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Item of the month - October 2009

Discussion in 'General Forex Talk' started by AsstModerator, Oct 30, 2009.

  1. AsstModerator

    AsstModerator FPA Forums and Reviews Admin

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    It's not an email. It's not a question. It's a general commentary that showed up as a review.

    I don't know why people do this. I've seen reviews left for a broker saying "all brokers are bad". I've seen reviews left for an EA saying "all EAs are bad".

    If people have a general opinion of a whole class of products, that's something for forum discussions, not reviews.

    In this case, I saved the text so I could put it here in the forums. This guy claims that no signals service can ever be profitable in the long run.

    I think his argument is interesting. Does anyone agree or disagree with this?
     
  2. Rubin Hood

    Rubin Hood Private

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    There are some factual errors in the thought process above. The Forex market is too large for 600 people to have substantial effect on. With trillions of dollars worth of liquidity each day, you'd have to have 600 *millionaires* similarly trading tens of millions of dollars *daily* to get a measly 1% impact on the market.

    Individual Forex brokers might filter out if many clients are trading the exact same way, and do something against it, but I don't see how the forex market as a whole could be swayed by a few hundreds of subscribers. As a side note, millionnaires probably don't subscribe to the kinds of services you mention above.

    Also, as far as I know, liquidity in the worldwide Forex market is provided by around 80% speculators.

    I do agree however that due to various reasons, very few signal services and EAs are worth the time, effort and money. The reasons, I think, are:
    - hype
    - false records
    - perfect track record on historical data but since history never *exactly* repeats itself, the method doesn't work on live data

    False records are probably the most common. *All* services have mixed track records but the dishonest ones cherry pick the good ones and only report those.
     
  3. Gaffled

    Gaffled Recruit

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    Good thoughts, although I have heard talks that FAPT sold way too many copies and brokers became wary of robots after that. Hence MegaDroid's focus on their stealth approach.

    In any event, I would think that the brokers would love an increased number of trades every day. Right?
     
  4. Pharaoh

    Pharaoh Colonel

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    I think the reviewer vastly underestimates liquidity, but Rubin Hood may overestimate it some. Trades between banks are a lot of the daily market, but not quite the overwhelming amount the reviewer thinks.

    If 600 people are mostly using the same brokerage (or brokerages that use the same liquidity provider), then it's possible that they could cause a ripple in the market, especially if each is trading more than 1 lot at a time. This is why many spike traders try to place trades with several brokers at once and why they don't share the names of the brokerages that work the best.

    The reviewer also doesn't notice that there could be smaller, reasonably successful trading rooms and signals services. If I had a successful service, was making plenty of money from the market (and subscriptions), and noticed that the market itself was beginning to react to the volume being traded by my group, I'd stop selling new memberships in order to preserve my business.
     
  5. Cyclon

    Cyclon Company Representative

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    Brokerage firms alone poke holes in this thinking

    Just the number of Brokerage firms alone pokes some severe
    holes in this thinking.

    With the number of successful and even semi-successful brokers,
    combined with the financial requirements for them to operate,
    and all that taken together makes the notion of them all competing
    over a "few" thousand traders on razor thin spreads pretty hilarious.

    No wonder some of them have resorted to scamming. :p

    Long term success is completely unrelated to anything other
    than market trading competence or business competence.

    Cheers,
    Cyclon
     
  6. Ken Long

    Ken Long Sergeant

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    Interesting thoughts. FAP-T did have problems at the start due to a high success ratio and many thousands of new subscribers overloading a few prefered brokerages, which brought retaliation from those brokers in the form of spread manipulation. Hard to blame them there, they have to protect their businesses.

    The idea that just 600 traders following the same signals could affect the market is a bit of an exageration. Even in the stock market those 600 would have to have some pretty deep pockets to make that kind of impact, however, if those 600 where all trading on the same broker, through any kind of auto trade service, that would likely set any dealing desk on a frenzy. However, if this was dispersed through a range of brokers and the slightly different timing of individual traders the affect would be negligable.

    Obviously, the retail end of the Forex market isnt as big, or as efficient as some would like to make it seem. The big banks and big traders do control a large percentage of the liquidity, but these banks and large traders still trade the market every day, some on very short term time frames. What we have to remember is that for many of us we arent trading against the market as much as against our brokers, especialy if we have a standard dealing desk broker and are trading small lots and short term, if we are trading even slightly longer term we dont have the same concerns.

    In this situation a day trading service using a specific broker could easily bring unwanted attention on themselves, but really the problem is more in line with trying to recomend short term trades to a large group. Short term traders have to be able to change their position in the market very quickly when the market changes, and this isnt always possible when catering to a large group in this manner. Other than that I can see no reason why a longer term service using the basic trend following theories of Dow and Elliot, along side the other big players, could not be equally successful.

    The problem comes down to what people want and think they can expect from a service. In most cases I would rather trust my money with a $100 day trading robot than a $1000 day trading service, I expect that over time the results will be about the same. Short term trading is really something one needs to learn and do for themselves. Longer term, more fundamentaly driven trades, are easier to recomend to others.
     
  7. Pyer2

    Pyer2 Recruit

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    Wouldn't The Opposite Be True?

