July 02Trading Strategies
Success in forex trading depends heavily on understanding the rules of the game. Evaluating the broker’s actions – assessing whether the trader is manipulating prices or whether what you are seeing is an actual reflection of the state of the market – is a paradox of problems and even the departure of many traders. Therefore, understanding pricing helps the trader avoid common mistakes and the feeling of being deceived.
A few isolated cases
The appearance of important news on the screen is undoubtedly an opportunity for reflection. At this point, many traders start asking for offers. However, when traders take advantage of the news, all too often they receive late quotes or excessively high spreads, which is interpreted as fraud and manipulation on the part of the broker. But let’s look at this example from a different angle. As soon as a big and significant event occurs, the broker tries to secure its clients’ dealings with the big banks. On the other hand, he notes that the banks have not made any offers. It’s generally accepted that prizes that appear after major news aren’t chased. If you insist, you can get a spread of 50 pips. Based on our experience, we can say that most traders who try to enter the market as soon as the news comes out are very disappointed. Market movements are often unpredictable and often in the opposite direction. In most cases this causes traders to lose money and often the money is very large. Another case: the market is in a calm state and the trader repeatedly requests the rate and gets the real market rate (in this case the real market rate is shown, which is what is shown in Reuters or Dow Jones. So this one course cannot be misinterpreted). However, despite repeated requests, the trader does not enter the market. What does this case mean from the mediator’s point of view? Due to the broker’s frequent inquiries, the broker in turn forwards the inquiries to the opposite party.
pricing without a spread, to encourage him to conclude a deal. That’s great. If you try, you will get a price option. But according to dealer etiquette, refusing such prices is unacceptable. If you refuse it once, you will not receive it again. Option prices don’t show much. Banks often widen the spread to show that such frequency of asking for quotes is inappropriate. However, a simple question arises: How does the average trader see the real market, and what is the “real market” anyway? Let’s start with what each trader sees on their screen from sources like Reuters, Dow Jones, DBC and others. These quotes are indicative, meaning banks are not required to buy or sell at these quotes. Such quotations can come from a variety of sources, ranging from reputable market makers to less reliable sources. Some offer providers enter the data manually, while others use automated means. Both methods are subject to errors that can cause the price to move in a positive direction for a given speculator (there can be a large stop-loss order for a client at 5-7 pips). There is no way to avoid such factors. For example, Reuters uses rates from about 2,600 banks, Dow Jones uses about 1,000 banks, and DBC about 500. We have been monitoring rates from these three sources for several months and seeing how well these rates match the real market. Sometimes, for example during the night, DBC delays the renewal of the franc by periods of about 20 minutes and its pricing differs from Reuters by about 70 pips. This is in quiet times. During Dow Jones, strange things happen when it fluctuates wildly.
How can we even see the real market?
There are systems that only collect data for large banks, such as ELECTRONIC BROKER SYSTEM (EBS) and DEALING2000/2 (D2). If offers are submitted via such systems, the banks are obligedtet to execute at the stated price. From this perspective, such systems can be viewed as an electronic medium. However, some large banks automatically submit rates offered through such systems. Hiccups can also occur here. Let’s say the market price of the CHF was 52-55 a second ago, then 52, then the sell price was 15 (bid 20 minutes ago). The program can take an average of 15 and 55, add 5 pips on each side and then quote the price as 30-40 while the actual market price is 50-52. Such errors can last up to half an hour at night, although the screen is updated, since other banks use the same automated system. Such a situation occurs less frequently in the euro, yen and sterling. It is recommended to pay attention to the rates offered by reliable banks, in particular the following banks: BANK ONE (USA), BARCLAYS (UK), RZB (Austria), ALLIED (Ireland), DEMIR (Turkey), SOCIETE GENERALE (France), ANZ (Australia). Unfortunately, due to the situation described above, this doesn’t help much in determining the actual price. We should also not forget about forward currency contracts (it is possible to calculate spot rates by discounting – such information is also available in the information system). With such a method, it is possible to determine the true value of the euro and the pound sterling. But back to the Swiss franc. If we transfer information from spot futures contracts, we will find that the spread is about 12 pips, which does not help to reduce doubts about the objectivity of the quotes we received (note that the average spread on the CHF 5 pips is).