Approach Forex Dealer

one except the model. that is. People are smart enough to realize when the rules of the game have changed (the bus schedule becomes useless after a certain amount of time has passed), while probability-driven models never take into account the fact that the Illodel itself Illay be wrong and Lhus conti nue to waiL for a bus thaL may. or may not, come. This critical flaw is essentially what makes model-driven trading approaches blow-up spectilcularly, and common sense dictates that the world is simply a lot more complex than any risk-model bui lder would have you believe.

Technical trading proves especially attractive to retail traders because it offers a way to "make sense" oul of a sometimes senseless market. and many find the possibility of discovering the "holy grail" of trading systems simply too good to pass up. Yet those obsessed with trying {Q find Ihe indicator or trad ing system would be beuer served in spending that time trying to understand the market instead of trying to outsmart it, since the only money-making machines that I know of are owned by the central banks of the world.

The clear benefit that systematic trading gives us is order. Having a clear, orga­nized, and coherent strategy is fundamental to trading success. Although in the end your "system" mayor may not prove to be profitable. you should always have a clear understanding as to why you are entering the position, and technicals help us tremendously in this regard. Generally spcaking, the simplcr the model, (he more elegant and useful it becomes, since charts filled with lines, indicators, and all kinds of technical tools only serve to distrac( the trader away from the crucial price action. A( a time when quantitative trading has been finally accepted by the general trading community, the intrinsic virtues of technical analysis are hard to discern since often it is traders' combined actions that turn them into self-fulfilling prophecies. If everyone follows the same indicator. then when it flashes a buy sig­nal everyone will go ahead and buy ... and surprise. the price goes up! A kind of "chicken and egg" scenario has emerged and. 1110re importantly, the retail crowd's love of technical analysis has also turned "obvious" technical levels into a mag­net for stop hunters. Many funds (including ours) actively front-run other people's models by anticipating the trading signals their systems will generate and then positioning themselves for the slight pop created by their execution. If anything. you should make a poi nt to stay away from any clear technical levels. since the price action around these are bound to be full of dealer manipulation. which is why it is never wise to trade breakouts in FX. With the amount of pricc "manage­ment" that goes on in the forex world, false breaks are more often the norm (han the exception. Chances are that Olher traders will have also identified the same important support/resistance levels that you did, and set their stops accordingly. Dealers know this. obviously. and routinely go after them, thus creating the false breaks.

Learn to use technical indicators. but also learn when to ignore them. Find something thilt works for you and stick with it. We know that no strategy is always profitable. so the key for technical traders is to identify and understand. your system 's strengths and weaknesses. This lets you limit your exposure in tradi­ tionally bad times and double-up in the good ones. Does your system work best in high-volatility or slow markets? Does it work best in ranging or trending environ­ments? Does it work best for USD pairs or others? These are the types of questions you should be asking of your system, since just like the blackjack player YOLI want to end up betting only when the odds are in your favor. In isolation all technical tools are essentially the same. and only in their application will you find the true differentiator. This is why I think it is vital 10 keep a discretionary element to your trading, even if it is simply knowing when to turn your system "on" or "off". We know that the only instrument that can consistently beat the market is the human mind, so make sure to use it.

Picking the Right Approach

Ahhough proper money management guidelines are the foundations needed to support any sort of trading strategy, al the core of all trading is the fundamen¬tal reasoning. a model or system used by traders to enter and exit positions. Broadly speaking, FX traders can be divided into the fundame ntalist and the tech¬nical crowd. On the one hand, fundamentalists choose to place their bets based on macroeconomic factors such as interest rates. GDP, inflation, CUf fe nt account imbalances, etc .. and their relation to a currency's intrinsic "value", Much like equity managers who like La buy "undervalued" companies, fu ndamental traders use economic models to forecast theoretical exchange rates a nd trade deviations from these.
The technical crowd, on the other hand, cares less about the underlying economic picture and instead prefers to rely on two things only: time and price. In their think ing, a currency's past behaviour is the best predictor of future exchange rates, so they focus on identifying purely mathematical reasons for entering/exiting trades, such as buying a currency after it moves X % in a one direction or using chart patterns to guide their trading.
Although the fundamentalist approach may seem like the more logical way to go, extensive research into the matter actually indicates that technical trading is a much morc profitable way to trade FX. Although the "value investor" mindsel may pay off in equities, it seems that this line of reasoning is utterly useless in forecasting exchange rates (especially in the short run) because of central bank intervention and other market nuances, and it gets decidedly beaten by using a simple randomizer model. This may explain why economists' forecasts are undeni;:lbly horrible, and to the short-term trader it means that they should focus their attention on the technical
side of trading, if only for the simple reason that it seems to be more profitable. Thai being said, technical trading is no sure road 10 riches either.


