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.

The Trader’s Desktop

How easy is it to place and monitor your orders? View your charts and technical indicators? Most retail dealers do a great job of this but layout and organization vary. Those factors can be important depending on how you trade, especially if you trade frequently. Can that information be easily backed up or saved? Almost all broker-dealers and integrated platform vendors have this process down pat; much of your decision is a matter of personal style. (See Figure 7.2.)














FIGURE 7.2 Trading Platform Source: www.ninjatrader.com

Trading Tools

Traders are fascinated by charts, numbers, and indicators, and most brokerdealers are happy to accommodate them. Downloading a demo account will give you a good idea of the toolset available. In a few instances the demo does not offer the entire palette so you need a mini-account to see and test drive everything. Not sure? Ask the broker.

Most platforms offer integrated charting and technical studies capability. For those platforms that do not, you need to access a third-party vendor. We recommend an integrated platform for the novice.

Unless you have a unique trading tool, the days of needing to access a broker’s platform for order entry and a separate platform for market analysis are coming to an end. Today’s platforms do all the integration for you.

Most of the popular indicators are available—moving averages, stochastics, relative strength, oscillators, Bollinger bands, and many others. (See Figure 7.1).





















FIGURE 7.1 Technical Indicators Source: www.ninjatrader.com

Bar charts with a variety of settings for time frames and units are offered. The new MetaTrader-5 platform has 21 preset time frames and if that is not sufficient, you can custom configure more—as many as you like with NinjaTrader. Be sure the dealer has what you need; integrated charting capability is a must, especially for the new trader. Swing charts, candlesticks, and point and figure charts are also available.

Most platforms offer a palette by which you can customize the look and feel of charts. The size, scale, and coloring of charts can make a big difference to your interpretation of them. As an experiment, take a single pair with the same time scale and unit and make a half-dozen or so charts with different parameters. My advice to the beginner is to keep all charts in the same size and color scheme. Trading is an extremely delicate process, and even small differences matter.

It is best if you have some idea of what you want before beginning your due diligence. Some primary considerations: colors, sizing/scaling, time frames, vertical and horizontal scrolling, printing. As an old-time trader, the author still likes to print charts for analysis.

TIP: Do not let the plethora of indicators and charts overwhelm you. I recommend that you initially work with bar charts, moving averages, and an oscillator. Learn them one at a time. Once comfortable, pick an Indicator of the Week to add to your platform and study.

Platform Capabilities

Perhaps most critical to the trader is a broker-dealer’s platform capabilities. Due diligence, vis-à-vis your needs, will take some time and effort on your part. Here is what to look for in several categories. Learn everything possible before making a trade. Demo accounts are ideal for this purpose. Many brokers now offer one of several standard trading platforms from independent vendors. The three most popular platforms are NinjaTrader, MetaTrader, and eSignal. If you find a platform you like you will want to endeavor to trade only with brokers offering that platform. The trend today is clearly toward everything under one roof—quotes, charts, indicators, order-entry, and programming.

FCM or IB?

A Futures Clearing Merchant (FCM) is a full, licensed broker-dealer who has met the current $20 million NFA capital requirement.

An IB (Introducing Broker) is an independent who routes trades and uses the trading platform and clearing services of a larger FCM (Futures Clearing Merchant) broker-dealer. IBs now must also meet a modest capital requirement but they are still essentially a coattail on the FCM.

The rationale for using an IB is that they may offer a higher level of customer care or value-add services you want and cannot get from the brokerdealer. An example of a value-add IB is HawaiiFOREX (GFTFOREX), which offers a structured educational program currently based on the work of Joe DiNapoli; www.atcbrokers.com (FXCM) with a variety of platforms. Service can also be a legitimate reason to prefer an IB over its own FCM as in the instance of www.tradeviewforex.com (IKONGM) although in this particular case the FCM also offers excellent customer care. Of course, everyone in the chain wants to get fed although markups are generally quite small.

No two traders are alike, and the landscape is constantly changing. Broker recommendations per se are risky business. That said, the author’s consensus opinion is that the new trader should open a demo account with one of the Big Three, an ECN, a market maker, and perhaps an IB to get a good look at the broker-dealer landscape. If your FOREX career blossoms—and we hope it does—move on to one of the larger ECN brokers. It is now possible to actually start with an ECN, but I still recommend testing the waters with a market maker in the mix. See Appendix A, “How the FOREX Game Is Played,” which discusses the current issues of importance to traders with respect to brokerdealer structure and practices.

All of this said, over the past five years things have gotten better, not worse, for the retail FOREX trader. What is true today may not be true tomorrow—one reason most traders hold accounts with multiple brokers.

Market Maker or ECN?

Market maker or ECN is the single most critical distinction between FOREX broker-dealers. A market maker, or dealer, is always the counterparty to your trades; an ECN requires an actual counter order for execution. Given the liquidity of the FOREX markets a counter order is only a problem in a very fast or very slow market or if you place an extremely large order. An ECN cannot play many of the games that market makers do—in large part they do not need to because they have no book to balance. But ECN trading also requires a more accurate and delicate trading touch—an additional skill that the trader must acquire.

