beat the forex dealer pdf free
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Xe Currency Converter. These are the highest points the exchange rate has been at in the last 30 and day periods. These are the lowest points the exchange rate has been at in the last 30 and day periods. These are the average exchange rates of these two currencies for the last 30 and 90 days.

Beat the forex dealer pdf free investing in crypto currency list

Beat the forex dealer pdf free

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In reality, the average client's trading approach combined with the unscrupulous practices of some brokers make spot FX trading more akin to the games found on the Vegas strip than to anything seen on Wall St. The FX market is littered with the remains of day traders and genius 'systems,' and to survive in the long-run traders have to realize that they are playing a game where the cards are clearly stacked against them. Bad luck perhaps? What if it happens more than once? Do you ever feel like the market is out to get you?

Well guess what, in this Zero Sum game it absolutely is. Covering the day-to-day mechanics of the FX market and the unsavoury dealings going on, Beat the Forex Dealer offers traders the market-proven trading techniques needed to side-step dealer traps and develop winning trading methods. Learn from an industry insider the truth behind dirty dealer practices including: stop-hunting, price shading, trading against clients and 'no dealing desk' realities.

More than just a simple manual, Beat the Forex Dealer brings to life the excitement of the FX market by delivering insights into some of the greatest trading triumphs and highlighting legendary disasters; all written in an easy to read style.

Make no mistake about it there is a lot of money to be made in currency trading, you just have to know where to look. Successful trading comes down to taking care of the details, which means skipping the theoretical stuff and providing only up-to-date, real-life examples while sharing the FX trading tips that have proved so profitable over the years. The average retail trader must feel a terrible disconnect between what is described by famous "experts" and their actual trading experiences.

Theory very rarely trans- lates into fact when it comes to trading. In this jungle it is a kill-or-be-ki ll ed att itude that marks survival, and the minute you step on to the playing field a target has been placed next to your account number. Reali zing that most FX books in print are either written by scam art ists or aca- dem ics with little real -world trading experience, I decided to put my ow n thoughts to paper. Being a firm believer in the "small is beautiful" mantra, I have therefore tried to keep this book short, and to the po int.

First, by exp laining the day-to-day mec han- ics of the FX market and pointing out so me of the more unsavory dealings go ing o n in the retai l s ide. I hope to make ev idel1l for the reader the ri sks and rewards in volved in cu rrency trading.

The second objective of the book is to he lp turn average traders into win nin g traders. However, by hi gh li ghting so me market-proven trading tricks and techniques, I hope to g ive traders an in iti al leg- up. As you may have guessed, th is book takes its name from Edward O. Thorp's landm ark work on blackjack. Beat the Dealer. In , the MIT mathematics professor revealed to the public the gambling industry's tri cks and traps, wh il e at the sa me ti me manag ing to teach a successfu l method for playing the game of twenty-one.

Likewise, you wi ll find thi s book roughly sp lit into two parts: the first half is dedi cated to revealing the fore ign excha nge market's unfair practi ces and the second hal f is designed to help the retail FX trader im plement an effective and wi nning ga me plan by prov iding trading tips and detailed examples. What most of the se new Pal1icipants fa il to rea li ze is that they are stepping on to a battlefield littered wi th the remains of day traders and gen ius "systems".

To be profitable, retai l traders must realize that the foreign eXl:hange market was fundamentally deve loped as a professional 's markel. In a market where the retail trader exerts little though growing influence, Illost can have little hope of success.

The reta il brokers who have sprung up recently would li ke you to believe that cu rrency trading is a high form o f fln ancia l speculation. In rea lit y, the average client 's trading approach combined with the unscrupulous practices of some brokers make spot FX trading more akin to the games fou nd on the Vegas strip than Q anyt hing see n o n Wall Street. All of these benefits ensure th at, in the long run, the house broker will end up with virtually all of th e player's trader's money.

The odds are si mpl y stacked in their favor. Thorp' s origina l Beat rhe Dealer was brilliant in that he focused his energy on a niche game blackjack whic h featured chan gi ng odds. In a ga me with fixed odds s uch as the louery a player is virtuall y assured ruin. Although the long-run odds may not favor the player.

Playi ng in this way enables you to refra in from gambling bett ing on luck and concentrate on playing the probabilities. FX traders need 10 take a cue from their card-playing counterparts and learn to trade only when the odds are shift ed in their favor. In thi s spirit. They see the possibility for greatness. Something must be missing Although they may spend hours duti- fully studying technical analysis.

By preying on the s mall spec ulator, these shadowy characters are often si ngle-handedly responsible for turning winning trades into losers. Both casi nos and FX brokers have an ace up their sleeve which ensures that the odds are always sh ifted agg ressive ly against a player, and not surpri s ing ly these villains share a co mmon name.

Their direct and purposerul interference ca n ruin evcn the most advanced or e lega nt trading system. Have you ever had your stop hit at a pri ce that turned out to be the lowlhigh for the day'! Bad luck perhaps? What if it happens more than once? Do you ever feel like the mark et is "out to get youT' Well, guess what Dealers make particularly tough opponents for traders because they act on better information.

Although it is hard to bluff when the other party knows your cards, you can however profit by betting on their actions. You know what they want your money and you have a rough idea of how they will come after it runnin g stops, shading prices.

Throughout thi s book you will find info rmation mea nt to help you identify and cou nteract typical dealer traps, which if impl emented correct ly can instantly improve your tradin g profits. Many of these are exact ly the same techniques used by hedge funds and eTAs to explo it loopholes left by their dealers. Make no mi stake about it. There is a lot of money 10 be made in currency tmding; you just have to know where to look. Sidestepping dealer traps is one simp le way of improving your daily PIL, but il is su rely the on ly one.

Successful Irading comes down to taking care of the detail s. In the end, it is my hope that by stripping away Ihe theory and gelt ing down to the core of trading you too may find yourself well on your way to beating the forex dealer! Interbank Market Loose term used to describe the FX tradin g done by banks directly with each other. Can essent ially be thought of as the "wholesale" FX market, where entry is restricted to profess ionals.

Not a physical market or exchange, the interbank market is a web of credit facilities built over time and used by banks to trade with eac h other directly or through electronic matching platforms such as Reuters and EBS. In theory, they should simply be Ihe middlemen between the FX wholesalers and their relail c li ent base, charging a small fee the spread for their service. Mu ch like on- line stock brokers E-tradc, ctc.

FX Dealer If the "interbank is the wholesale market and the brokers are the middle- men, then the dealers are the sa lesmen. The dea ler then goes to the wholesa le market, executes the order, and keeps the price difference in theo ry al leasl. Retai l dealers co ncern themselves mostly with prov idi ng accurate prices thro ugh th eir o n-line trading platforms , handling cl ien t fl ows, and runnin g SlOps of cou rse!

T Tmd", "Iu. Venier :. If you arc not at all fam iliar with the foreign exc hangc markct or trading in general. There are many valuable books that teach tec hnica l ana lys is, can- dlestick read ing. Most of those books give the beginn ing trader a basic grounding in the fina ncial theory Ihat underpins successful tnlding, and should be dutifully studied by all tnlders; this book is not meant to replace any of them.

The materi al covered in thi s book is st ri ctl y centered on sharing profess ional "buy-si de" insights for trading the spot foreign exc hange market. Under thi s scenario. As Burton Malkiel famously noted, "A blindfolded monkey throwing darts at the financial pages of a newspaper can select a portfolio that will do just as we ll as one carefull y selected by the experts". This market view is supported by the fac t that the vast maj ority of mutual funds fail to beat the broader market year after year.

Simply put. Need less to say, thi s view of things does not sit we ll with Wall Street, which preaches that research. Assuming that we can draw a s imilar parallel to other markets, then why bother trading? Wh y spend so much time researching he market and analyzing prices whe n we could just as si mpl y close our eyes and buy or se ll?

Thankfully for traders, although the random wa lk theory paints a strong case against IllUlual funds. Investors consistently fall prey to fear, envy, overcon fidence, faddis m, and Olher recogni zably human imperfections th at make markets not onl y inefficient but predictably inefficient. In the short run , recognizable pattern s are indeed visible in the stock market. Bubbles are created, and then bu rst.

If the DOW goes up one week, it is more lik ely to go up the next week. In the lon g run all of these moves smooth themse lves out, but in the short ru n, predicting and trading these constant adjustments ca n actually make ror quite a profitable proposit io n. The chart pauems are similar since the impetus behind them I!

The point in trading is therefore not to forecast the future events them selves. The day the financia l comm unit y realized exactly how imperfect a sc ience it pracli ces was 19 OClober , On thi s "Black Monday" US sLOck markels man- aged to drop an incred ibl e By the late s it seemed that marke ts had finally been "figu red out" and trading was no longer the realm of ri sk-hungry cowboys as technology quickly came to rep lace the gut in pricing and trading decisions. Yet in li ght o f all this, the world 's biggest a nd most soph ist icated market still managed to shed nearly one-quarte r of its value in olle day and on no news, putting into question even the most basic financial assumptions.

By noon of that day, IBM 's stock stopped trading in the fa ce of only sell orders; literall y no one wanted to buy. If a stock is onl y worth as much as someo ne is willin g to pay for it, did thi s mean that IBM 's stock was, at least for the time being. What exactly was goi ng on? How could we call the market rational a nd efficient. On Markets 5 The fact that this evelll now seems as distant as the stock marker crash of is evidence of just how much we have moved forward.

The problem with this kind of oversimplified interpretation of the market is th at it tend s 10 marginalize an individual's contribution. Why did people sell on Black Monday? The problem for the academic world is that whi le real ri sks interest rates.

After all, how on eart h can we measure Joe In ves tor's sensiti vit y to risk when on the one hand he spend s days researching and analyz ing which ca r to buy and on the other hand he buys Pets. Over the years traders have learned to get a grasp o n this tricky subj ect, and some interesting things about the perception of risk ha ve emerged. We know that risk tolerance decreases once the market is full y in vested, which is why asset bubbles build up slowly and dellatc violentl y.

We also know that our brain is hard-wired to shy away from pain and regret, thus making us se ll our winning stocks while holding on to losers hoping that they will turn around. How many dead internet stocks do you still have in your portfolio? What we now know is that markets are effic ient, but they are not perfectly efficient. The point where buyers and sellers meet does not always reflect "equi- librium", and the sheer number of arbitrage-hungry hedge funds out there can be taken as an indication of th e market's imperfection.

Since prices are man-made creations thaI reflect our biases as much as they do economic reality, markets may stay in a slale of disequilibrium for a long time when the very reason for buying prices going up in turn leads other people to buy. Those used to doing the day- to-day dirty work in the markets, the traders, deal- ers, and " locals" in the pit, have all co me 10 realize thaI at least in the short run , markets are orten manipulated and highly ilTalional.

Psychology mailers. The eerie similarity between the crash of and can probably be att ri buted to traders in using the past as a wny of predicting the future. Source: Lope Markets Traders that overlook th ese behavioral aspects end up in troubl e when confronted with tumultu ous and emotional markets. His farewell letter to in vestors pretty much says it all : The key to Ti ger's success over the yea rs has becn a steady commitment to buying the best stocks and shorting the worst.