Since the advent of trading. the lrad ing community has been obsessed with ways of predicting or forecasting the future through their use of models. As computa¬tional power increased over time, so did the popularity of technical or quantitative trading models and now a wide variety of these are used, ranging from sim¬ple moving-average systems to complex neural network algorithms. Unfortunately most, if not all, models have built-in biases, so an unquestioning belief in them is eXLrcmely dangerous. To prove this point. a famous study was conducted where
thousands of different indicators and technical 100is were tested in an cffort to find the best forecaster of US GDP growth. After an exhaustive search and counlless regressions, one leading indicator was found that seemed to fit the data pertectly: buttermilk production rates in Bangladesh! Yet I still have not figured out how to get that on my Bloomberg.
Most risk models still in use today consider the one-day October 1987 mar¬ket crash to be a one-in-a-billion event, or the statistical equivalenl of getting hit by lightning
In order to understand beuer why all probability-driven models have limitations that will eventually lead them to fail spectacularly. il is useful 10 look at a very simple example. Imagine yourself silting at a stop waiting ror the bus to come. You know the frequency of the bus service (every ten minutes), but not the actual arrival lime. If the buses run according to schedule, then the probability of a bus arriving in the first minute of you getting to

Rest 3ssured that after a sufficient amount of time has passed, there wi ll be no one left at the bus stop no.