Regarding market makers: Some are good, even very good; many are awful. Keep in mind what “counterparty to your trade” means. Then remember that market makers hold all the cards—the data stream, the dealing desk, or control via their liquidity providers with an NDD (No Dealing Desk), the trading platform, and all the tools—requoting, pip spreads, trading rules, dealer intervention, accepting or canceling trades—all for the supposed purpose of maintaining an orderly market. National Futures Association (NFA) Compliance Rule 2-43 has minimized some of these factors—but not eliminated them by any means. Progress is being made but continued excesses will make them the dinosaurs of the industry.

ECNs have their own issues—the biggest one is that their platforms are more difficult to learn and use effectively. They are often bare bones and require integration of third-party charting and technical services. But they have much less leeway because they are functionally trade matchers. In fast or slow markets liquidity may actually be worse with an ECN because they do not have many of the orderly market tools at their disposal. But on balance, I feel that once you have gotten your feet wet in FOREX shop for an ECN. Several retail brokers are offering ECN trading to even mini-accounts. How they bundle 10k lots into a 250k bank lot without intervention I have not fully determined.

The core issue—and the reason the author predicted in the second edition that market makers would lose ground to ECNs—is that market makers manipulate the book to maintain order. This involves a number of activities such as requoting, dealer intervention, and setting pip spread—as and when they please. Market makers trade against their customers—it is why and how they are what they are. A profit for you may well be a loss for them. What would you do with a customer who cost you money on a consistent basis?

Market makers set, manipulate, or control pip spreads usually as legitimate operations of the market-making process; ECNs generally do not. Many trading platforms—both market maker and ECS—provide depth of market (DOM): the ability to see standing buy and sell orders, the quantities and prices bid and asked. This can be valuable information if you learn how to use it properly.

To complicate matters some firms that are obviously market makers now advertise a no dealing desk. The author is unsure how such a hybrid operates; in some instances it appears to be nothing more than semantics in an effort to shake the market-maker moniker. Lack of regulation makes knowing how a broker-dealer processes trades difficult if not impossible. The author queried five such brokers about this process and received no response from four of them and what can only be described as “mumbo-jumbo” from the other one. More and more brokers are attempting to distance themselves from the market-maker label, but whether they are actually making any significant changes to how they execute trades remains a question in many instances. You will hear the term liquidity provider from both ECNs and market makers. For a market maker it really has little meaning but it sounds good. It does not matter how many liquidity providers a broker-dealer has if it stops the feed to sniff and/or manipulate it before passing it through to the customer.

In reviewing the fine print of account forms you notice that even ECNs withhold the right to intervene as market makers. Yes, it is confusing! In FOREX, ultimately, “You pay your money and you take your pick.”

Demo Accounts

Always start with a Demo Account! All retail FOREX brokers offer these accounts. This account allows you to preview most of the broker’s platform features and become familiar with how charting, indicators, order placement, and accounting are handled. Do one survey of demos to decide which brokers to take to the next level with a micro-account or mini-account. Typically a microaccount allows for trades of as little as 1,000 units; a mini-account, for 10,000 units. There may be some difference between the demo account and a real-time account, especially in the data-feed and order types; make an effort to find out what these are for each broker on which you do due diligence.

Broker-Dealer Due Diligence

Retail brokers can be divided into market makers (dealers) and ECNs (Electronic Communications Networks). ECN is the way the true Interbank market operates. ECN brokers can have from one to a dozen liquidity providers. Market makers now also speak in terms of liquidity providers to avoid the stigma of the market-maker moniker. Each approach has advantages and disadvantages. Most retailers are still market makers, but more and more are venturing into the ECN world. The Big Three (see below) now offer a market-maker venue to small traders and an ECN venue for their larger and institutional clients. Market makers are going to be better at providing liquidity in slow or fast markets; ECNs are perceived as more legitimate in not engaging in activities market makers have at least been accused of—stop harvesting, ballooning spreads, and requoting. ECN platforms are somewhat more difficult to use and require more diligence on the part of the trader.

The beginner should first determine what tools he or she will need to trade. Of course, the more you study, the more you learn and the more you want. Your needs may change. Download and conduct due diligence on at least five of these broker-dealers’ demo platforms. Today, many brokers provide a variety of different platforms to even small traders. Use the checklist I provide to research their services in the categories noted and how they relate to your needs. Keep notes. I answer some of the questions for you; more can be found on their web sites, in their documents, and on the FOREX Internet review boards and forums.

I like to send an e-mail question or two to sales to gather information but also to see if and how they respond. Ask to be contacted back by e-mail. Most sales reps will ignore your request and call you, a few will e-mail you, and many will not contact you at all or simply add you to an automated mailing list. Six years after writing the first pages of the first edition of Getting Started in Currency Trading, I continue to be amazed by the inability of many brokerdealers to answer an e-mail at all—much less in a timely manner!

Increasing capital requirements for retail broker-dealers will continue to shake up the retail FOREX industry. I also expect mergers between major players to continue and even a musical chairs effect is on the horizon as smaller firms jockey for position vis-à-vis increasingly onerous regulations. The entire marketmaking paradigm may be in a fast fade. Most traders now have multiple brokers—typically a primary and two secondary broker-dealers. Given the flux of the industry, this seems like a good idea.