In a rational environment, thi s strat cgy functions well. But in an irrationa l market, where earnings and price considerati ons take a back seat to mouse clicks and mo men tum , such logic, as we have learned, does not cou nt for much.

I To fade a move is to trade against the prevailing direction. On Markets 7 From a trader's perspective. If irra- tional investors make a bundle o n the way up, while ratio nal in vesto rs lose their shirts shorting the move, then who is rati onal and who is not? Markets are not rational or irrat iona l.

As long as people are buying and selling, short-term speculato rs are indifferent as Q the rationale behind the moves because they know there is mo ney to be made on both sides of any trade. All that traders care about is maximiz in g their profits by posi- tioning themselves in adva nce of the next move, while acade mi cs oflen miss the forest fo r the trees by be ing so far removed from the trading fl oors of the world.

Of all financial market s. Since a market thi s free and liquid is typ ica ll y hard LO out-guess. The FX market has never been a value creator. A US portfolio manager buying Japanese stocks or an Ital ian co mpany acquiri ng raw materials from Brazil both inadvertently become FX participants. The portfolio manager simply needs the yen to buy the stocks and the company needs do llars to buy the coffee.

This type of behavior breeds inefficiencies eage rl y exp lo ited by more active market panicipants, and fonunately for FX traders small arbitrage oppOI1unities still abou nd. Although the market may be very effic ient at giv in g you a price, whether that price is an accura te reflection of the cu rrency's true "value" is another story altogether, whi ch is why good anal ysis and trading techniques do payoff in the long run.

Research and analysis in FX proves valuable because the currency marke t is different than Wall Street. The FX market is different than other markets. Profitable trading strategies do exist and can be found. To understa nd a bank 's motivation for getting involved in thi s market, all you have to know is that by combining a large FX dealing desk with a decent prop trading group, pretty soon you will be talking about billions in profits.

These types of numbers have long made FX the playground of on ly the biggest and baddesl globa l banks, and because at its core the FX market continues to be a credit market. Marketshare 1. Deutsche Bank Goldman Sachs Bank of America JPMorgan Chase Merrill Lynch The interbank market operates on thi s somewhat unusual principle. As you may wel l imagine. For this reason, big banks prefer to deal with big banks, and small er fish are essentiall y shut out of the FX pond.

As a res ult. Technology has managed to open up thi s ti ght-knit grou p somewhat. The rea lity is that the sa me small gro up of banks still co ntro ls the FX market. For example, in some emergi ng countri es a Ci tibank or UBS may be the onl y ga me in town, so anyone want ing to trade that currency is forced to "pay up" to play in their turf.

More often than not thi s leaves those with limited access to information at the mercy of their bank dealer. Th is is where the FX world differs from traditional finan cial markets, and th ings deemed illega l in most other markets are si mpl y regarded as "part of the game" in FX.

Insider trading. Unlike exchange-traded markets NYSE where a market maker has a responsibility to quote the Same price to two different parties, an FX dea ler may quote hi s cl ients whatever price he wi shes. Spreads mysteriously widen and shrink , and the "who's who" factor dominates. Good customers receive dece nt prices a salesman will sha Ul to the dea ler "good price, mate! God forbid that the dealer "read" you correctly and guessed your intentions try calling up your deal er and as k him " I wish to buy, what's the price all eura-dollar?

These inefficiencies, of course, all play into the hands and pockets of the brokers. Dealers are free to behave in thi s way because they are very often the only game in low n, and they know that there is not much customers can do about il. In the sa me way that you and I know ingly get ripped off by the exchange booth guys at the airport, traders know they arc gcning short-changed but often have linle rc ;ourse.

If Go ld man is the on ly one wi ll ing to take your trade at that moment, you ca n either take it or leave it; it is as si mpl e as that. Although theory states that in vestors should not be capable of beating the market in the long run, people like Paul Tudor Jones l are happy to go agai nst conventi ona l wisdom by consistently beating the market year aner year.

Eit her their success is merely the resuh of a stati stical fluke or great traders are simp ly a breed apart. The mark of a great trader is their abi lity to walk the wa lk and talk the talk. Whi le most peop le actuti ll y find thal all paper they make great trad ing deci sio ns, when real money beco mes in volved they soon lose the upper hand.

That is because as soon YOLI enter the market, you beco me emotio nall y artached to you r posi tion and the switch from paper profils to real doll ars and cents clouds you r Lhinking by inserting doubt into your reasoning. Think about the past in vestment decisions you regret the most. They usua lly involve sou nd investments that you p ull ed the pl ug on too SOOI1 I knew I shoul d have held on to that property in Florida!

Either way, the error in judgment is frequent ly caused by the emoti onal ru sh brought on when sw itching from perce ntages to greenback s. This mental toughness is the reason g reat traders are often referred to as having ice-water running through their ve ins o r having pri vate parts made out of steel. Trading is one of the few profess ions l hal enable you to quantify exactl y how good you are. Usua ll y it is through a com bination of peer respect.

And how do they know if Ihey had a good or bad day? Prob lems 1Pan of the University of Virginia hcdgies. Never a down year. Of note. Now imagine being able 10 look at you r scree n at he e nd of your shift and let it tell you how your day was. For traders, the measuring stick is si mpl e: mon ey. The lllorC you make , the better you are at your job. If you made morc than the guy to your right that mu st mean that you are better at your job than he is, and if you lost money today thal means you had a bad day at work.

This turns trading floors into pure meritocracies, and those that make money have the power. Unlike investing, where the focus is on creating wealth e. Trading, like poker, can be described as a zero-sum game. If you are winning then someone else must be losin g.

Another interestin g quality about traders is that proficiency with numbers docs not automat- ically translate into positive trading results. The ability to look beyond the obviolls facts and figures , to think of the market not only from an objective standpoint but also from a subjecti ve view.

The idea was simple yet brilliant: in a time of slow communications, courier pigeons cou ld be lIsed to tran sm it gold prices across the Eng li sh Channel, giv in g you a day 's head start on the market and opening the door 10 arbitrage opportunities. When the price was lower in Paris, they would purchase it there and se ll it in London. Their advantage was information, which was thoughtfull y transformed into profits.

Deal ing with ullcenainty can also mean being pro-active ;:lnd forcing your oppo- nent 's hand. When asked about hi s playing. Ed Lasker. What move do they fear the most? What wi ll they do if prices go down? Succe«ful lraders apply these sa me concepts on a day-to-day basis. Market panicipants and pawn shops know that it is much easier to rip-off so meone in trouble than to make money through you r ow n tradin g skills, so over the years they have evolved into effic ient killing machines that would make Darwin proud.

If the market catches a wisp of a hedge fund III trouble. Aug 7 t4 2. Antic ipati ng highe r natural gas pn ces. At this point. The sudden nood of supp ly gets the market 's attention, and the NYMEX boys soon real ize that Amaran th is siui ng on a huge long position.

Fundamem,tis are pushed aside ilS traders move in fo r an easy play. The rrie nd ly financia l community gladl y offers to "bail them oul" by buying thei r positions at heavily di scou nted prices. Not su rpri singly. It bailed them ou t cash in their positions ror great gains. This acti ve " hunting" role is so meth ing that most model deve lopers do not take into account, and to a large degree it can be sa id that their "sigma-n ine,,2 events are often self-perpetu ated. If Amaranth had not gone balls-oll t long on natural gas, for exampl e.

As George Soros fa mously proclai med, "As a market participan t, I don' l need to be concerned with the co nseq uences of my Ifl nancialJ acti ons:' In other words, he did not create the imbalance, so why shoul d he be blamed when he corrects it? Forex traders are a unique brand of specul ator with an alm ost monasti c devotion to th eir pro fess ion, working obscene ho urs and concerning themse lves wi th global macro eve nts.

What effect will the Tokyo eanhq uake have on the Swiss franc? How will the US do ll ar react to infl ati onary sig ns coming oul of Germany? Try ex plai ning how you make a living to a stranger or you r spouse and they will look at you as if you are crazy. The abili ty to select. Th rough the eyes of a forex trader every asset trade is essenti all y a bet o n exc hange rates. The world' s eco nomies are now one g iant interconnected machine, and the grease that keeps the gears runn ing smooth ly is foreign exc hange.

Legendary FX traders have made their careers by fi gu rin g out. This clairvoyance often instill s a level of se lf-confidence that would hu mble professio nal ath letes. In A Rare Breed 17 Why is it a bad idea to give your star trader the keys to the backoffice? The trading world IS filled Wlttl stories of one-mcln demolition crews often referred 10 as' rogue IrDrlers" Her ' ,lrn some of ttle mosllnf;:unous Yasul Hamanaka.

The Sumitomo Corp. Unfortunately for Sumitomo, his 10 year career was mostly filled with bogus contracts and fictitious entries meant to hide his mounting losses. Nick Leeson. Star trader for Barings Bank. John Rusnak. Allied Irish Bank's chief rogue trader. Peter Young. If the bi g banks arc the FX wholesalers, then dealers are the sa lesmen trusted to push their in ventory. Like the used cur sal esma n who wants to cl ear his lot, FX dealers are looking to move as much in ventory as possible "chopping wood" in dealer s peak and regularly adjust their profit margins here and there in order to accompli sh thi s.

It may be worth accommodaling a tran sactio n for a custo mer at a slightly lower commi ssion or loss if it means locking up busi ness from that client in the future. Because of the whee ling-and-dealing style of their work , deale rs have hi storically been more associated with the streets of Brooklyn than any Ivy League school, and they are renowned for bein g quick on their feet and excellin g at order-flow trading; they are the defi nition of the intra-day trader.

Anot her favorite trading rule of the spot dealer is 10 never tru sl the first price. After a news release, dealers know that the first price print is the knee-jerk reaction of the market and most ofte n wrong, so dealers routine ly use news events to Rush out any weak positio ns by movi ng the market again st them. This is co mmonly known as the "head fake," whereby the price moves sharpl y in one direction before reversing course, catching many traders off-guard in the process.

A dealer's biggest nightmare is a runaway market. Prices can al ti mes ru n away from a dealer so quick ly that they are unable to offset their exposure, and leaves the stressed-out dealer with positi ons deep underwater. Man y ri sk-hu ngry dealers that contin ued to quote prices durin g the USDJPY crash of , for example, were wiped oul.

In general, any one-way market is bad for dea lers, since pri ces do not retrace and they are forced to eventuall y unload their positions at a loss. However, from a dealer's perspecti ve, thi s is sim pl y seen as the "cost of doing business.

Both have va lid po ints in thi s love-hate relationshi p actuall y most ly hate. As in an y bus iness, good market cont acts and relati onshi ps are fu ndamental to success in the market , and a trader may put u p with a dea ler's shodd y quotes if he knows he ca n count on him to take a large C ADJPY order on a Friday afternoo n.

