Hello everyone. New on the forum and I just started my education in FOREX (I know what a pip, spread, leverage, margin, candlesticks and some of the very basic concepts mean, so I’m not completely ignorant about the subject, but a newbie nonetheless)
I’m reading “Getting Started in Currency Trading” by Michael D. Archer (2nd edition) and I just found out about the nature of these online brokers called Market Makers (the author calls them FOREX dealers). What I have understood is that they control EVERYTHING. To me they sound like a casino. If they see that you’re winning too much, they go after you and make you lose. While ECN’s, on the other hand, are more “objective” (for a lack of a better term) in the sense that the market in that case is supposedly “real” and not “artificially” created by some company.
The author states that these Market Makers are trying to distance themselves from that label because it attracts bad vibes from potential customers once they know that these online dealers can (and usually) trade against their customers. But he stills recommends to newbies to sign in with a Market Maker first and then jump to an ECN. Why???
Once I go live (in the future of course), why would I give my money to an online broker that legitimally can trade against me? It’s seems like ECN’s are more “fair” (if you know what I mean).
By its very nature, the stock market tends to be very monopolistic. There is only one entity, one specialist that controls prices. All trades must go through this specialist. Because of this, prices can easily be altered to benefit the specialist, and not traders.
The specialist system in stocks has faded considerably in the face of electronic trading. That said, there are market makers in basically all markets. They are the ones who stand ready to make a market and take the other side of incoming trades. This is no different than what forex dealers do. The difference in forex is that the market is much more diffuse and decentralized such that one can deal with any number of market makers, or go the ECN route and interact with market makers more indirectly in that fashion.
And it should be noted that retail forex dealers do not control everything. They are taking in a price feed from one or more liquidity providers and dealing with their customers on that basis. They don’t just make up whatever price they want.
All this stuff gets blown way out of proportion, especially in regulated markets like the US where the CFTC keeps an eye out for potential manipulation.
I think I get the “more decentralized” aspect of the FOREX market, but even if you have the freedom to go from one Market Maker to the other, usually people tend stick to one, therefore [I]the[/I] particularly chosen Market Maker becomes a sort of “monopolistic” entity that controls, if not all, most of the variables in play. Why would the author say that they “hold ALL the cards” then? And that they trade against their customer in many cases.
It seems that I haven’t understood to what extent is the control these Market Makers have, and their difference with ECN’s.
The author states that Reatil Forex Dealers are the counterparty of ALL trades made in their platform and they manipulate the “book” to balance it properly, while ECN’s require [U]an actual[/U] counter order to execute your trade and they don’t need to balance that “book” he refers (which I guess is some sort of accounting book).
The way he describes both types of brokers make it sound (to me) like Market Makers just create a fictious market where they can manipulate variables to always win in the end, while ECN’s are more “fair” because you need an actual counter order from a real person to execute trades.
When was this book written? 2008 I think. There has been a lot of regulations since then placed on brokers. Now sure there are some ugly brokers out there I am sure. But a regulated broker cant just say oh I want to see EUR/USD spike 500 pips todays since everyone is selling so I can take there money. Well they can but they are not going to make that money uncle sam will after he smacks them around a bit. I would also hate to tell you there are not much difference with ECN brokers. All price feeds come from liquidity providers. While some are better than others its all the same. The only real difference is the name on the ticket. ECN brokers your name will be on the ticket where market makers (if you money makes it to the market) will have the brokers name on the ticket as a market maker will just stock pile orders and place them through as 1 big order.
It was published in 2008. A fourth edition is coming next month. I thought about changes happening ever since, but I don’t have any knowledge since I’m just starting in this.
But my guess is that they do it in a more subtle way and still take people’s money. And that’s my fear. Do they control the price or not? Or if partially, to what extent?
I read on another thread that ECN’s request more money to start trading. Actually, it was on an article linked on that thread. If they’re basically the same, then the whole thing is a manipulated market for the retail trader. The house almost always wins. Is that a correct interpretation?
I need to keep digging then, because I don’t quite get it yet. If they can “spike” pips, that’s a form of price control, right? Can they do that at will or certain conditions need to be met?