Becoming a Great Trader

Anyone who has ever traded knows that it can be an exhausting psychological battle that leaves you mentally and physically spent at the end of the day. Although trading is not easy, many people choose to make it even harder for themselves by simply jumping in without laking a second LO understand the different styles and
how they relate to their personality. By trading "against the grain", you are setting yourself lip for a constant personal psychological battle (should I cut or stay) that often leads to bad decision making, losses, and unhappiness.
Matching up your personality with your trading style helps to minimize these personal battles, and if you arc a new trader, the first step should be to figure out what kind of trader you have inside you.
TRADING TO YOUR STRENGTHS
Assuming YOLI think you have the skills and drive needed to become a great trader. figuring out what kind of tnldc r you want to be (more than just a "winning trader"!) is a critical step that requires some personal reflection. Although this does not
require you to tra vel 10 the Gobi Desert {Q find yourself, you should spend some
lime figuring Ollt what trading approach best suits your personality.
For example, if you feel you are patient methodical. and can generally keep your emotions in check, then you may benefit from trading on a longer time frame ::Ipproach. Do you prefer to play chess or video games? On the other hand, if you arc a high-energy, impatient, and emotional individual, you Illay choose to trade intra-day for the instant gralific3Iion it provides.
The difference between holding longer•term positions and going home every night flat is more than just a technical one, since watching profits flyaway during momentary retracements can prove more painful to some than taking small losses intra•day. Needles.!. to say, the best lraders are completely detached and have abso¬lutely no problem watching their P/L gyrate, but in reality they are few and far between.
Beat the Forex Dealer
All traders, whether self-Iaught or not, must at some point ask themselves this
question: "Am I improving?" Answering this question honestly will save you a mountain of heartache down the road. since it is of no use to waste valuable lime and money doing something that docs not fit your sk ill sel, If you feel that you are improving (measured by your P/L), then Slick with il. If ancr several years you do nO( see any improvement in your trading, then you must have the courage to call it quits. Some people make good archilcclS, some make good traders: it is as simple as that. I cannot make a jump-shot to save my life, so I make no pretension of an NBA career.
If, for whatever reason. you are set on becoming a trader. proper money man¬agement is by far the most important factor in achieving success. When you think about it, most traders spend most of their time trying to figure out when to trade. instead of how much to trade, which is surprising given that money management is the ollly thing a trader can actually control!
There is no guaranteed way to make money (except collecting spreads), and even the best and the brightest arc often wrong more than they are right. The market is bigger than you, biggcr than me, and definitely smarter than all of us. We are bound to be wrong and make mistakes, bUI proper money management techniques enable us to weather sustained drawdowns and live to fight another day. Funnily enough. the biggest public misconception about traders is that they regularly take huge risks, whcn in reality great traders aim to minimize their risk relative to their returns at any given moment.
Whether trading a mechanical system or in a discretionary fashion, all traders should know beforehand how much they are willing to wager. Ask yourself: how do I determine my position size? How do I set my stops? All too often traders choose arbitrary numbers that have little to do with proper money management, and ex it according to their " pain threshold" instead. Our innate fear of failure makes us place too much importance on not losing. rather than learning to manage our losses comfortably.
The good thing about money management is that it is easy to implement. Although good trading systems may be impossib1e to find. good money man¬agement rules do exist, and the best way to see if your money management needs tweaking is by looking at your results. For example, if your losers are substantially smaller than your winners, then you may want to consider taking slightly larger posilions. If you consistently post large winners and losers, you should consider tak ing smaller positions to mitigate the risk of ruin. Proper money management maintains the all-imponant risk -reward balance in check, and although your plans may vary from those I present here, the bottom line of any system should be the same: to minimize the chance of blowing-up. Long-term success in this business is achieved by accumulating steady profits and occasionally hitting the home-run trade, and the longer you stay in the market, the more times you get to swing at the bull.
Becoming a Great Trader
OVER LEVERAGE