You ca n have the best ideas in the world. Of co urse, ha vin g a good re lati onsh ip does not mean you are not willin g to take the mher party's money. Every ti me a trader pi cks up the phone to deal, he knows that the person on the other end of the line is goi ng to try to rip him o ff, but s mart traders also routinely pl ay tricks on their brokers. A favo rite FX tri ck was to leave small stops with dea lers all over the city and wa it for the m to take the bait before entering the market with your real move in the form of massive orders that would catch dealers wro ng-fooled and looking sill y.

Similarl y, dealers often know the pos ition of their cl ient directl y through the margin depos it or indirec tl y through industry contacts and ac ti vely push the market again st them. More concerned with time than price , these guys have to constantly keep track of value dates and expirations.

Spot Dealers: Fly-by-the-seat-of-your-pants crowd. Rely more on their gut than their head. Can instantly calculate averages and are above all concerned with their net exposure at any given time. Generally more street-smart than book-smart. If they smell blood they pounce. Retail Spot Dealers : Usually ex-bank dealers that were Mretired Mor decided to move on to a cushier gig. They occupy an awkward place between the interbank and the retail market, with most transactions being generally straight-forward.

Cushy job that entails little more than tracking customer flows and offsetting risk with their market makers. Now and then they organize ambushes on their clients, something they revel in. Everything from backortice systems to tradin g has been affected by the changes, generall y making things faster, more accurate, and more reliable.

Bank dealers are now less like ly to find "surprises" ilt the end of the day. Whereas before a trader was forced to make the round s in an effort to find a price. With all of the liquidity providers now imputing their best price into a common platform, it shou ld in theory be a much better way of going about things, and for the Illost part it is.

However, don't feel l OO sorry for the dea ler, for there will always be a place for hi s trade. Although electronic platform s are great for "vani lla" tran saction s, if you are a fu nd trying to push through a large Mexican peso trade in early Sydney time.

No e-platform wi ll ever make a market out of thin air. If thi s seems li ke a lot to you, it is because it is. So the questi on becomes. Who is trading? What pairs are they trading? The nex l obv ious ca ndidate would have to be hedge fund money, since nowadays everything is blamed on hedge funds.

Visit www. Today's FX Market 25 fund money ull ocaled 0 FX is esti mated to be around trill ion, even leveragi ng thi s amou nt aggressive ly woul d still leave a gigantic gap in reponing. So w ho is do ing all the trad ing? Where are they trading? How are they trading? The bank the n qui ckl y contacts one of their counterparti es to offset their ex pos ure, which may in turn offset their expos ure through the de ri vati ves market.

Although it is hard to te ll exact ly where these fl ows are coming from, w hat is undeniably true is that FX vol umes have been steadil y increas ing. Volumes are in fac t ri sing at such a tremend ous pace that only a fundame ntal shift in people's percepti on of FX can ex plain the curre nt sit uation. If a large inte rnational mu tua l fu nd wa nted 10 buy European stocks.

Thi s was a case of Ihe simpler the better, since in their minds their core compete ncies lay in picking stocks, Ilot the d irecti on of the doll ar. After the bursting of the stock market bubble and 11 September, times got tougher for asset managers and lhey soon began to look at FX with kinder eyes. They rea li zed lhal the ir FX holdin gs could actuall y be regarded as a separate asset class, whi ch had to be "optim ized" in their consta nt search for alpha excess return.

This change in perception proved to be a radical shift for the in vestment com mu - nity, and continues to be a major driving fo rce in the FX markets today. More and more funds are now actively managing their FX exposure, ei ther in-house or by employi ng a currency overlay manager CO M. This renewed the foclls on FX and the search fo r yie ld has in turn led to the resurgence of the carry trade,3 which in turn ofte n leaves stro ng trends in its wake.

In an age of low yie lds and in creasingly competiti ve effi cient markets, th is new brand of FX participant is here 10 stay. Soros and other speculators had begun to take increasingly large short sterling positions on the groundS that the UK economy was suffering from high inflation and a slumping housing market.

If the rate fell below that level, the Bank of England would have to intervene in order to prop up their currency. On Sep. The UK Chancellor tried to stir up some demand for the pound by raising rates not once, but twice in the same day, yet by evening it became obvious that they could not continue to prop up "Her Majesty" so they decided to throw in the towel and unceremoniously withdrew from the ERM.

The pound was then free to trade outside of the fixed range and eventually fell to as low as 2. Moral of the story: When everything is in your favor, go for the home-run trade. JSoTTowing a low-yieldin g instrument and trading it for a higher yielding one in an effort to make money from the yield difference.

For example, you take a to. Although over half of all FX turnover is handled by the interbank market essen tially banks trading with each other thi s percent age has been rap idl y shrink- ing it accounted for two-t hirds of all tradin g 10 yea rs ago due to the increased partici pation of sophisticated and varied investors. Where FX was once solely the domain o f global banks, nowadays a growing number of speculators such as hedge funds and eTAs actively jostl e for space alongside the more traditio nal players.

In a way, it see ms on ly fillin g that the largest market in the world should al so have the most varied group of panicipants, and everybody from the hedge fund crowd to the freq uent flier crowd now has an interest in foreign exchange rates. In order to simplify things, we can divide the FX market into the four major types of panicipams: marker makers, corporate accoums, speculawrs, and central banks.

Banks are the only o nes wi th deep-enough pockets to handle the biggest of FX transaction s. Unlike bank dealers , whose primary purpose is to m. Speculators can use them to gai n anonymity while trading, prop desks may li se them for arbitrage, and indi viduals may use them because of their smaller size. I good dealer. Along with insur- ance and pension funds. The Coca-Colas and GEs of the world receive and make payments all over the world.

These corporate nows need to be carefu lly predicted and hedged in advance so that accurate budgets and projections may be created. Since corporate clients are not a particularly SpeCll- lative bunch, they arc primarily interested in hedging flows through the forward market.

For them. Their primary aim is to generate prolits through their views on the markel, as opposed to simpl y co ll ecting transaction fees brokers or using FX as a mea ns to an end corporates. The big players in this group include prop desks bank s trading their ow n proprietary accounts , hedge funds. These traders have an appetite for ri sk and a put-your-money-where-your-mouth -is mentality.

Along wit h dealers. Each national bank is responsible for their currency. Central banks are loathe to see their currency being used for speculati on. Since C Bs love to sec specu lato rs get hurt. In thi s world, the bottom rung of the food pyra mid is occupied by the "public", us uall y cus tomers whose fie ld of ex perti se li es olltside trading currencies corporates or unsophisticated market participant s retai l. Since everybody feeds off the publ ic espec iall y banks and brokers this is not where you want to be, and if you are a retail trader pay ing a 5 pip spread for a 20 pip trade then you immed iate ly fa ll in to thi s category.

Hedge fu nds and other sophisti cated spec ulators, on the other hand, are at the top of this food c hain , Due LO their speed and market insights, these ad vanced pl ayers are ab le to prey on banks and brokers that are more concerned with coll ecting spreads than ident ify ing arbitrage oppo rtuni ties, It 's a spec ulator's duty to take so me of the bank's risk-free profi ts and pocket them for the mse lves.

Although the odds are stacked aga inst th em, so me retai l traders do, however, manage to overco me the odds with a mix o f confi dence and sk ill that any bank trader wou ld envy. Find her and hire he r! Unfortunate ly these bright Slars seem to be few a nd far betwee n, since the vas t majority of reta il spot FX trade rs a re just not very good in the long run.

Aft er a ll , if market makers profit by trading aga inst their client bascothen their client base must be wrong most of the time fo r the m to make money. Re tail traders in a ny market ma ke great contra ri a n indi cators. Althou gh you may think the ir c hances of success are , so me how a mate ur trade rs have the innate ability to pi ck tops a nd bottom s and con siste ntl y get c hewed up by the market because o f the ir mi sguided trading dec isions a nd lax money manage me nt rul es see below.

The Players 31 Thi s chart illustrates some of the erroneous logic that is habitually exhib ited by the retail crowd and exploited by professional s. On the back of the g reat news, Creative's stock gapped hi gher the next day and traded as high as 7. The volume traded was almost len times the daily average, indicating large retail partic ipation. Dealers were well aware of the news, but maybe surpri singly they begin to sell soon after the opening bell they were se lling while the masses were buying.

Why did Lhey choose La go against the lide? If the lawsui l had c han ged the fundam e ntal s of the industry forcing Apple to stop producing the ir product, for example then their reaction would probably have been different , but in thi s scenario they were happy to sell all day long to the unsuspecting buyers and fini sh the day with a healthy profit when the buying subsides and the price returns to its pre-news leve l.

The trend is obvious. The prices are not interbank, the size is not interbank. So what exactly abollt it is interbank? Their moti vat ion is obvious, si nce the more you trade, the more they make. In a scenario like this, who's looking out for your best interests? Befo re the advent o f the cum, Europeans were accustomed to dealing with foreign exchange all the time, and anyone who has li ved in a country with a volatile currency will tell you that they always like to keep one eye on the exchange ratc.

Throughout the s, US futures exchanges complained to the government that they were drowning under a mountai n of red-tape and o utdated reponing measures. Under the CFMA , over- the-counter market s were kept exempt from US govern ment oversight and some of the more restri cti ve regulations on futures exc hanges were removed to ensure their g loba l competitiveness.

This, combined wi th the internet revolutio n, opened Ihe doors for FX brokers a lso ca lled FeMs 10 largel a relail audience and begin offering on-line margin trading accounts. Retail FX brokers thu s gained legilimacy by placing Ihe "regulaled by Ihe NFA" logo on Iheir websi le, and Ihe power o f the internet mean t that these start-ups needed little more than a Reuters line and a toll -free number in o rder to compete with traditional brokerage houses. The early years of the retail FX market featured a number o f rag-lag outfits con- sisting of over-caffeinated dea lers in liny Manhattan offi ces offering their clients spreads wide e nough 10 drive a truck through, and mosl would surely have contin- ued to li ve an un eventful life had it not been fo r th e coll apse of the internet bubble.

The three or four firms that recog ni zed thi s opportuni ty and focused all of their anemian on their marketing efforts quickly became the market leaders and have neve r looked back. These retail operati ons that have mu shroomed in the last fi ve years sit in a slill -to- be-defined gray area within the FX markel. In theory Lhey should act as littl e more than middl emen between the true interbank market and their reta il cl ient base.

In a time when stock market euphori a was grippin g the nati on. All of the transactio ns they handled were off-exchan ge wi th the fi rm taking the other side o f all trades. Becau se the orders where not immediately olrset in the market, the shops could either wait until the price moved in their favor be fore fi lling them keeping the difference o r wait until the end of the day 10 match buys and sells at the ir ow n "adj usted" price.

The dea lers that ran the shops knew that in a time of delayed q uotes and nontransparent pricin g, cl ients had lillie way of know ing where the market stood at the exact moment they placed their orders. Because of these ad vant ages. Unfortunate ly, tod ay's retail FX brokers share man y trai ts with these outl awed operati ons, incl uding: Nontransparent pricing.

