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.
My question - What is the market depth data and how can I profit from it?
I don’t understand the interbank system as well as the nasdaq level II info but it looks similar.
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.