Some years ago, Procter & Gamble blindly entered into a series of leveraged deriva¬tive trades and discovered to their great surprise thal leverage nO{ only magnifies gains but, more importantly, it also magnifies losses, in their case to the tune of $300 million. This incident brought to life the risks of leverage to the corporate crowd. bUl retail traders are still all 100 often unaware of the inherent risks. Lever¬age. or gearing, is a double-edged sword that should be used sparingly, something not helped by the fact that retail FX brokers constantly extol the virtues of 200-1 leverage. By making it seem that "with $1000 dollars you can cOnlrol $200 000" is a good thing, they suck naNe traders into the leverage trap, since constantly over¬leveraging your trades is the equivalent of always driving at 100 mph ... sooner or
later you are going to crash and burn.
Taking a $1000 starting balance. if you were to trade $200 000 in EURUSD. a mere ten point move (a 0.1 % move) against you would translate into 20 % of your account equity getting wiped out. In fact, just by entering the trade (spread), you would alre;:ldy be down 6 % on the trade, which is much more than any permissible loss. Trading position sizes this big in relation to your account size mean that you are essentially trading yourself into a corner, and any market noise is bound to wipe out your account. The brokers love this. of course, since it means easy money for them. If you are overleveraging your trades. then you may as well be handing over your cash to your broker.
Professional money managers generally use no more than two to live times leverage. and the retail investor should definitely not use more than ten. To put that in perspective, using ten times leverage on a $1000 account means that the price would have to move 1000 points against you before your account is wiped out. That is a lot of room to maneuver. and it gives the trader greater flexibility.
FLEXIBILITY
Choosing the right amount of leverage is the first critical step in maintaining your Oexibility in the market, which is critical if you are to survive for the long-haul. Flexibility in trading means giving yourself options: options to enter a trade, to stay in it, and to exi t. By becoming overexposed to anyone position, you essentially remove options from your table lIntil you are faced with an "all-or-nothing" trade, and in the FX world your survival is measured in days, not years.
Since the currency markets are not one-way streets, the normal gyrations of the market mean that. given time, you will usually have an opportunity to get out of a bad trade or elller a posilion that you may have missed. Most traders have had the frustrating experience of gelling Slopped-out, only 10 see Ihe market relurn back
Beat the Forex Dealer
to your entry at some point later in the day. The only way to gel around these sometimes arbitrary market movements is to Slay flexible and trade multiple lots.
By trading only one lot you are essentially making a 50/50 bet that the rate will move in your direction. Besides not being very wise (it has a negative expected outcome when you take the spread into consideration). it is also not much fun. You should try to think of your initial entry as your lOe testing the tcmperalllre of the w.ater in the pool. If you find out it is too cold. then you can sit it oul. but if it is just the right temperature. then you are free to j ump right in. Trading small until you think yOli have all of the information and confirmation YOll need gives you the flexibility to properly posi tion yourself for the move, or pull out with a small loss
if your analysis proved incorrecl. As YOll may well know. for some reason the FX
gods see fit to lest our mellie every time we enter a trade by moving the market immediately against us, but trad ing mUltiple lots means that our first entry does not become critical and we give ourselves a cushion while the market decides where it wants to go. Trading in this way also means missing out on far fewer trades when compared to the all-in approach. since pulling the initial trigger becomes rather painless and makes the decision-mak ing process much less stressful.
To properly trade multiple lots you must fi rst calculate the total amount you are willing to risk before you enter your trade. Again. different traders take different risks, but it is safe to say that the intra-day trader should not risk more than 1-2 % of their account size on anyone position. This means that for 11 $ 10 000 account. your loss should never be greater than $200 0/1 alt lors combillel/. Look back on your trading and see how big your losses typically are. If you are an intra-day trader and every time you lose you end up taking a 3-5 % hit, then YOll need to stop immediately and come up with better money management rules. This is the same type of analysis that professionals regularly run on their trading. and it proves very insightful since the reasons for your underperformance wi ll most often be glaring.
Trading with proper money management rules will not guarantee you ~uccess, but it will prevent you from falling into the money trap. The "more I bet. the more I win" mentality is not for traders but for gamblers, and using their logic is a sure road to ruin. Avoiding this trap simply means learning to manage your lo!;ses by using simple guidel ines:
•Never risk more than 2 % on anyone position.
•Never trade more than five times leverage on any onc position.
•Trade Illultiple lots wilh multiple enlries.
•If you cannot afford multiple 100 000 lots. trade mini lots.