The FX market is an over-t he-counter market, meaning the price your broker gives you is he price you get. You have no choice in the matter. Prici ng is not done th rough a central exchange. Encouraging overleveraging. Like the bucket shops. Trading against your clients. It is standard practice in the FX world to trade against your clien t base. Card Stacking 37 the interbank market. The bro ker may then wa it until the cl ient fl ow is surfi cient to o rrset with their market maker or Ihey may choose to hold the pos ition and effec ti vely trade agai nst their client s.

A "no dea ling des k" poli cy simpl y means that dealers ha ve been replaced with mach ines. Unfair practices. Although the odds were stacked aga inst the bucket shop client. Jesse Li vermore,4 for examp le, became so good aI pick ing stoc ks th at he was soon banned from all the bucket shops in the East Coast.

Casinos do not like winners a nd neither do FX brokers. A cas ino may sen d a crooked deale r to stop the win ner's streak and retail FX firms may resort 10 denying service or complicating execution to such a degree th at it makes trading impossible. If anything, th is sho uld be a clear sign that your broker is trading against YOll , since it beco mes evident th at your broker is los ing money if you are posting profits.

The questi on that co mes to mind is, "Wh y would bro kers behave in thi s manner? Since stati sti cs show that most traders blow- up their accounts before reaching their first anni versary, it is in a broker' s best interest to gel as much as they can as qui ckl y as they can. There is no such thing as a "long-term" relati onship between a market maker and hi s cl ients, and whil e the degree of dodgy ness may vary fro m shop to shop.

Stories of bi g in vestment banks ripping off large corporate cli ents routinely make the news, so is it reall y any surpri se to hear that retaillraders do not fare any better? Since deal ers routinely change jobs and li ve on a daY-la-day basis or bo nU S-la-bonus, actuall y it should come as no surpri se to learn th at they focus purely on short-term profits.

Arter al1. A dealer's j ob is a risky one, an d he knows that if you could. Although I am sure squeaky-clean shops ex ist somew here, I ha ve yet to come across any. The more accounts they open, the more money they make. According to Drcw Niv. They will try eve rythin g from huge internet adverti sin g ca mpai gns to direc t mail offerings, eve n goin g as far as holdin g trading "conferences" or "seminars".

In the end. Take, for ex ampl e. What could poss ibl y be wrong with rewardin g good traders? A lot, actuall y. Tradin g contests and drea ms of a large payoff pl ace people in direct co mpetiti on with each other. If you are tradin g to beat your ne ighbor.

Card Stacking 39 bring up and focus squarely o n the dollars and cents, we st ill find brokers coming out on lOp even when they are the ones paying out to traders on a monthly basis. Layers between the retail trader and the interbank market Each layer represents an e tra cost. Most probably these guys simply leveraged their accoun ts to the max, picked a volatile pajr, closed their eyes, and bought.

Not much ski ll was involved in that brilliant strmegy. The really interesti ng part comes when we sh ift the atlention away from the winners and focus instead on the results of the rest of the field. Out of four hundred participants, Jess than finished the month above breakeven a surpri singly high number, actual ly , and the rest finished with a losing record. This type of game where lots of small accounts vie for a big payoff is nO new; it is usually just called a lottery.

In this sense, forex brokers are simply great at twisting the truth and transforming the laughable into something deemed va luable by traders. Who else cou ld co nvince trade rs that paying twice the spread s imply to be Hat is act uall y of benefi t 10 them?

These guys shou ld run for Congress! Large reta il FCMs have their own market makers, a Citi or Gold man for ex am ple, which offer them a I pip spread or less on the most liquid pairs, whi ch they use as their ind icati ve pri ce. To thi s rate, they add thei r 2 or 3 pips or more! However, because these middlemen are free 0 manipul ate their price feed, they can essenti all y show their cl ients any pri ce they wa nt , and the same person that is do ing the buyi ng and the selling also becomes the person that controls the prices.

If this smell s fis hy to you, it should ; after all, it is the primary reason why exchanges were created in the first place, si nce the lack of transparency always plays into a dealer's hands. If a broke r is convi nced that the curo is going higher, for exa mple, he wi ll shade his quotes s li ghtl y higher to benefit fro m the move.

Th is is all fa irl y common practice in the FX world. If a dealer notices that a bunch of good-sized stops have gathered nearby reme mber, they know where your stops lie! Naturall y, the move will be seen as si ngle blip. If a cl ient co mplains, brokers are shi elded by the fact that there is no ce ntral exchange from which to compare seco nd -by-second pri cing.

We na iled you! Card Stacking An example of price manipul ation. With two feeds from two different FX brokers, you can see how at the same moment one price spikes while the other one does not. T hese days. Do not assume that because they proclaim to be large and "well respected" in the ind ust ry that that makes them upstanding guys. According to the NFA, before choos ing a broker you sho uld keep some of these things in rnind : You arc relying on the dealer's creditworthiness.

Basicall y, if Ihey go down. Since retail off-exchange forex trades are not guaranteed by a clear- ing organ iza ti on, the fu nd s that you have deposited are nOI insured and do not receive a priority in bankruptcy. There is no central marketplace. Un like regulated fu tures exchanges C BOT. The fo rex dealer determin es the executio n pri ce. The trading system could break down. A sys tem fai lure 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 in vestment sche mes thaI promise significant returns with little risk. You should tak e a close and cautious look al the investment offer itself and continue to monitor any in vestment you do make.

AI the time of writing, third-party so licitors for retail spot forex trading were still not su bject to regulatory oversight, and Illay make misleading st3! A Google sea rch on the term "forex" wi ll quickly reveal all kinds of scam s and false promises made poss ible by la x government oversight. However, one quick visit '0. The problem is that alth ough it is a valuable instituti on. It is just not very effecti ve.

These are the guys that send crooked dealers and pOll zi sc hemes to jail, but their FX overs ight is limited beca use of the spot market's over-the-counter nature. The CFfC is set up to regul ate exc hange-traded markets, 50 in FX they can do little more than enforce outright scams and fraud. Because the ri se of the retail forex market caught regulators sleeping, looph oles in outdated year-old mini mu m fundin g regul ation enabled new FX brokers to establi sh themselves with littlc, if any, capital.

Although thi s sho uld have scared the daylights out of their retail clients wi th milli ons of do llars in nonsegregated trading accounts, most of the time they were blissfull y unaware of the consequences until it was too late due to a lack o f awareness programs. The subsequent bankruptcy of several small brokers th at took their client's mo ney with them fi nally led the government to rai se the minimum net capital requirement and begin to crack down on these woefull y underfin anced operati ons.

As of now, the minimum net capit al requirements have been rai sed to several milli on do llars see Notes secti on fo r the full regu lation and the o nce-nonex istent aud its have been stepped up dramati ca lly. A futures commission merchant who is not in compliance with these requirement s has ten business days 10 achieve compliance or immediately cease do in g business and go imo liquidation, which still leaves retail client s o ut in the cold. Slowly but surel y thi s has begun to weed out most of the dangerously under-funded brokers, yet Illany more "borderline" brokers still remain.

The o nly way to ensure the safety o f your funds is to o nl y trade with brokers who are well above their minimum capital requirement s. FCMs are required to file mo nthl y reports with the CITC stating their current finances, but remember that since these reports are only audited o nce a year you are for the st pan relying on your broker's word. Government ove rsight of such a complex and fundamentall y OTe market is very hard to implement, bu t if the shoddy dealings continue then look for much tighter regul ations to be implemented down the line, al tho ugh the retai l FX bro kers will surely not go dow n without a fi ght.

In fact, FX bro kers are raking in so much money these days hundreds of milli ons o f doll ars that they have even hired their ow n lobbyists to keep govern- ment at bay. You know yOll have hit the big time when you can afford to bu y a lo bby! How ca n the FX brokers defend the ir acti ons some of which ca ll for jail time in other markets and continue to tell th e ge neral public that intra-day FX trading is a great "i nves tment " and deemi ng it "easy"?

How can they co ntin ue to do bus iness with people that so li cit clients through fa lse marketing and fraudulent claims? New regul at ion needs to be put into pl ace that will guarantee transparency in pricing and safety of fu nds to the reta il cl ient, but it is up to the average trader to plant the seeds of change by com pl ain ing vigorously to the gove rn ment authorities at the sligh test hint of dis ho norable dealings.

We wi ll all be in 11 bette r place once a fair set of rul es are adopted that lets both brokers and traders flourish. After all. Hundreds of companies now offer clients great money-mak ing trading signa ls or programs. Need less to say , the actual serv ices Lhey provide leave much to be des ired. LeI me put it thi s way: if you had a proven, money-making FX trading system would you sell it La the genera l public?

Probably nol. Hedge funds and private traders spend milli o ns of doll ars developing and safeguarding their trading systems, but you can sti ll fi nd hu nd reds of different trading programs fo r sale on the internet or trad in g magazines. Common sense tell s us that these "systems" are probably not very good to begin wit h. When looking It third-party providers. For exa mp le, if the "guru" you are look ing at does not trade hi s own recommendations. If the resuhs cannot be veri fied note that simply posting them on a website is not verifying them!

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.

Looking around the internet I have also seen many " me ntors" popp ing up, who offer to show traders the ropes in exchange for a fee. When a new trader joins a firm he will pair up with a more experienced trader who w ill teach him how to become a great trader. The motiva ti on there is si mple: they have a vested interest in seein g their pupi ls succeed because of the lime and money they have in vested in them, and the hope is that they make milli ons for the whole compa ny.

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'? The truth is that before these guys became popular FX guru s. In the rea l world , mentors choose their stude nt s, not th e ot her way around. The best mentors you ca n possibly find are friends or acqu aintances who m you know to be good Lraders, since they have verifi ab le results and their motivat ion is clear.

This is a direct result of the increase in popularit y of forex tradin g and the lax overs ight by governm ent agencies. Before enterin g into any investment scheme. There are many great analysts and third-party serv ices out there; you just have to make sure you pick the right o nes. A whole commu nity of professional technicians, econo mi sts, and analysts ex ists to service the institutionallrading industry.

The difference is that Lhey mak e their mOlley th rough their calls reputation not through your trading by getting referral money fro m the broker. As the sayi ng goes, you get what you pay for. Not just a coo l website. They can be ex-prop lraders. It is useless to tell the average trader that the euro will drop to 1. Opportu nity cost is a real cost for most traders with limited liquidity.

Consider, that foreign currency hedging techniques forex sorry

I sessions the. Integration : Alchemist me, this. If was new connection to the and the I in listening in and user.

Well guess what, in this Zero Sum game it absolutely is. Covering the day-to-day mechanics of the FX market and the unsavoury dealings going on, Beat the Forex Dealer offers traders the market-proven trading techniques needed to side-step dealer traps and develop winning trading methods.

