Account Minimums

Micro-accounts now start at $1—but realistically you need $300 to $400 even to trade 1k lots in FOREX mini-accounts (10k lots) are $1,000 to $3,000 and standard accounts (100k lots) typically begin at $5,000. ECNs tend to have higher minimums. This is a far cry from the days in the commodity futures markets where $5,000 was considered a mini-account and $25,000 was the standard. In FOREX the ability to set your own lot sizes and leverage make smaller accounts justifiable. Account size, leverage, and lot size should all work in harmony and be consistent; your broker-dealer monitors such parameters carefully in an effort to protect both parties.

The new NFA minimum margin requirements may impact minimum account sizes.

TIP: Your grubstake should be at least the equivalent of 30 trade losses and initial margin for a single trade. If you risk $50 per trade (50 pips on a mini-lot), you should have a $1,600 account. How much you risk per trade is determined by money-management parameters.

Order Backup

Does your broker offer the capability to phone an order if their trader platform goes down or your Internet drops? Be sure that telephone order backup is available, although lines will be swamped if it is a system-wide outage and not your own Internet connection. If you open a mini- or micro-account, ask your broker to let you test a telephone order so that you know it exists and have the process down pat for when and if you need it. Keep in mind that brokers do not expect their platforms to go down often, and when they do, their backup systems tend to be overwhelmed.

TIP: Keep one secondary account with enough funding to cover whatever you expect your maximum exposure to be when trading. Be sure it is on a different FCM and data feed than your primary account.

Margin Requirements

Because a trader can open an account from $1 to $1,000,000 and trade any size lot, margins and leverage are something of a misnomer in FOREX.

Broker-dealers allow you to set your own fixed maximum leverage— typically from 10:1 to 100:1. Dealers are mostly concerned that you do not hold open positions in excess of your account balance. If you do—or even come close—you will get a margin call, and you will be expected to meet it immediately. A broker may even liquidate part or all of your position(s) without informing you.

The lower the margin requirement, the higher the leverage factor. Profits and losses are magnified as the leverage is increased.

In reality today margin calls in FOREX are rare. Brokers are able to electronically monitor all parameters based on your account size, trading activity, and experience. If you attempt to enter an order outside of those parameters it will not execute. Big Broker is watching you!

Simple money-management rules—that you implement—are the key to avoiding margin calls and overtrading. In Chapter 16, “Money Management Simplified,” I offer the Campaign Trade Method for novices.

I recommend these basic four ideas to new traders: (1) never commit more than one-half of your account balance to open positions, (2) never trade more than two market pairs concurrently, (3) never commit more than 25 percent of your capital to a single position, and (4) never trade over 50:1 leverage. Begin your trading career at 20:1 and work up in increments of 10:1 as you are successful, and start with a demo account, move to a micro-account then to a miniaccount before committing your full grubstake. Experienced traders often modulate these parameters according to how confident they are of a trade. But that requires experience to make it an effective tool. New traders should keep the number of money-management parameters simple and to a bare minimum.

Orders (Traders use a wide variety of different orders for entry)

Traders use a wide variety of different orders for entry, stop protection, and exit (price objectives). Our advice: Keep it simple. Thoroughly understand what an order does and how it works before using it. Many exotic order types add a level of complexity to the trading process that beginners normally do not need. Some orders also offer an extra license to the broker-dealer to manage their book; ergo, they generally love them and encourage them. Functionality of orders may differ slightly from market makers to ECNs.

You should be able to do everything you want with three types of orders: Market or Instant Execution, Stop, and Limits. Remember, speculative hedging is now prohibited for NFA member broker-dealers. You cannot simultaneously buy and sell the same currency pair.

I offer more detail on order placement and management in Chapter 9, “Making the Trade.”

Data Feed

Application Programming Interface (API) is your broker-dealer’s price data stream from its liquidity providers—usually banks—made available for custom programming. What sources it is composed of is usually difficult if not impossible to ascertain. No two are identical. Market makers use a composite of sources—that may even include its own micro-ECN. But given the enormous liquidity of the market, they do not usually vary a great deal. The exception is when market makers requote.

Most brokers offer their API as a separate service. A trader would use the API to drive third-party software or his or her own software program. On the flip side, third-party vendors offer their services using various dealers’ API. It can be confusing. If you use a third-party program for trading or even just for your charts, be sure it has a one-to-one or close correspondence with your brokerdealer data stream. Rolling your own integration is strictly for experienced programmer gurus. New traders should probably avoid third-party integration, also.

APIs are becoming less and less important as the integrated trading platforms now offer robust scripting languages. NinjaTrader’s NinjaScript is a subset of C# with many additional functions, objects, and libraries specifically designed for trading system development.

Historical Data

If you want to look at charts from months and years gone by, you will need historical data. Some brokers offer it in their trading platform, some as a separate service, and some not at all. For comprehensive historical data, you may wish to consider one of the data vendors in Chapter 13, “The FOREX Marketplace.” Historical data is available online, for download or on a CD. The vendor www.disktrading.com is a good value.

Both the MetaTrader and NinjaTrader platforms offer excellent tools for integrating historical data—and it is an easy task to import additional data, as needed.

The site www.disktrading.com offers historical data preformatted for all the major platforms—a big time saver!

Historical data is the inexpensive approach for developing and testing trading methods, systems, and theories. See the section Market Environments (ME) in Chapter 18, “Improving Your Trading Skills,” for approaches to effectively testing trading methods and systems.

Platform Stability and Backbone

As we have mentioned above, trading platforms are enormously complex software programs. Real-time delivery of information is also a daunting task. Put those factors together and it is a minor miracle they work as well as they do. But . . . things happen. One of the biggest brokers had their trading platform crash for almost 24 hours in February 2007. Platform stability has improved enormously in the past few years.

What backbone is a prospective broker-dealer using—Windows, Java, Web-based, or Flash? Windows is the most stable, and Java is cross-platform if you are using a Mac computer. At one time Java platforms had a bad habit of crashing under heavy loads but that seems for the most part to have been remedied. If you use Java do not install the latest Sun update without getting the okay from your broker-dealer. Updates are supposed to be downwardly compatible, but there is a lot going on in a real-time trading platform. Having owned a web conferencing business, author Archer has been leery of Java, but it has improved a great deal recently.

Flash platforms are available, but they do not have the years of development behind them that Windows and Java platforms do. Flash platforms have potential, once developers in FOREX get a handle on the immense Macromedia tool set.

The Internet is not perfect. You should not trade online unless you have a high-speed Internet connection. A backup connection from a different vendor is a good idea if you are a serious trader. Cable is more reliable than DSL in most locations. Some brokers offer their platforms on multiple backbones and even recommend specific browsers for their Windows-based venues. Traders should also invest in a reliable battery backup power supply for their computer.

Once you are trading with substantial amounts of money and taking larger positions, consider opening a small secondary account with a different brokerdealer in a different country on a different backbone. Should your primary broker go incommunicado and you need to execute a trade, you have an out. In your due diligence process, after you have sampled four or five mini-accounts and select a primary broker you may consider leaving a mini-account open as a hedge.

Trading platform stability has improved enormously in the past few years, but you must still be prepared for the occasional interruption of service.