Becoming a Great Trader
If you don't think trading mistakes will happen to you, just take a look at what some "pros" did:
2003: Shares in now•bankrupt internet finn Exodus surged more than 59000% after a bank trader accidentally bid $100 for shares that were trading around 17 cents at thetlmel
2002: A colossal blunder by Bear Steams saw the firm sell $4 billion worth of stock at the closing bell instead of the Intended $4 million I Fortunately for the finn, they were only filled on $6oom or so of the orders before realizing their goof.
2001: Just before the close of the UK mar1<.et, a fat-fingered Lehman Bros employee mistakenly sold $SOOm worth of stock -100 limes the Intended amount. The slip-up temporarily dropped the FTSE more Ihan 2%!
2001: An absent•minded UBS trader hoping to sell 16 shares of Japanese company Denlsu al6oo000 yen each mistakenly sold 600000 shares al16 yen each! Before he knew it, the trader was already $120m in the hole ..
1998: Perhaps the most classic blunder of all time was made by a now-infamous Salomon trader who Is said to have accidentally sold £850m worth of French government bonds ...... slmply by leaning on his keyboard!

Fighting Back

If you are feeling discouraged having realized just how far the odds have been stacked against the individual trader, rest assured that there are a few simple mea¬sures that can be immediately implemented to gain back some of the lost ground. The brokers may have initially gained the upper hand, but they have by no means left the retail trader without recourse.
USE DIFFERENT PRICE FEEDS
If you use the same price feed on your trading platfofm and your charting appli¬cations, then you are essentially trading with blinkers on. By limiting yourself to your FCM's artificially created bubble, you are giving up the power to become judge and executioner. Your SlOpS may be run or you may trade off manipulated prices, but you wou ld never realize that the moves did not correspond to the general market.
As a trader, you want to remain at all times objective and have as broad a view as possible of the market, something that cannoL be accomplished using a single feed. Having a second or third feed is your way of getting a "second opinion'• on the market and gives you a way to confirm the price action. Your platform feed should only be used for placing trades, bUL your strategy and analysis should rely on the purest, most unbiased price feed you can find. Most retail traders do not have the luxury of trading with a Reuters or EBS feed, but rest assured that alternative sources can be found. Every trader should spend some time comparing different feeds and charts to see how they perform in fast-moving markets when retail platforms regularly freeze their prices (and notice that demo feeds are different from live feeds). Having a stable and faithful charting application is especially vital to all short-term traders.
Do a search for yourself and find one thaI suits your needs, but remember that mosl of these "informative" websites are actually run or sponsored by brokers, so make sure that you know where the price feed is coming from. It may be worth the
Beat the Forex Dealer
added cost of subscribing to an independent and dedicated charting package, since the benefit of receiving an accurate picture of the market will more than offset the cost in the long run. Before choosing one. however. ask them who provides them with the ir streaming FX data feed.
KEEP DETAILED RECORDS
The next thing that traders can do to gain back some of the 10s1 grou nd is to keep detailed trading records. The number one reason is that 1110St slighted traders find it difficult to take action against their broker owing to lack of evidence. Clients may
feel cheated when their orders are not filled correctly, orders disappear from their
screen. or when they find open trades suddenly closed, but it is all very difficult to prove. When you call your broker to complain you may Slate that "my order disappeared!", to which they may reply "do you have proor?" This ortell turns the matter into a your-word versus their-word scenario. which is why it becomes imperative to keep good trading records.
An easy way to do this is to take screen shots. You can find and download a variety of applications on the web, and taking screen shots of your orders in the market, trades. or any other important market activity (like unlawful price spikes) gives you a solid foundation on which to argue any future disagreement. Professionals do it and so should you.
OFFICIAL ACTIONS
If you feel you have been wronged and cannot come to a suitable agreement with your broker, do not hesitate to contact either the CFTC or the NFA. Although most brokers will usually fold when threatened with official action. if they inste,ld choose to call your blu ff go directly to these agencies since both offer programs thm may help clients resolve disputes with brokers. You do not need to hire a lawyer to file a complaint, and usually laking this initial step is enough to scare a broker into a (reasonable) settlement. since the last thing they want on their official record is another disgruntled trader.
The NFA offers an arbitration program to help customers and NFA Members resolve disputes. Information about NFA's arbitration program is available by call¬ing Nl--"A at 800-62 1-3570 or visiting the Dispute Resolution section of its web site al www.nfa.fulUres.org.
Similarly, the CFTC offers a reparation program for resolving disputes. If you want information about filing a CITC reparations complaint, contact the CFTCs Office.

If you are fcd up with your broker's obnoxious habits, an obvious alternative to trading with an off-exchange broker is to trade through an exchange. The Chicago Mercantile Exchange operates its own clearing house and virtually eliminates credit risk by acting as the counterparty lO every transaction. An additional benefit to the individual is that your funds are held in segregated accounts. meaning that they are protected in case of bankruptcy (unlike on-line brokers). Hedge funds and individual traders have used the CME for years to transact theiJ' FX business. so take a look at their FX offering and see if it is right for you.

Of course the number one thing traders can do to shift the odds in their favor is to become benee traders. Thjs sounds obvious, but it is true. It is much easier to place the blame on bad dealers, systems providers, CIC., than on yourself, and for all of the shoddy dealings a retail trader may receive, at the end of the day it is usually their lack of experience and/or bad trading habits that are responsible for the miserable results.
The learning curve can be steep and uncompromising, and in this market there is no free lunch to be had. All traders, even the most successful ones, have paid
their "tuition" to the market and all realize that the key to becoming successful
is survival. Simply put, (he longer you stay in the market the better your chances are of turning into a great trader. For new traders this means establishing your survivability in the market and for experienced traders it means not falling into bad habits.
Obviously, even with all of the sophisticated chaning and analytical software available nowadays success is still extremely difficuil to accomplish, and moving up the learning curve can take a degree of dedication, capacity. and motivation that many traders simply do not possess. This leads many retail traders to "olilsolirce" the analytical work to a third party, whieh can prove extremely hazardous since before you know it you find yourself blindly following the advice of some market guru, expen, or system. If it were only so easy! The actual decision-making process is the hardest pan of trading, so make sure that you keep a firm grasp on it.
Once we put aside all of the nonsense handed out by brokers and gurus, it is lime to get into the meat of becoming a greal FX trader. What exactly does it take to post steady profits in this business? What trading rules do professionals adhere to? What FX tricks exist out there that can help improve your performance?
The second half of this book is intended to give active traders the information and tools they need to survive in the FX market and begin developing their own habits and techniques that will turn them into successful traders.