Learn from an industry insider the truth behind dirty dealer practices including: stop-hunting, price shading, trading against clients and 'no dealing desk' realities. More than just a simple manual, Beat the Forex Dealer brings to life the excitement of the FX market by delivering insights into some of the greatest trading triumphs and highlighting legendary disasters; all written in an easy to read style. Make no mistake about it there is a lot of money to be made in currency trading, you just have to know where to look.

Successful trading comes down to taking care of the details, which means skipping the theoretical stuff and providing only up-to-date, real-life examples while sharing the FX trading tips that have proved so profitable over the years. By stripping away the theory and getting down to the core of trading, you too will find yourself on the way to beating the forex dealer! A vid R eaders. Beat the Forex Dealer. An Insider's Look into Trading Today's Foreign Exchange Market" The foreign-exchange market is often referred to as the Slaughterhouse where novice traders go to get 'chopped up'.

The 10X Rule. The rrie nd ly financia l community gladl y offers to "bail them oul" by buying thei r positions at heavily di scou nted prices. Not su rpri singly. It bailed them ou t cash in their positions ror great gains. This acti ve " hunting" role is so meth ing that most model deve lopers do not take into account, and to a large degree it can be sa id that their "sigma-n ine,,2 events are often self-perpetu ated.

If Amaranth had not gone balls-oll t long on natural gas, for exampl e. As George Soros fa mously proclai med, "As a market participan t, I don' l need to be concerned with the co nseq uences of my Ifl nancialJ acti ons:' In other words, he did not create the imbalance, so why shoul d he be blamed when he corrects it? Forex traders are a unique brand of specul ator with an alm ost monasti c devotion to th eir pro fess ion, working obscene ho urs and concerning themse lves wi th global macro eve nts.

What effect will the Tokyo eanhq uake have on the Swiss franc? How will the US do ll ar react to infl ati onary sig ns coming oul of Germany? Try ex plai ning how you make a living to a stranger or you r spouse and they will look at you as if you are crazy.

The abili ty to select. Th rough the eyes of a forex trader every asset trade is essenti all y a bet o n exc hange rates. The world' s eco nomies are now one g iant interconnected machine, and the grease that keeps the gears runn ing smooth ly is foreign exc hange. Legendary FX traders have made their careers by fi gu rin g out. This clairvoyance often instill s a level of se lf-confidence that would hu mble professio nal ath letes.

In A Rare Breed 17 Why is it a bad idea to give your star trader the keys to the backoffice? The trading world IS filled Wlttl stories of one-mcln demolition crews often referred 10 as' rogue IrDrlers" Her ' ,lrn some of ttle mosllnf;:unous Yasul Hamanaka. The Sumitomo Corp. Unfortunately for Sumitomo, his 10 year career was mostly filled with bogus contracts and fictitious entries meant to hide his mounting losses.

Nick Leeson. Star trader for Barings Bank. John Rusnak. Allied Irish Bank's chief rogue trader. Peter Young. If the bi g banks arc the FX wholesalers, then dealers are the sa lesmen trusted to push their in ventory. Like the used cur sal esma n who wants to cl ear his lot, FX dealers are looking to move as much in ventory as possible "chopping wood" in dealer s peak and regularly adjust their profit margins here and there in order to accompli sh thi s.

It may be worth accommodaling a tran sactio n for a custo mer at a slightly lower commi ssion or loss if it means locking up busi ness from that client in the future. Because of the whee ling-and-dealing style of their work , deale rs have hi storically been more associated with the streets of Brooklyn than any Ivy League school, and they are renowned for bein g quick on their feet and excellin g at order-flow trading; they are the defi nition of the intra-day trader.

Anot her favorite trading rule of the spot dealer is 10 never tru sl the first price. After a news release, dealers know that the first price print is the knee-jerk reaction of the market and most ofte n wrong, so dealers routine ly use news events to Rush out any weak positio ns by movi ng the market again st them. This is co mmonly known as the "head fake," whereby the price moves sharpl y in one direction before reversing course, catching many traders off-guard in the process.

A dealer's biggest nightmare is a runaway market. Prices can al ti mes ru n away from a dealer so quick ly that they are unable to offset their exposure, and leaves the stressed-out dealer with positi ons deep underwater. Man y ri sk-hu ngry dealers that contin ued to quote prices durin g the USDJPY crash of , for example, were wiped oul. In general, any one-way market is bad for dea lers, since pri ces do not retrace and they are forced to eventuall y unload their positions at a loss.

However, from a dealer's perspecti ve, thi s is sim pl y seen as the "cost of doing business. Both have va lid po ints in thi s love-hate relationshi p actuall y most ly hate. As in an y bus iness, good market cont acts and relati onshi ps are fu ndamental to success in the market , and a trader may put u p with a dea ler's shodd y quotes if he knows he ca n count on him to take a large C ADJPY order on a Friday afternoo n. You ca n have the best ideas in the world.

Of co urse, ha vin g a good re lati onsh ip does not mean you are not willin g to take the mher party's money. Every ti me a trader pi cks up the phone to deal, he knows that the person on the other end of the line is goi ng to try to rip him o ff, but s mart traders also routinely pl ay tricks on their brokers. A favo rite FX tri ck was to leave small stops with dea lers all over the city and wa it for the m to take the bait before entering the market with your real move in the form of massive orders that would catch dealers wro ng-fooled and looking sill y.

Similarl y, dealers often know the pos ition of their cl ient directl y through the margin depos it or indirec tl y through industry contacts and ac ti vely push the market again st them. More concerned with time than price , these guys have to constantly keep track of value dates and expirations.

Spot Dealers: Fly-by-the-seat-of-your-pants crowd. Rely more on their gut than their head. Can instantly calculate averages and are above all concerned with their net exposure at any given time. Generally more street-smart than book-smart.

If they smell blood they pounce. Retail Spot Dealers : Usually ex-bank dealers that were Mretired Mor decided to move on to a cushier gig. They occupy an awkward place between the interbank and the retail market, with most transactions being generally straight-forward. Cushy job that entails little more than tracking customer flows and offsetting risk with their market makers.

Now and then they organize ambushes on their clients, something they revel in. Everything from backortice systems to tradin g has been affected by the changes, generall y making things faster, more accurate, and more reliable. Bank dealers are now less like ly to find "surprises" ilt the end of the day. Whereas before a trader was forced to make the round s in an effort to find a price. With all of the liquidity providers now imputing their best price into a common platform, it shou ld in theory be a much better way of going about things, and for the Illost part it is.

However, don't feel l OO sorry for the dea ler, for there will always be a place for hi s trade. Although electronic platform s are great for "vani lla" tran saction s, if you are a fu nd trying to push through a large Mexican peso trade in early Sydney time. No e-platform wi ll ever make a market out of thin air.

If thi s seems li ke a lot to you, it is because it is. So the questi on becomes. Who is trading? What pairs are they trading? The nex l obv ious ca ndidate would have to be hedge fund money, since nowadays everything is blamed on hedge funds. Visit www. Today's FX Market 25 fund money ull ocaled 0 FX is esti mated to be around trill ion, even leveragi ng thi s amou nt aggressive ly woul d still leave a gigantic gap in reponing.

So w ho is do ing all the trad ing? Where are they trading? How are they trading? The bank the n qui ckl y contacts one of their counterparti es to offset their ex pos ure, which may in turn offset their expos ure through the de ri vati ves market. Although it is hard to te ll exact ly where these fl ows are coming from, w hat is undeniably true is that FX vol umes have been steadil y increas ing.

Volumes are in fac t ri sing at such a tremend ous pace that only a fundame ntal shift in people's percepti on of FX can ex plain the curre nt sit uation. If a large inte rnational mu tua l fu nd wa nted 10 buy European stocks. Thi s was a case of Ihe simpler the better, since in their minds their core compete ncies lay in picking stocks, Ilot the d irecti on of the doll ar.

After the bursting of the stock market bubble and 11 September, times got tougher for asset managers and lhey soon began to look at FX with kinder eyes. They rea li zed lhal the ir FX holdin gs could actuall y be regarded as a separate asset class, whi ch had to be "optim ized" in their consta nt search for alpha excess return.

This change in perception proved to be a radical shift for the in vestment com mu - nity, and continues to be a major driving fo rce in the FX markets today. More and more funds are now actively managing their FX exposure, ei ther in-house or by employi ng a currency overlay manager CO M. This renewed the foclls on FX and the search fo r yie ld has in turn led to the resurgence of the carry trade,3 which in turn ofte n leaves stro ng trends in its wake.

In an age of low yie lds and in creasingly competiti ve effi cient markets, th is new brand of FX participant is here 10 stay. Soros and other speculators had begun to take increasingly large short sterling positions on the groundS that the UK economy was suffering from high inflation and a slumping housing market. If the rate fell below that level, the Bank of England would have to intervene in order to prop up their currency.

On Sep. The UK Chancellor tried to stir up some demand for the pound by raising rates not once, but twice in the same day, yet by evening it became obvious that they could not continue to prop up "Her Majesty" so they decided to throw in the towel and unceremoniously withdrew from the ERM.

The pound was then free to trade outside of the fixed range and eventually fell to as low as 2. Moral of the story: When everything is in your favor, go for the home-run trade. JSoTTowing a low-yieldin g instrument and trading it for a higher yielding one in an effort to make money from the yield difference. For example, you take a to. Although over half of all FX turnover is handled by the interbank market essen tially banks trading with each other thi s percent age has been rap idl y shrink- ing it accounted for two-t hirds of all tradin g 10 yea rs ago due to the increased partici pation of sophisticated and varied investors.

Where FX was once solely the domain o f global banks, nowadays a growing number of speculators such as hedge funds and eTAs actively jostl e for space alongside the more traditio nal players. In a way, it see ms on ly fillin g that the largest market in the world should al so have the most varied group of panicipants, and everybody from the hedge fund crowd to the freq uent flier crowd now has an interest in foreign exchange rates.

In order to simplify things, we can divide the FX market into the four major types of panicipams: marker makers, corporate accoums, speculawrs, and central banks. Banks are the only o nes wi th deep-enough pockets to handle the biggest of FX transaction s. Unlike bank dealers , whose primary purpose is to m. Speculators can use them to gai n anonymity while trading, prop desks may li se them for arbitrage, and indi viduals may use them because of their smaller size.

I good dealer. Along with insur- ance and pension funds. The Coca-Colas and GEs of the world receive and make payments all over the world. These corporate nows need to be carefu lly predicted and hedged in advance so that accurate budgets and projections may be created. Since corporate clients are not a particularly SpeCll- lative bunch, they arc primarily interested in hedging flows through the forward market. For them.

Their primary aim is to generate prolits through their views on the markel, as opposed to simpl y co ll ecting transaction fees brokers or using FX as a mea ns to an end corporates. The big players in this group include prop desks bank s trading their ow n proprietary accounts , hedge funds.

These traders have an appetite for ri sk and a put-your-money-where-your-mouth -is mentality. Along wit h dealers. Each national bank is responsible for their currency. Central banks are loathe to see their currency being used for speculati on. Since C Bs love to sec specu lato rs get hurt. In thi s world, the bottom rung of the food pyra mid is occupied by the "public", us uall y cus tomers whose fie ld of ex perti se li es olltside trading currencies corporates or unsophisticated market participant s retai l.

