: the forex brokers would need to know what is likely to happen in the future if they are to successfully spike you and take your money. The only time I’d think forex brokers would know of what direction a currency pair is likely to head would be receiving economic information prior to its release - and I do remember reading somewhere that central banks do contact other banks letting them know prior to the announcement what interest rate decisions have been made!

So, in my mind, I’d think that if the central bank is likely to disclose the figures to third parties prior to its announcement, would other organizations do the same? I mean, a human still needs to write up the report do they not? And people talk, do they not? Hmm…

Anyway, I resurrected this topic again after reading through Phil Davis’ The Forex Non-Dealing Desk Trader blog where he provides some insightful commentary on the importance (and differences) between standard dealing desk forex brokers, and a non-dealing desk brokers - with non-dealing desk forex brokers being the preferred.

He also has a forum where forex traders provide stories on their forex trading woes.

Manipulation is a difficult thing to prove, however I don’t doubt that spiking can happen, but the only solution to eradicating this problem would be to centralise the forex market at a transparent exchange - and the undertaking of such an endeavour would be momentous to say the least!!

I came across an excerpt by famous forex trader Jimmy Young the other day (thanks to Felix) and out of this list which was aptly titled - 45 Ways to Avoid Losing Money Trading FOREX, point number 6 stuck out the most.

#6 read…

Broker demo accounts are a shill game of sorts; they’re not as time sensitive as real accounts and therefore give the impression that time sensitive trading systems, such as short-term moving average crossovers can be consistently profitably traded; once you start dealing with real money reality is quick to set in.

And do know what?

I agree with him.

After having personally sampled many forex demo accounts I would definitely agree with Jimmy. In fact, it’s no real secret to everyone who has been around the forex game for some time that most demo accounts operate on a slower server - and there’s equally good reason for why forex brokers do this: to save money.

So what would be the purpose of trading a demo account?

I believe the sole purpose for trading a demo account should be to acquaint yourself with the platform. Place a few trades, know what buttons are responsible for doing what, and structure the platform in a way that is suitable to your trading needs. But as for relying on a demo accounts results on the profitability of a system I would personally be very suspect. You would gain much greater insight into the real performance of your forex system if you opened up a live account, deposited the minimum amount and then traded the smallest lot size possible.

Several brokers around the place are beginning to offer micro mini positions and minimum account opening balances of around US$200-300. Forex brokers such as Oanda offer $1 lot position sizes.

So be careful when trading forex broker demo accounts - especially if you are testing short-term economic announcement breakout systems.

Interactive Brokers is another popular forex broker outfit that has gained notoreity throughout the last couple of years. As IB already had a large trader base through its other trading divisions promoting their forex division wasn’t going to be too difficult to get off the ground.

As IB has been known around the world as a deep discount broker offering very competitive commissions to futures, options and stock traders, they have successfully moved their operations to incorporate forex trading.

Some of the highlights about Interactive Brokers Forex division are:

• Can trade the spot forex market PLUS the currency futures market from the same account (in fact, you can trade anything IB offers from the same account - i.e. stocks, options… etc)
• Advanced orders such as Stop Limit, Trailing Stop, Stop, Good Till Cancelled, Good After Time, Good Till Date/Time are allowed
• IB offer a free API to traders who open an account
• Spreads are relatively tight, I’ve noticed spreads of 1 pip between EUR/USD and USD/JPY crosses

Some of the things to be wary of are:

• US$25,000 minimum trade sizes (various for other currencies see here for detail)
• Interactive Brokers has two forex platforms: one for trading (IDEALPRO) and the other for exchanging currency between trading accounts/positions (and trying to understand how to balance a foreign currency position can be rather frustrating if you don’t know anything about foreign exchange) - this second platform is known as IDEAL
• The IB IDEALPRO forex platform has a kludgy feel about it, but this could just be me
• Commissions of 0.2 basis points on trade size value or US$2.50 (whichever is higher)

Interactive Brokers provides the ultimate platform from trading just about anything around the world, by adding a forex arm to their arsenal they sure have provided everything a trader could ever want.

Unfortunately though, there’s a big downside to IB, that isn’t apparent until you’ve opened an account and encountered a problem, and that is: their support sucks. I mean, really sucks. If you do open an account with IB ensure you’ve tested all facets of your trading (including depositing and withdrawing moneys and buying and selling the instruments you’re interested in trading in) before adding large amounts of money with them.

Opening an account at IB is relatively straight forward, and can be done in less than an hour or two.

It is difficult to pass IB up when they offer everything a trader would ever need from one central account, but as with all things cheap be careful of the old axiom - You get what you pay for.

If you’ve used Interactive Brokers FX then I’d like to know how your experience has been with them, please add your comments.