I’m doing the Pipsology School, but, can you recommend me some books for newbies? (anyone)
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But my guess is that they do it in a more subtle way and still take people’s money. And that’s my fear. [QUOTE=Brolin8;350575]
That right there is one of the most important thing you must understand when in comes to brokers and price feeds. You are going to pay your broker plain and simple. There is no way around it. Generally in the from of spread. Now they get there price quotes from there providers and then mark it up and hand it over to you. Its that mark up that differs from broker to broker. Heavy volatility and the works can drive that mark up even higher. There are a lot of theories as to why and most of them sound good. To be honest at the end of the day they do it because they can. Supply and demand. You demand your order filled well guess what they can supply that order but you are going to pay for it. They are not out to take your money personally but every ones money. Thats this thing called business. See business is about making money. Not giving your products away for free. In the end you pay for what you get. All you have to do is learn what you want out of your broker and find it for a price you are ok with.
The house does always win. Retail forex (like futures) is a zero sum market before spreads (and commissions where applicable). In aggregate, the market makers and brokers are the only group that wins. Obviously, that doesn’t mean individual traders can’t win. It’s just that every single transaction actually shrinks the pot a tiny bit as the house takes its slice.
As for the rest of the discussion, I suggest reading this post.
When I first started learning about FX I opened demo accounts with 5 brokers and would watch and compare their price feeds.
For the most part, all the brokers price feeds were fairly consistent. I did notice greater differences during off-hours, weekends, BIG news releases and during financial meld-downs and crisis. I remember the May 2010 flash crash there were gaps and the price feeds did seem to go all over the place, but that wasn’t the type of day retail traders should’ve been messing with.
As far as “pip spikes”. Usually if Oanda shows a spike so do FXCM, IBFX, and all the other brokers. So I would suggest you do something similar and open demo accounts with a few brokers watch and compare the price feeds. After a few weeks if you still don’t have confidence in the price feeds, maybe you’d be better thinking about trading instruments traded on a central exchange, futures, stocks, etc.
And never trade with a broker you don’t have confidence in, there’s already enough to worry about when trading.
I’m starting. The only platform I’ve tested is FxPro’s (DEMO account, of course). I’ve only made some random trades since I don’t know any strategies or technical and fundamental analysis. Just to get a feel of an actual platform and experimenting with the software. As time goes by and I learn more things, I guess I will open demo accounts with different brokers.
I’m thinking trying FOREX.com but their demo account only lasts 30 days. Their platform looks “neat,” but I suppose that I should not get tempted just by the looks.
In order for any trader to win in his deals it is best that he uses a trading strategy that is both tried and tested so that he can get to the levels he wants.
After I finish Pipsology School and the book I mentioned at the beginning of the thread, I plan to read “Essentials of Foreign Exchange Trading” by James Chen (2009).
And after that I’m intrigued by this one: “Beat the Forex Dealer: An Insider’s Look into Trading Today’s Foreign Exchange Market” by Agustin Silvani. Apparently he talks about brokers’ “dirty” tactics like “pip spikes” and such and supposedly tells you how to “beat” them. At least it sounds interesting.
In the School of Pipsology there is a section, “Which Type of Trader Are You?”. I would suggest you sit down and decide what style of trading you want to plunge into, scalping, day trading, swing, etc. Then look for trading methods that fit that style and start right away demo trading.
IMO it’s like learning how to ride a horse, you can read all the books, take all the classes, but the sooner you can spend hours & hours and more hours in the saddle, the sooner you will develop the skills and ability to become proficient.
I found this on another thread about “stop-loss hunting.” Sounds like a good approach considering that it seems to be part of how the “game” is played.
And after that I’m intrigued by this one: “Beat the Forex Dealer: An Insider’s Look into Trading Today’s Foreign Exchange Market” by Agustin Silvani. Apparently he talks about brokers’ “dirty” tactics like “pip spikes” and such and supposedly tells you how to “beat” them. At least it sounds interesting.
I can’t speak to this book, but have serious questions about it given the whole “dirty” tactics thing as you might guess from my previous comments. Also, the “90% loss rate” bit from the book’s description on Amazon is at best a vague comment and at worst completely inaccurate, depending on what exactly is meant by that.
I’ve read both of your reviews. I’m now interested in the Dummies one just because you say that it goes into more detail about discussing different currency pairs (which I suppose are mostly the majors). Since I’ve read many traders recommend to newbies to focus on just one pair at the beginning, it seems useful to know the characteristics of a specific pair.