Since everybody feeds off the publ ic espec iall y banks and brokers this is not where you want to be, and if you are a retail trader pay ing a 5 pip spread for a 20 pip trade then you immed iate ly fa ll in to thi s category.

Hedge fu nds and other sophisti cated spec ulators, on the other hand, are at the top of this food c hain , Due LO their speed and market insights, these ad vanced pl ayers are ab le to prey on banks and brokers that are more concerned with coll ecting spreads than ident ify ing arbitrage oppo rtuni ties, It 's a spec ulator's duty to take so me of the bank's risk-free profi ts and pocket them for the mse lves.

Although the odds are stacked aga inst th em, so me retai l traders do, however, manage to overco me the odds with a mix o f confi dence and sk ill that any bank trader wou ld envy. Find her and hire he r! Unfortunate ly these bright Slars seem to be few a nd far betwee n, since the vas t majority of reta il spot FX trade rs a re just not very good in the long run. Aft er a ll , if market makers profit by trading aga inst their client bascothen their client base must be wrong most of the time fo r the m to make money.

Re tail traders in a ny market ma ke great contra ri a n indi cators. Althou gh you may think the ir c hances of success are , so me how a mate ur trade rs have the innate ability to pi ck tops a nd bottom s and con siste ntl y get c hewed up by the market because o f the ir mi sguided trading dec isions a nd lax money manage me nt rul es see below.

The Players 31 Thi s chart illustrates some of the erroneous logic that is habitually exhib ited by the retail crowd and exploited by professional s. On the back of the g reat news, Creative's stock gapped hi gher the next day and traded as high as 7.

The volume traded was almost len times the daily average, indicating large retail partic ipation. Dealers were well aware of the news, but maybe surpri singly they begin to sell soon after the opening bell they were se lling while the masses were buying. Why did Lhey choose La go against the lide? If the lawsui l had c han ged the fundam e ntal s of the industry forcing Apple to stop producing the ir product, for example then their reaction would probably have been different , but in thi s scenario they were happy to sell all day long to the unsuspecting buyers and fini sh the day with a healthy profit when the buying subsides and the price returns to its pre-news leve l.

The trend is obvious. The prices are not interbank, the size is not interbank. So what exactly abollt it is interbank? Their moti vat ion is obvious, si nce the more you trade, the more they make. In a scenario like this, who's looking out for your best interests? Befo re the advent o f the cum, Europeans were accustomed to dealing with foreign exchange all the time, and anyone who has li ved in a country with a volatile currency will tell you that they always like to keep one eye on the exchange ratc.

Throughout the s, US futures exchanges complained to the government that they were drowning under a mountai n of red-tape and o utdated reponing measures. Under the CFMA , over- the-counter market s were kept exempt from US govern ment oversight and some of the more restri cti ve regulations on futures exc hanges were removed to ensure their g loba l competitiveness.

This, combined wi th the internet revolutio n, opened Ihe doors for FX brokers a lso ca lled FeMs 10 largel a relail audience and begin offering on-line margin trading accounts. Retail FX brokers thu s gained legilimacy by placing Ihe "regulaled by Ihe NFA" logo on Iheir websi le, and Ihe power o f the internet mean t that these start-ups needed little more than a Reuters line and a toll -free number in o rder to compete with traditional brokerage houses.

The early years of the retail FX market featured a number o f rag-lag outfits con- sisting of over-caffeinated dea lers in liny Manhattan offi ces offering their clients spreads wide e nough 10 drive a truck through, and mosl would surely have contin- ued to li ve an un eventful life had it not been fo r th e coll apse of the internet bubble.

The three or four firms that recog ni zed thi s opportuni ty and focused all of their anemian on their marketing efforts quickly became the market leaders and have neve r looked back. These retail operati ons that have mu shroomed in the last fi ve years sit in a slill -to- be-defined gray area within the FX markel.

In theory Lhey should act as littl e more than middl emen between the true interbank market and their reta il cl ient base. In a time when stock market euphori a was grippin g the nati on. All of the transactio ns they handled were off-exchan ge wi th the fi rm taking the other side o f all trades. Becau se the orders where not immediately olrset in the market, the shops could either wait until the price moved in their favor be fore fi lling them keeping the difference o r wait until the end of the day 10 match buys and sells at the ir ow n "adj usted" price.

The dea lers that ran the shops knew that in a time of delayed q uotes and nontransparent pricin g, cl ients had lillie way of know ing where the market stood at the exact moment they placed their orders. Because of these ad vant ages. Unfortunate ly, tod ay's retail FX brokers share man y trai ts with these outl awed operati ons, incl uding: Nontransparent pricing.

The FX market is an over-t he-counter market, meaning the price your broker gives you is he price you get. You have no choice in the matter. Prici ng is not done th rough a central exchange. Encouraging overleveraging. Like the bucket shops. Trading against your clients. It is standard practice in the FX world to trade against your clien t base. Card Stacking 37 the interbank market. The bro ker may then wa it until the cl ient fl ow is surfi cient to o rrset with their market maker or Ihey may choose to hold the pos ition and effec ti vely trade agai nst their client s.

A "no dea ling des k" poli cy simpl y means that dealers ha ve been replaced with mach ines. Unfair practices. Although the odds were stacked aga inst the bucket shop client. Jesse Li vermore,4 for examp le, became so good aI pick ing stoc ks th at he was soon banned from all the bucket shops in the East Coast. Casinos do not like winners a nd neither do FX brokers. A cas ino may sen d a crooked deale r to stop the win ner's streak and retail FX firms may resort 10 denying service or complicating execution to such a degree th at it makes trading impossible.

If anything, th is sho uld be a clear sign that your broker is trading against YOll , since it beco mes evident th at your broker is los ing money if you are posting profits. The questi on that co mes to mind is, "Wh y would bro kers behave in thi s manner? Since stati sti cs show that most traders blow- up their accounts before reaching their first anni versary, it is in a broker' s best interest to gel as much as they can as qui ckl y as they can.

There is no such thing as a "long-term" relati onship between a market maker and hi s cl ients, and whil e the degree of dodgy ness may vary fro m shop to shop. Stories of bi g in vestment banks ripping off large corporate cli ents routinely make the news, so is it reall y any surpri se to hear that retaillraders do not fare any better?

Since deal ers routinely change jobs and li ve on a daY-la-day basis or bo nU S-la-bonus, actuall y it should come as no surpri se to learn th at they focus purely on short-term profits. Arter al1. A dealer's j ob is a risky one, an d he knows that if you could. Although I am sure squeaky-clean shops ex ist somew here, I ha ve yet to come across any. The more accounts they open, the more money they make. According to Drcw Niv. They will try eve rythin g from huge internet adverti sin g ca mpai gns to direc t mail offerings, eve n goin g as far as holdin g trading "conferences" or "seminars".

In the end. Take, for ex ampl e. What could poss ibl y be wrong with rewardin g good traders? A lot, actuall y. Tradin g contests and drea ms of a large payoff pl ace people in direct co mpetiti on with each other. If you are tradin g to beat your ne ighbor. Card Stacking 39 bring up and focus squarely o n the dollars and cents, we st ill find brokers coming out on lOp even when they are the ones paying out to traders on a monthly basis. Layers between the retail trader and the interbank market Each layer represents an e tra cost.

Most probably these guys simply leveraged their accoun ts to the max, picked a volatile pajr, closed their eyes, and bought. Not much ski ll was involved in that brilliant strmegy. The really interesti ng part comes when we sh ift the atlention away from the winners and focus instead on the results of the rest of the field. Out of four hundred participants, Jess than finished the month above breakeven a surpri singly high number, actual ly , and the rest finished with a losing record.

This type of game where lots of small accounts vie for a big payoff is nO new; it is usually just called a lottery. In this sense, forex brokers are simply great at twisting the truth and transforming the laughable into something deemed va luable by traders. Who else cou ld co nvince trade rs that paying twice the spread s imply to be Hat is act uall y of benefi t 10 them? These guys shou ld run for Congress! Large reta il FCMs have their own market makers, a Citi or Gold man for ex am ple, which offer them a I pip spread or less on the most liquid pairs, whi ch they use as their ind icati ve pri ce.

To thi s rate, they add thei r 2 or 3 pips or more! However, because these middlemen are free 0 manipul ate their price feed, they can essenti all y show their cl ients any pri ce they wa nt , and the same person that is do ing the buyi ng and the selling also becomes the person that controls the prices. If this smell s fis hy to you, it should ; after all, it is the primary reason why exchanges were created in the first place, si nce the lack of transparency always plays into a dealer's hands.

If a broke r is convi nced that the curo is going higher, for exa mple, he wi ll shade his quotes s li ghtl y higher to benefit fro m the move. Th is is all fa irl y common practice in the FX world. If a dealer notices that a bunch of good-sized stops have gathered nearby reme mber, they know where your stops lie!

Naturall y, the move will be seen as si ngle blip. If a cl ient co mplains, brokers are shi elded by the fact that there is no ce ntral exchange from which to compare seco nd -by-second pri cing. We na iled you!

Card Stacking An example of price manipul ation. With two feeds from two different FX brokers, you can see how at the same moment one price spikes while the other one does not. T hese days. Do not assume that because they proclaim to be large and "well respected" in the ind ust ry that that makes them upstanding guys. According to the NFA, before choos ing a broker you sho uld keep some of these things in rnind : You arc relying on the dealer's creditworthiness.

Basicall y, if Ihey go down. Since retail off-exchange forex trades are not guaranteed by a clear- ing organ iza ti on, the fu nd s that you have deposited are nOI insured and do not receive a priority in bankruptcy. There is no central marketplace. Un like regulated fu tures exchanges C BOT. The fo rex dealer determin es the executio n pri ce.

The trading system could break down. A sys tem fai lure 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 in vestment sche mes thaI promise significant returns with little risk. You should tak e a close and cautious look al the investment offer itself and continue to monitor any in vestment you do make. AI the time of writing, third-party so licitors for retail spot forex trading were still not su bject to regulatory oversight, and Illay make misleading st3!

A Google sea rch on the term "forex" wi ll quickly reveal all kinds of scam s and false promises made poss ible by la x government oversight. However, one quick visit '0. The problem is that alth ough it is a valuable instituti on. It is just not very effecti ve. These are the guys that send crooked dealers and pOll zi sc hemes to jail, but their FX overs ight is limited beca use of the spot market's over-the-counter nature.

The CFfC is set up to regul ate exc hange-traded markets, 50 in FX they can do little more than enforce outright scams and fraud. Because the ri se of the retail forex market caught regulators sleeping, looph oles in outdated year-old mini mu m fundin g regul ation enabled new FX brokers to establi sh themselves with littlc, if any, capital.