    More buyers than sellers cause price to go up / more sellers than buyers causes price to go down. I can't see any validity as to this being the reason why signal services & EA's fail in the long term. If there were so many subscribers trying to get the same price that liquidity became an issue , then slippage may become a problem with stop & market orders, but other than that I believe they are actually helping each other's positions go into profit.
     
  8. wdgreen

    wdgreen Recruit

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    Head Fakes

    I have noticed what I refer to as head fakes at news announcement release times. I think they are triggered by some traders to trap stops. As a result, I'm reluctant to place a sell order (for example) with a tight stop just before a news release, even though I fully believe the price will fall. Have you seen this price behavior. What do you think.
     
  9. DrD

    DrD Recruit

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    How do brokerage firms really make their money?

    Do brokerage firms make their money by collecting on the spread on each and every trade, trade against their clients or a combination of both?

    When a brokerage firm's client enters a trade, (I will use a standard lot size with USD as the counter currency in a pair in this example), the brokerage collects $10.00 per trade if they offer 1 pip spreads . The more clients they have making trades, the more revenue ($10.00 per trade per client) they generate.

    If would seem logical that brokerage firms would "want" their clients to maintain their account equity as long as possible in order that they (the clients) continue making trades so that the firm can generate revenue by collecting on the spread from each and every client on each and every trade.

    Having said that.... it would also seem plausible that brokerage firms would use "their" money (which in fact "may be" the pool of money from their clients' equity in their accounts) to actually trade against their clients.

    This would be the manner by which a brokerage would generate larger revenues faster BUT may ultimately burn a lot of their clients' accounts in the process.

    Would this be in their best interests?

    Do they grab $10.00 per trade per client over the long haul for small steading profits OR do they make larger quick profits at the expense of some of their client base? Are brokerage firms in essence "scalping" their client base for large, quick revenues or using their client base for long steady profits?

    My sense is that they would do both. If the brokerage firm sees by the number of retail traders entering a position in the same direction, they could use their significant capital resources to trade against their clients for large, quick revenues. However, that is diametrically opposed to taking small profits from their clients over the long term for "consistent" revenues.

    As they are "in the business of trading" it seems reasonable that they would scalp some clients for large, quick revenues and use their entire client base to generate smaller but steady long-term profit.

    This may explain why it is so very difficult to day trade for small, quick profits as we may be in reality trading against the brokerage firm.

    The big players (financial institutions, countries settling trade balances, big business and the individuals with very, very deep pockets) more than likely trade on the long-term trends as they are most likely to have the "professional resources" that analyze and follow the economic indices that set the trends in the first place.

    From my research on the Forex market, it appears that it is "common knowledge" that brokerage firms "stop hunt." This technique, I assume, is the manner in which they use their significant capital resources to generate large and quick profits at the expense of their retail client base.

    I am relatively new to Forex so I apologize in advance if my logic is inaccurate.

    Would anyone care to shed some light on the way I see brokerage firms operating?
     
  10. PistolDave

    PistolDave Corporal

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    I agree

    The way you see it is, I think, very accurate.

    Think about it, if you have been around the trading arena for long you have surely heard that 90% or more of small traders lose more than they make, overall. Now if this is true you have to say that if you were a broker, and you were offering this service to these traders, all you would have to do is take the opposite side of their position and you would have a very high percentage of wins to losses in the long run. Simple math. Just like they owned a casino.

    How can they be so sure you will lose so often that it's like free money for them to take the opposite side of your trade? It's because they know YOU! Not you in particular, but what most of US usually DO and how we usually TRADE.

    The brokerage firms are well aware of the statistics of the average retail forex trader. For example, they know the average account size, average trades per day, week, month, etc. that we place. They also have detailed stats on how long the average customer keeps their deposits in their account, how much the percent drawdown is before the customer finally folds up and closes the account, the amount of time the average trader keeps an account open before moving on, etc. They can observe your trading style, etc. This mass of data allows them to create a mathematical model to maintain maximum profitabilty for the brokerage.

    In other words, they own the game, they know more about your trading habits than you can imagine, and they have perfected a system that is very, very strongly slanted in their favor for them to take your money. And if all else fails they can still manipulate the data so as to make sure you don't beat them out of a profit.

    Wonderful system, isn't it.

    Get this: YOU ARE TRADING AGAINST YOUR BROKER! You are a cash cow to them and they want to maximize their profits from you.

    If you accept what I have said as true, then you need to think long and hard about how to create a system for yourself that they cannot easily beat. Don't do what everyone else does.

    Here are some ideas to consider:

    1) Don't trade small time frames. The high leverage, erratic movement, and frequent trading in and out of the market combine to make it more difficult to overcome the spreads and slippage created by the broker which eat up your funds and put you out of business sooner.

    2) Use lower leverage and a larger account size. Small overleveraged accounts trading for microscopic sized gains (scalpers) can be crushed any time the broker wants to create a data "spike" and there's not a damn thing you can do about it. They won't let you continue once you start winning.

    3) Develop and implement a strategy that allows you to place fewer trades and stay in the market longer and catch the longer term trends.

    The bottom line is that you, like in retail marketing, are the "target" and the brokers have developed a very efficient system for parting you from your hard earned cash. They are not your enemy, but they intend to make money from you if possible. Unfortunately it is up to you to find a way to use this "necessary evil" in your quest to make money in the markets.

    Again, think about what the "average" newbie does, and be the exception to the general rule.

    Good trading to you,
    PD
     

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