Third-Party Services

The retail FX market's rise in popularity has created a whole new side-industry focused on providing a range of services geared toward the rctail trader. Hundreds of companies now offer clients great money-making trading signals or programs

To ensure that you are gell ing a fair shake, it is best to make sure that the "expert" or "system" has no relationship with any broker. A dead giveaway is them asking you to trade with their "preferred" broker, which is just another way of saying that they make a pip or two out of every trade that you place. You want to steer clear of anyone making money from your trading. since at the end of the day they do not care if you win or lose money: they just want you to trade.
Looking around the internet I have also seen many "mentors" popping up, who offer to show traders the ropes in exchange for a fee. Although the practice of
Beal the Fore1l: Dealer
mentoring has long been established in the markets, paying someone for this kind
of service is simply a bad ide..: all you have to do is understand their motivation. When a new trader joins a firm he will pair up with a more experienced trader
who will teach him how to become a great trader. The motivation there is simple:
they have a vested interest in seeing their pupils succeed because of the lime and money they have invested in them, and the hope is that they make millions for the whole company. Now compare that to menLOrs offering (0 leach you for a fee. What is their motivation? To make their pupils succeed or to simply generate fees'? If this mentor/trader is so great. why is he teaching random strangers? The truth is that before these guys became popular FX gurus. they were selling miracle brooms on infomercials. In the real world, mentors choose their students, not the other way around.
The best mentors you can possibly find are friends or acquaintances whom you know to be good Lraders, since they have verifiable results and their motivation is clear.
SCAMS
According to the CFTC, the amount of FX scams has skyrocketed in the last few years. This is a direct result of the increase in popularity of forex trading and the lax oversight by government agencies. A quick web search is enough to show the full range of forex scams out there, some promising 1000 % return with no risk! Before entering into any investment scheme. every investor should regularly check
the CFTe's website and also make a point to regularly check www.futuresbuzz,eom
for the latest industry news and FX scams.
THE GOOD GUYS
Therefore, if look.jng for a second oplllion. who do you trust? There are many great analysts and third-party services out there; you just have to make sure you pick the right ones. A whole community of professional technicians, economists, and analysts exists to service the institutionallrading industry. providing innovative trading ideas or market advice. The difference is that Lhey make their mOlley through their calls (reputation) not through your trading (by getting referral money from the broker). I have personally used several subscription services in the past, with varying results, but have noticed that good services have a few things in common:
•First, they are not cheap. As the saying goes, you get what you pay for.
•Second, they have a track record. Not just a cool website.
•Third, they have real-world FX trading experience. They can be ex-prop lraders. dealers, Ireasurers. etc. Basically lhey know how the real FX world

Third-Party Services
works. and lake into accou nt the manipulation, aberrations, and "irrational¬ity" thai sometimes prevails in these markets.
•Fourth, there is a time and money~management aspect to their analysis. It is useless to tell the average trader that the euro will drop to 1.20 if first they have to go through 300 pip gyrations and wait for three months. Opportunity cost is a real cost for most traders with limited liquidity. The last thing you want to do is have your equity locked in a trade that is not moving while bypassing other (maybe betler) trading opportunities.
The bOllom line is thaI every grem trader has paid their "tuition" to the market, usually in the way of years and thousands of dollars. Don't expecl much from a $19.99 system. Success is the direct product of hard work and determination. and you have to learn to trust your own analysis and trading ski lls. Remember that self-confidence is a hallmark of all greal traders.
RULE 1. Never take the advice of someone who is not willing to put money behind their so-called analysis. If they are not willing to take a hit, then what is their downside to making a prediction?
RULE 2, Never listen to anyone "talking their book", Most jokers on chat forums are sitting on positions deep underwater and are desperate to get out. Any advice Ihey can possibly give you is losing advice and shou ld be used as a contrarian indicator if" anything, Even the big names routinely talk their book. When Bill Gross of PIMeD (biggest bond trader in the world) appears on CNBC give his views on the market. do you really think he is going to say something thai goes against his positions?