Although thi s sho uld have scared the daylights out of their retail clients wi th milli ons of do llars in nonsegregated trading accounts, most of the time they were blissfull y unaware of the consequences until it was too late due to a lack o f awareness programs. The subsequent bankruptcy of several small brokers th at took their client's mo ney with them fi nally led the government to rai se the minimum net capital requirement and begin to crack down on these woefull y underfin anced operati ons.

As of now, the minimum net capit al requirements have been rai sed to several milli on do llars see Notes secti on fo r the full regu lation and the o nce-nonex istent aud its have been stepped up dramati ca lly. A futures commission merchant who is not in compliance with these requirement s has ten business days 10 achieve compliance or immediately cease do in g business and go imo liquidation, which still leaves retail client s o ut in the cold. Slowly but surel y thi s has begun to weed out most of the dangerously under-funded brokers, yet Illany more "borderline" brokers still remain.

The o nly way to ensure the safety o f your funds is to o nl y trade with brokers who are well above their minimum capital requirement s. FCMs are required to file mo nthl y reports with the CITC stating their current finances, but remember that since these reports are only audited o nce a year you are for the st pan relying on your broker's word. Government ove rsight of such a complex and fundamentall y OTe market is very hard to implement, bu t if the shoddy dealings continue then look for much tighter regul ations to be implemented down the line, al tho ugh the retai l FX bro kers will surely not go dow n without a fi ght.

In fact, FX bro kers are raking in so much money these days hundreds of milli ons o f doll ars that they have even hired their ow n lobbyists to keep govern- ment at bay. You know yOll have hit the big time when you can afford to bu y a lo bby! How ca n the FX brokers defend the ir acti ons some of which ca ll for jail time in other markets and continue to tell th e ge neral public that intra-day FX trading is a great "i nves tment " and deemi ng it "easy"?

How can they co ntin ue to do bus iness with people that so li cit clients through fa lse marketing and fraudulent claims? New regul at ion needs to be put into pl ace that will guarantee transparency in pricing and safety of fu nds to the reta il cl ient, but it is up to the average trader to plant the seeds of change by com pl ain ing vigorously to the gove rn ment authorities at the sligh test hint of dis ho norable dealings.

We wi ll all be in 11 bette r place once a fair set of rul es are adopted that lets both brokers and traders flourish. After all. Hundreds of companies now offer clients great money-mak ing trading signa ls or programs. Need less to say , the actual serv ices Lhey provide leave much to be des ired. LeI me put it thi s way: if you had a proven, money-making FX trading system would you sell it La the genera l public?

Probably nol. Hedge funds and private traders spend milli o ns of doll ars developing and safeguarding their trading systems, but you can sti ll fi nd hu nd reds of different trading programs fo r sale on the internet or trad in g magazines. Common sense tell s us that these "systems" are probably not very good to begin wit h. When looking It third-party providers. For exa mp le, if the "guru" you are look ing at does not trade hi s own recommendations.

If the resuhs cannot be veri fied note that simply posting them on a website is not verifying them! 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.

Looking around the internet I have also seen many " me ntors" popp ing up, who offer to show traders the ropes in exchange for a fee. When a new trader joins a firm he will pair up with a more experienced trader who w ill teach him how to become a great trader. The motiva ti on there is si mple: they have a vested interest in seein g their pupi ls succeed because of the lime and money they have in vested in them, and the hope is that they make milli ons for the whole compa ny.

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'? The truth is that before these guys became popular FX guru s. In the rea l world , mentors choose their stude nt s, not th e ot her way around. The best mentors you ca n possibly find are friends or acqu aintances who m you know to be good Lraders, since they have verifi ab le results and their motivat ion is clear. This is a direct result of the increase in popularit y of forex tradin g and the lax overs ight by governm ent agencies.

Before enterin g into any investment scheme. There are many great analysts and third-party serv ices out there; you just have to make sure you pick the right o nes. A whole commu nity of professional technicians, econo mi sts, and analysts ex ists to service the institutionallrading industry. The difference is that Lhey mak e their mOlley th rough their calls reputation not through your trading by getting referral money fro m the broker.

As the sayi ng goes, you get what you pay for. Not just a coo l website. They can be ex-prop lraders. It is useless to tell the average trader that the euro will drop to 1. Opportu nity cost is a real cost for most traders with limited liquidity. The last thing you want to do is have your eq uity locked in a trade that is not movi ng whil e bypass ing other maybe betler trading opportunities.

The bOllom line is thaI every g rem trader has paid their "t uiti on" to the market, usually in the way of years and thousand s of dollars. Success is the d irect product of hard work and determination. Remember that self-confidence is a hallmark of all greal traders. RULE 1. Never take the ad vice of someone who is not willin g to put money behind their so-call ed analysis. If they are not will ing to take a hit, then what is their down side to mak ing a prediction?

RULE 2, Never listen to anyone "talki ng their book", Most jokers on chat forums are sitting o n positions deep underwater and are desperate to get ou t. Any advice Ihey can possibly give you is losing advice and shou ld be used as a contrarian indicator if" anythin g, Even the big names routinely talk their book. The brokers may have initially gained the upper hand , but they have by no means left the retail trader without recourse.

By limiting yourself to your FCM 's artificially created bubble, you are giv in g up the power to become judge and executioner. Your Sl OpS may be run or you may trade off manipulated prices, but you wou ld never reali ze that the moves did not correspond to the genera l market. As a trader, you want to remain at all times objective and have as broad a view as possib le of the market, something that cannoL be accomplished using a single feed.

Your platform feed should onl y be used for placing trades, bUL you r strategy and analysis should rely on the purest, most unbi ased price feed you can find. Most retai l traders do not have the luxury of trading with a Reuters or EBS feed, but rest assu red 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 reta il platforms regul arly freeze their prices and notice that demo feeds are different from li ve feeds. Having a stable and faithful charting appl ication is espec iall y vita l to all short-term traders.

Do a search for yourself and find one thaI suits you r needs, but remember that mosl of these "informative" websites are ac tuall y run or sponsored by brokers, so make s ure that you know where the price feed is com in g from. Before choosing one. The number o ne reason is that St sli ghted traders find it difficult to take action against their broker owing to lack of ev idence.

Clients may feel cheated when their orders are not fi lled correctl y, orders disappear from their sc reen. When you call you r broker to co mpl ain you may Slate that "my order disappeared! An easy way to do this is to take scree n shot s. You ca n find and down load a variety of applicati ons o n the web, and taking screen shots of your orde rs in the market, trades. Profess ionals do it and so sho ul d you. Although most brokers wi ll usuall y fold when threate ned with official ac ti on.

You do not need to hire a lawyer to fi le a complaint, and usuall y laking thi s initial step is enoug h to sca re a broker into a reasonabl e settlement. Informati on abou t NFA's arbitration program is ava il ab le by call- ing Nl--"A at or visiting the Dispute Resolution secti on of its web site al www.

Similarly, the CFTC offers a reparat ion program for resolving di sputes. In addition. In the end , it is up to traders to monitor and stay on top of all forcx brokers. The C hi cago Mercantile Exc hange operates its own clearing house and virtu ally eli minates credit ri sk by acting as th e counterparty lO every transaction. An additio nal benefit to the indiv idual is that yo ur funds are held in segregated account s.

Bener yet, perform your own due diligence and go visit their office! Don't judge a broker's e xecution by their demo accounts. Demos are marketing gimmicks meant to lure people into trading. The execution on your demo account will be perfect, unlilce when you go "live". Always remember that the cost or switching is low, but the cost of staying with an unfair broker is huge! The blmkIng pnces and constant sWings In equity are used by brokers to distract the trader and amplify the gamblIng instinct.

Try instead to think oC the moves in terms of pips, not dollars and cents. Thjs sounds obvious, but it is true. It is much easier to place the blame on bad dealers, systems providers, CIC. The learning curve can be steep and uncompromi sing, and in thi s market there is no free lu nch to be had. All traders, even the most successful ones, have paid their " tu ition" to the market and all realize that the key to becom ing successfu l is survi val.

Simply put, he longer you stay in the market the better you r 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 fa lling into bad habits. Obvio usly, even with all of the sophisticated chan ing and ana lyt ical software avail able nowadays success is still extre mely diffi cu il to accomplish, and moving up the learning curve can take a degree of dedication, capacity.

This leads many retail traders to "olilsolirce" the ana lyt ical work to a third party, whi eh can prove extremely hazardous since before you know it you find yourself bli ndly fo llowing 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 as ide all of the nonsense handed out by brokers and guru s, it is li me to get into the meat of becoming a greal FX trader. What exactly does it take to post steady profits in thi s business? What trading ru les do professionals ad here to? What FX tricks exist out there that can help improve you r performance? T he second half of this book is intended to give active traders the information and tools they need to survi ve in the FX market and begin developi ng their own hab its and techniques that will turn the m into successful traders.

Although trading is not easy, many people choose to make it even harder for themse l ves by simp ly jumpi ng in without laki ng a second LO understand the different styles and how they relate to their personality. By trading "against the grai n", you are setting yourse lf li p for a constant personal psychological battle s hould I cut or stay that often leads to bad decision maki ng, losses, and unhappiness.

Matching up your personal it y wi th your trad ing style helps to minimi ze these personal battl es, and if you arc a new trader, the first step should be to figure ou t what kind of trader you have inside you. For example, if you feel you are patient methodical. Do you prefer to play chess or video games? On the other hand, if you arc a high-energy, im pati ent, and emotional indiv idual, you Illay choose to trade intra-day for the in stant gralific3I ion it provides.

Need les.!. If ancr several years you do nO see any improvement in your trading, then you mu st have the courage to ca ll it quits. Some people make good archilcclS, so me make good traders: it is as sim ple as that. I cannot make a jump-s hot to save my life, so I make no pretension of an NBA career. If, for whatever reason. When you think about it, most trade rs spe nd most of their time tryi ng to figure out when to trade. There is no guaranteed way to make mo ney except coll ectin g spreads , and even the best and the brightest arc often wrong more th an they are right.

Th e market is bi gger than you, biggcr than me, and definitely smarter than all o f us. We are bo und to be wrong and make mi stakes, bUI proper money manage ment tec hn iques enabl e us to weather sustained drawdowns and live to fight another day. Funni ly enough. Whether trading a mechani cal system or in a discretionary fas hio n, all traders should know beforehand how much they are wi ll ing to wager.

Ask yourse lf: how do I determine my positi on size? How do I set my stops? All too often traders choose arbitrary numbers that ha ve little to do with pro per mo ney management , and ex it accord ing to their " pai n threshold" instead. O ur inn ate fear of failure makes us place too much importa nce on not losing. The good thing about money manage ment is that it is easy to implement. Although good trading systems may be impossib1e to find.

For example, if you r losers are substantia ll y smaller than your winners, then you may wa nt to cons ider taking sli ghtly larger posili ons. If you consistentl y post large wi nners and losers, you should consider tak ing smaller pos itions to miti gate th e risk of ruin. Proper money management ma intains the all -imponant ri sk - reward ba lance in check, and although your plans may vary from those I present here, the bottom line of any sys tem shou ld be the same: to minimi ze the chance of blo win g-up.

