Currency Secrets

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.

I received an interesting email from an avid Currency Secrets reader today. Even though the reader asks questions that pertain to Dukascopy I thought I’d expand my answers to include the forex market (and forex brokers) in general.

Here’s the email I received…

I have been looking at Dukascopy, I like their site because the charts are fast and they offer market depth data.

Do you know anything about this?

Okay, let’s individually answer each question…

What Is Market Depth Data?

Market depth data is the collation of all limit-based orders available from your forex broker’s clientele and the spreads of their market makers (such as banks, brokers or pure market makers).

How Do I Profit From Market Depth Data?

I’m going to assume that ALL forex brokers offering Level II screens present the same STRUCTURE (obviously they’ll have different prices and quantities inside their market depth screens), so if this assumption is incorrect then ignore my answer.

I think it would be terribly difficult to profit from analyzing market depth data alone.

Here’s why I think this is so:

• The spreads offered by the forex broker’s market makers will take up the majority of the quantities seen in the market depth screen and they will likely present BOTH a bid AND ask price EACH with the same quantities. Therefore, because bid and ask quantities are the same we have no real gauge on which side of the market is the strongest (or weakest) – EACH QUANTITY IS THE SAME!!
• As the forex market is not fixed to one central exchange the forex brokers who offer “Level II” screens will not present what the ENTIRE market is doing – because they can’t! Conducting any form of analysis with only a fraction of what is really going on can lead to faulty analysis. Now this wouldn’t matter with say analyzing your forex broker’s charts as most charts very rarely differ by much (only during extreme volatility), but as market depth can differ greatly amongst Level II brokers AND based on the fact that market depth analysis relies HEAVILY on ANTICIPATING what it likely to happen in the short-term it can lead to erroneous analysis as you simply don’t have all the data.

Hopefully that can enlighten you on forex broker’s market depth screens and why using it as a tool for analyzing where the market is likely to go is probably useless.

If anyone uses it to profitably trade the forex market I, and no doubt many others, are all ears!

I don’t understand the interbank system… do you know anything about this?

The interbank system represents the largest portion of the currency market. It’s where the banks offset, regulate and speculate with their positions against other major banks.

Generally most forex brokers protect their positions by hedging their positions opened by their clientele in the interbank market.

The interbank market is not open to the retail currency trader – hence the term “interbank” (inter- being the prefix meaning “between” and hopefully you know what a bank is… therefore we have a definition of “between bank(s)”).

To trade in the interbank market one would need to trade with a broker that automatically offsets their position in the interbank market (i.e. doesn’t trade against the trader) and provides a small spread.

One such currency broker that offers this facility is Oanda (chart on this page shows the process).

When a company says that you can trade on the interbank market they generally mean that they MAY offset their position in the interbank market.

Hopefully these answers have helped, if anyone has any further details please add a comment below.