Don't Trust Your FCM

As the Chinese general Sun-Tzu Ollce said. "Keep your [riends close and your
enemies even closer." All traders should heed this advice and keep a watchful eye on their FX broker. These days. dodgy activity seems 1O be more oflen the norlll than the exception, so it is imperative to conduct your own due diligence on your broker before opening an account. Do not assume that because they proclaim to be large and "well respected" in the industry that that makes them upstanding guys.
According to the NFA, before choosing a broker you should keep some of these
things in rnind :
You arc relying on the dealer's creditworthiness. Basically, if Ihey go down. you go down. Since retail off-exchange forex trades are not guaranteed by a clear¬ing organization, the funds that you have deposited are nOI insured and do not receive a priority in bankruptcy. Even customer funds deposited by a dealer in an FDIC•insured bank account are not protected if the dealer goes bankrupt (remem¬ber REFCO anyone?). so you should first check with the CFTC's website and see the state of their balance sheet.
There is no central marketplace. Unlike regulated futures exchanges (CBOT. CME), in the retail off•exchange forex market there is no central marketplace with many buyers and sellers. The forex dealer determines the execution price. so you are relying on the dealer's integrity for a fair price.
The trading system could break down. If you are using an internet-based elec• lronic system to place trades. some part of lhe system could faii. In the event of a system failure, it is possible that, for a certain lime period, you may not be able to enter new orders, execute existing orders, or modify or cancel orders that were previously entered. A system failure may also result In loss of orders or order priority. You could be a victim of fraud. As with any investment, you should protect yourself from fraud, Beware of investment schemes thaI promise significant returns with little risk. You should take a close and cautious look al the investment offer
itself and continue to monitor any investment you do make. As of now, the minimum net capital requirements have been raised to several million dollars and the once-nonexistent audits have been stepped up dramatically. A futures commission merchant who is not in compliance with these requirements has ten business days 10 achieve compliance or immediately cease doing business and go imo liquidation, which still leaves retail clients out in the cold. Slowly but surely this has begun to weed out most of the dangerously under-funded brokers, yet Illany more "borderline" brokers still remain. The only way to ensure the safety of your funds is to only trade with brokers who are well above their minimum capital requirements. FCMs are required to file monthly reports with the CITC stating their current finances, but remember that since these reports are only audited once a year you are for the 1110st pan relying on your broker's word.
The bottom linc is that loday's relail spot FX market is the Wild West of the investment world, where virtually anything goes. Government oversight of such a complex and fundamentally OTe market is very hard to implement, but if the shoddy dealings continue then look for much tighter regulations to be implemented down the line, although the retail FX brokers will surely not go down without a fight. In fact, FX brokers are raking in so much money these days (hundreds of millions of dollars) that they have even hired their own lobbyists to keep govern¬ment at bay. You know yOll have hit the big time when you can afford to buy a lobby!
For the retail trader to get a fair shake, the deceptive dealings (long outlawed in most other markets) must simply come to an end. How can the FX brokers defend their actions (some of which call for jail time in other markets) and continue to tell the general public that intra-day FX trading is a great "investment" and deeming it "easy"? How can they continue to do business with people that solicit clients through false marketing and fraudulent claims?
New regulation needs to be put into place that will guarantee transparency in pricing and safety of funds to the retail client, but it is up to the average trader to plant the seeds of change by complaining vigorously to the government authorities at the slightest hint of dishonorable dealings. We will all be in better place once a fair set of rules are adopted that lets both brokers and traders flourish. After all. fair dealings should be every broker's duty, not choice.