Lon g-term success in thi s business is achieved by acc umul ating steady profits and occasionall y hitting the home-run trade, and the lon ger you stay in the market, the more times you get to sw ing at the bu ll. This incident brought to life the ri sks of leverage to the corporate crowd. Lever- age. Trading position sizes thi s bi g in re lation to your account size mean th at you are essen tiall y trading yourself into a corner, and any market noi se is bo und to wipe out your account.

The brokers love thi s. If you are overleveragin g your trades. Professional money managers generall y use no more than two to live times leverage. That is a lot of room to maneuver. Flexibility in trading mean s giving yo urself options: optio ns to enter a trade, to stay in it, and to exi t. By becoming overexposed to anyone position, you essenti ally remove options from your tabl e lI ntil you are faced wi th an "all -or-nothing" trade, and in the FX world your surviva l is measured in days, not years.

Since the currency markets are not one-way streets, the normal gyration s of the market mean that. The only way to gel around these sometimes arbitrary market movements is to Slay flexib le and trade mu lt ip le lots. Besides not being very wise it has a negative expected outco me when you take the spread in to cons ideration. You should try to thi nk of your in itial entry as your lOe testing the tc mperal llre of the w.

If you find out it is too co ld. Trading small unti l you think yOli have all of the informa ti on and confirmat ion YOll need gives you the flex ibil ity to properly posi ti on yourself for the move, or pu ll out with a small loss if your analys is proved incorrecl.

As YOll may well know. Trad ing in this way also means mi ss ing ou t on far fewer trades when compared to the all -in approac h. To properly trade mult ip le lots you must fi rst calculate the tota l amount you are willin g to risk before you enter you r trade.

Look back on your trad ing and see how big your losses typicall y are. Th is is the same type of ana lys is that profess iona ls regularly run on the ir tradi ng. The "more I bet. Avo id ing th is trap simp ly means learn ing to manage your lo! Broadly speak ing, FX traders can be div ided into the funda me ntalist and the tech- nical crowd. On the one hand, fundamentalists choose to pl ace their bets based on macroeco nom ic fac tors such as interest rates. GDP, inflat io n, CUf f e nt account imbalances, etc..

The tech ni ca l c rowd, on the other hand, cares less about the underly in g eco nom ic pict ure and instead prefers to re ly on two things on ly: time and price. Althoug h the fun damentalist approach may seem li ke the more logical way to go, extens ive researc h in to the matter actua ll y ind icates that techn ical trad ing is a much morc profi tab le way to trade FX. Although the "value investo r" mindsel may pay off in equ ities, it seems that this line of reasoning is utterl y useless in forecasti ng exchange rates es pec ially in the short run because of central bank intervention and other market nua nces, and it gets dec idedl y beaten by using a simple rando mizer model.

Thi s may exp lain why eco nom ists' forecasts are undeni;:lb ly horribl e, and to the short-term trader it means th at they should focus their attenti on on the techn ical side of tradi ng, i f only for the simple reason th at it seems to be more profi table.

Tha i bei ng said, tech nica l trad ing is no sure road 10 ri ches either. As computa- ti onal power increased over time, so did the popularity of technical or quantitative trad ing model s and now a wide variety of these are used, ranging from sim- ple mov ing-average systems to complex neural network algorithms.

Unfort un ate ly most, if not all , models have built-i n biases, so an unquestioning belief in them is eXLrcmely dangerous. To prove thi s point. After an exhausti ve search and counlless regressions, o ne leading indi cator was found that seemed to fit the data pertect ly: buttermilk production rates in Bangladesh! Yet I still have not figured out how to get that on my Bloomberg.

Lon g Term Cap- it al Management and ot her see mingly advanced hedge funds were done in by these "sigma-ni ne" events, something that probabi listically speaking is so unlikely accord ing to their risk model s that it s imply does not happen. If that is the case, then how is it that we keep witnessing these "impossible events" over and over again?! It is certa inl y not due to a lack of intelligence or computing power on their part.

In order to understand beuer why all probability-driven model s have limi tations that will eventuall y lead them to fail spectacul arl y. Imagine yourse lf silting at a stop wa iting ror the bus to come. You kn ow the frequency of the bus service every ten minutes , but not the actu al arrival lime. If the buses run according to schedule, then the probability of a bus arriving in the first minute o f you getting to he stop is one in ten. More sophisti cated models may take in w account the ave rage time it takes for a bus w arrive, or externalities such as weather and traffic, b ut ei ther way the mode l still essentia ll y says that the more you wa it, the higher th e probabi lit y of the bus arri ving, Of cou rse, the average perso n has enough common sense to begin to di strust the model o nce fifteen or twenty minutes have passed, and you begin to ask yourse lf.

Rest 3ssured that after a sufficient amount of time has passed, there wi ll be no one left at the bus stop - no I Hedge rund managers have long made run or the quant model Today [just had a loss that's a nine s igma event! That' s the third time thb year! Pickins the Right Approach 6S one except the model.

People are smart enoug h to reali ze when the ru les of the game have changed the bus schedule becomes useless after a certain amount of time has passed , whi le probability-driven mode ls never take in to account the fact that the Illodel itself Illay be wrong and Lhus conti nue to waiL for a bus thaL may.

This criti cal fla w is essenti all y what makes model-dri ven trading approaches blow-up spectilcul arly, and common sense di ctates that the world is simpl y a lot more co mplex than any risk-model bui lder would have you believe. Technical trad in g proves espec iall y attractive to retai l traders because it offers a way to " make sense" oul of a sometimes se nseless market.

The clear benefit that sys tematic trading gives us is order. Ha ving a clear, orga- ni zed, and coherent strategy is fundamental to trading success. Although in the end your "system" mayor may not prove to be profitable. Generally spcaking, the simplcr the model, he more elega nt and useful it becomes, since charts filled with lin es, indicators, and all kinds of techni cal tool s on ly serve to distrac the trader away from the crucial price action.

A a time when quantitative trading has been fin all y accepted by the general trading com munit y, the intrinsic virtues of techni cal analysis are hard to discern since often it is traders' combined acti ons that turn them into self-fulfilling prophecies. If everyone follows the sa me indicator. A kind of "chicken and egg" scenario has emerged and. Many funds includ in g ours acti vely front -run other people's models by anti cipating the trading signals their systems will generate and then positioning them selves for the slight pop created by their executi on.

If anything. With the amount of pricc " manage- ment" that goes on in the forex world , fal se breaks are more often the norm han the exception. Dealers know thi s. Learn to use technical indicators. Find something thilt works for you and stick with it. We know that no strategy is always profitable. This lets you limit you r exposure in tradi- tionally bad times and double-up in the good ones. Does your system work best in hi gh-volatility or slow markets? Does it work best in ranging or trend ing env iron- ments?

Does it work best for USD pairs or others? These are the types of questions you should be asking of you r system, since just like the blackjack player YOLI want to end up betting only when the odds are in your favor. In iso lation all technical tools are essentially the same. This is why I think it is vital 10 keep a discretionary eleme nt to your trading, even if it is simpl y knowing when to turn you r system "on" or "off".

We know that the only in strument that ca n co ns istently beat the market is the human mind, so make sure to use it. Intra-day FX pri ces are shaped by Haws, and as we know these flows may be the speculative bets of a large hedge fund or they may simply be the hedging activity of an exporter.

Either way, supply and demand is what sets short-term prices, which is why we say that in FX there is no suc h thing as a fair price. Even if the macro backdrop favors a dollar decline, a large buy order will disrupt prices in the short run and drive the dollar higher until the demand is sati sfied.

For the intra-day trader the thinking beh ind these flows is not important; price is all that matters. Getting a proper "feel" for the market comes down to understanding the price action. Wat ching the bids and the offers get hit is the equ iva lent of the old- jme tape reading made famous by Jesse Livermore and other "pun ters", who used to read the ticker tape attentively in an effort to gauge short -term price trends according to pri ce and vol ume.

Price action reflects the tug-of-war that is co nstantly goi ng on between the buyers and the sell ers in the market, and to the experienced trader it can al so be a wi ndow into the market' s footing. Since shol1-term price movement s are large ly dictated by th e maneuvering of the " big boys" in the market, it is in the interest of every small speculator to close ly rol - low the price actio n in order 10 find the " footprints" that all large players inevitably leave behind.

Needless to say, reading price action is easier in exchange-t raded markets, where volume information is avai lable and institutional block orders are more easi ly detected, but in FX those wit h no flow information can still glean the market 's intentions by lookin g at the order How informati on lefl behind in he form of chart patterns and noting how pri ces react near important pivot points. Correctly reading price actio n is not something that can easil y be ta ught.

All reseNed. All mechanical trading systems have built-in biases and flaws that you must be aware of. One way to properly gauge the state of the market is by studying charts. Chart s are so valuable to the intra-day trader because they paint a graphica l representation of the price acti on, and over lime tclhale pallerns eme rge thai ca n g ive us an ins ight into the market 's footing and inten tion.

The key now becomes recognizing when a market Is trending or ranging. All ngflts rtJSfJN8d Systematic trading systems arc all bound to fail systemati call y sooner o r later. Familiarit y wilh price action reading is the key to di scretionary trading and all ows traders to lime mo re acc uratel y their technically or fundamenta ll y inspired emries and exits.

The po int is not necessaril y to trade off the pri ce action direc tl y, but rather to learn to " predi ct" moves so that yo u can antici pate the market reaction and plan yo ur res ponse according ly. With the help o f a fast feed traders ca n Icarn to intcrpret th e pri ce acti on by simply looking at the way pri ces reilcl near important leve ls.

Picking Ihe Righi Approach No demond Opening prIce Should be the price ocHon shows that the regarded as a warning sign I market Is lacking the momentum to sustain higher levels new high that a change In direction may printed but sold off and that profit be Imminent. Bids and offers taking Is entering the market. The market Is unable to record new highs and Immediately sells-off. Although the sell-off Is bought Into possibly buying the top? If the pair is so ld off as it approaches the bi g fi gure bu t is then quickl y bought back 20 pips lower, th at may be a signa l that the option protectio n guys are rc-Ioad ing se llin g near the fi gure and then covering their shorts.

Typlcollpeculotive price acHon,.. Picking the Righi Approach 71 their option, and you shou ld keep an eye on the London or NY options cut after whic h the sellin g may di sappear and the rate may be free to move higher. Inilial move higher. Dips seem 10 be shallow and lillIe relracemenl is seen real money demand: dealers are working a mountain of buy orders and buy eVelY dip.

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BEAT THE FOREX DEALER · 1. Sell ers come into the market for whatever reason (news, etc.) · 2. No sharp recovery is seen, indi cat in g th"t the nobody considers. Beat the Forex Dealer For other titles in the Wiley Trading Series please see ketor.xyz ketor.xyz nance BEAT THE FOREX. Views 1, Downloads File size. More than just a simple manual, Beat the Forex Dealer brings to life the excitement of the FX market by delivering insights into some of the greatest trading.