Traders have vastly different experiences with brokers. Listed below are some that I would not fund with five cents but that receive wonderful reviews from others. Certainly study the reviews—but in the end, make your own call.

Use the Broker Due Diligence form to keep track of the brokers you review and or test. The reader can download this from the Getting Started section of www.goodmanworks.com.

TIP: The author has used 14 FOREX brokers in the past 10 years of trading. No broker is even close to perfect. Dealing with a FOREX broker—no matter how good they are—is part of the business of trading. Use at least one primary broker and two back-ups. Do not let poor communication from brokers distract you. Do not be surprised when a previously great broker turns mediocre for no apparent reason. Keep your eye on the ball.

A Guide to FOREX Brokers

While regulation has indeed increased, it remains much less robust than it is in either the securities or commodity futures industries. FOREX has no central clearinghouse, making it a substantially different space from commodity futures or listed securities. Prospective traders need to understand the differences and ramifications when selecting a FOREX broker.

At last count I found more than 100 FOREX broker-dealers with online retail platforms. Although some of them are Introducing Brokers (IBs) for other companies, there remain many full Futures Clearing Merchants (FCM) brokers from which to choose.

One big improvement since the last edition: Several third-party trading platforms with a full complement of features are now offered by multiple brokers. Previously, moving brokers meant learning a new platform. But now, if you find a trading platform you like, you can have a wide selection of brokers to choose for your trading activities. The most popular platforms are discussed in Chapter 14, “Retail FX Platforms.”

Profit Threshold

This is a little more complex, but important for money management over the longer term.

When you enter a trade you will also want to enter a stop-loss and a takeprofit order. Almost all traders seek a ratio higher than 1:1 between these two, with take-profit as the larger number for a profit/loss ratio. A 3:1 ratio means you risk one unit to make three units. For example, if your stop-loss (S/L) is 50 pips, your take profit (T/P) is 150 pips. Table 6.7 shows the basic Profit-Loss ratios for T/P and S/L pip values. Ninety percent of profit-loss ratios fall in the shaded area.

Once you make 10 trades you will know how many were winners and how many were losers. Over the long haul it is difficult to sustain more than 60 percent winners. Most traders are happy to get 40 percent winners. This can also be quoted as a ratio of winners/losers. For example, if out of 10 trades you have five winners and five losers, the ratio is 1:1. This is a relatively high ratio for winners/ losers but relatively low for profit/loss. Table 6.8 shows the basic Winners- Losers ratios.












TABLE 6.7 Profit-to-Loses Ratios

As you can intuitively see, the two are inversely correlated. To achieve a profit in the long term, the higher the profit/loss ratio, the lower the winner/loser ratio can be. Conversely, the lower the profit/loss ratio, the higher the winner/loser ratio must be to keep you in the black.

TIP: The higher your winners-to-losers ratio is, the lower your profit-loss ratio can be to meet the Profit Threshold. Conversely, the higher your profitloss ratio, the lower your winners-to-losers ratio can be to meet the Profit Threshold. Short-term traders—guerillas and scalpers—typically have high winners-to-losers ratios, but low profit-to-loss ratios. Long-term traders—day traders and position traders—typically have high profit-to-loss ratios, but low winners-to-losers ratios. There is more than one way to skin the FOREX cat.















TABLE 6.8 Winners-to-Losers Ratios

An example of this: If I hit three winners out of every 10 trades (seven losers) and achieve a 3:1 profit-to-loss ratio of $300/$100, I lost $700 but made $900 so I am okay. Table 6.9 shows the intersections of these two ratios as Positive, Negative, or Neutral (Profit Threshold). Chapter 16, “Money Management Simplified,” discusses the profit threshold in relation to the Campaign Trading Method.

TIP: Depending on your own selected T/P-S/L (Profit-Loss Ratio) you must know the Profit Threshold Winners-to-Losers Ratio. Where does the black end, the red begin? You do not want to cross that line; if possible, not even come close to it.

The light gray areas are losing and danger-zone combinations. The dark gray area of both high profit-to-loss and high winners-to-losers is difficult to maintain for any significant number of trades. Going there typically means the trader is using high leverage, investing most of his or her margin, and trading frequently. Such behavior is not sustainable over long periods of time.

For each trade you enter you must consider three factors: Leverage, Account Traded, and Required Margin. The information in Table 6.10 is also in Tables 6.7, 6.8, and 6.9 but is presented here for ready reference.












TABLE 6.9 Profit Threshold





















TABLE 6.10 Leverage, Lot Size, Margin

For Futures Traders

Futures traders tend to think in dollars versus a commodity asset (silver, soybeans, pork bellies, etc.). The switch to co-relational values with ratios—one currency against another—can be a bit trying at first. The trick is to practice calculating profit and loss for fictitious trades. Again, use any of the online calculators available for practice. Change each parameter in turn and observe how it alters the others as well as the outcome. It may help to think of a currency pair as a spread.