Problems with the Forex Markets
Trading the Forex Market is Not What
Please read the information below with an
open mind. I didn't write it, but my mentor, a very trusted and
experienced trader did. He traded for over 50 years, and I
believe every word he says.
Why Not To Trade Forex!
"...we do not advocate forex trading unless
you have a particular reason as to why you need to trade during
the middle of the night, or you have a specific need to trade
in currency pairs that do not involve the U.S. dollar. If the
U.S. dollar is involved and you are able to trade during U.S.
market hours (7:20am-2:00pm U.S. Central Time) you are much
better off trading currencies in the Chicago currency futures
markets. Here are the reasons why:
Brokers can deceive you about there being no
commissions. Three pips = $30 minimum/round turn
(called the spread) is in reality a commission that
eats up your capital at an astonishing rate. Even
winning traders lose money and end up with negative
results because of this outlandish overhead.
Trading futures, you should never have to pay a
broker more than $10/round turn, and usually quite
a bit less than that.
Guaranteed fills. True but… The only way a broker
can guarantee fills is for the broker to become the
buyer or seller of last resort. That means the
broker is running a bucket shop. All forex brokers
are the buyer and seller of last resort.
Brokers do not all tell the truth about volume.
They show the volume for all forex trading, which
doesn't even come close to the volume they truly
have at their own brokerage, which is where you are
trading. Volume in currency futures is considerably
higher than the volume traded at any single forex
broker, often greater by a factor of ten.
Leaning. Brokers say they are charging you a 3 pip
spread to trade the popular currency pairs. But in
reality a broker may be making as much or more than
10 pips on your trades. He does this by skewing
prices. Since you are not trading at an exchange,
the broker can feed you any price he wants to feed
you. He can buy at the bank for perhaps 7 pips less
than he sells to you. He then charges you 3 pips
for the privilege of being ripped off for a total
of 10 pips.
Unregulated. Forex may sound like an exchange but
it isn't. It exists entirely in cyberspace with
every broker and every bank having different prices
for any particular currency. There is little or no
regulation, even for brokers who register with the
CFTC and the NFA. Forex brokers do not have to mark
to market each day as do futures brokers. If your
forex broker files for bankruptcy or absconds with
your money you have zero recourse.
No guarantee. If a forex broker does go out of
business, you could lose all your money. There are
no guarantees and no one standing behind it.
Futures brokers are required to mark to market at
the end of every session every day. They have to
put up cash to cover every open trade on their
books. Futures brokers have gone broke, but no
futures customer has ever lost one cent of the
money in his trading account because of a failed
broker. Nor have they had to wait for their money.
It is immediately available.
You can get exactly the same action in the euro fx
futures as you get in the "Euro" forex. Commissions
are as low as one tenth per round turn depending on
volume, through a regulated broker, trading
electronically at an exchange where you know the
true price of the currency.
What is the true price? A forex broker can only
give you the price of a currency as quoted to him
by the bank through which he trades. Banks have
differing prices for a currency. You never know
what the real price is because there is no central
exchange through which all prices flow. Besides not
knowing the true price from the bank, you can also
be deceived by "leaning" or "skewing" of the real
price at the bank. Forex brokers commonly lean the
Forex brokers are not necessarily truthful. They
lure people in with hype and false advertising: "No
commissions!" "Guaranteed fills." "24 hour
trading:" Who in their right mind is going to trade
in the middle of the night unless they have a
special need. While it is true that total forex
volume is greater than in the futures, futures
volume at the exchange is greater than the volume
at your broker for the most popularly traded
currencies. The only place where the liquidity
differential matters is in currencies like the
Mexican peso, the Brazilian real, and somebody's
drachma. Those thinly traded currencies may be more
liquid in forex. But if you trade anything but the
few most liquid and popular currencies, you are
going to be paying at least 5 pips, and often more.
Unless you have a particular commercial need to
deal in Polish zlotys, Indian rupees, or some other
thinly traded currency, you don't need forex.
You are told by forex brokers that there is little
or no stop running. This is one of their biggest
and boldest fabrications. The truth is there is far
more stop running in forex than in futures, and
possibly as much stop running as in the stock
market. I have friends who work in forex as well as
many traders who of necessity have to trade forex.
One of my students is a market maker in forex.
These are people who should know, but in case you
don't want to believe me or them, simple
observation of forex trading will reveal the vast
amount of stop running that takes place there. Who
is it that runs the stops? Why it is your friendly
forex broker. The broker has a vested interest in
seeing to it that your orders are filled. Stop
running is nothing more than order filling. The
broker sees to it that everybody's order gets
Probably you have heard that if you are winning
regularly in forex, you may be barred from trading.
Is this true? Yes it is. The fact that it is true
is just another proof that when you trade forex you
are trading at a bucket shop. In the book,
"Reminiscences of a Stock Operator," we are told
that Jesse Livermore was banned from trading at
certain stock brokers because they couldn't stand
him beating the house. The same thing is true with
many forex brokers. Since they are the ones
guaranteeing you a fill, they are in effect the
buyer and seller of last resort. The truth is that
most forex brokers have precious little liquidity
at their firms. In order to give you the impression
that there is liquidity, it is the broker who gives
you your fill. It is the broker who does the stop
running that supposedly doesn't exist in forex. But
if you are regularly beating the socks off the
broker, he will ban you from trading at his firm.
Now you know the truth about forex. I
challenge any and all forex brokers to prove that I am wrong. I
will change or remove anything proven to be untrue in what I
Is there hope for a trader who wants to
trade forex? Yes there is. There are forex brokers and retail
banks where the trading is legitimate, with no leaning and a
very small spread. I am not at liberty to tell you which ones
those are. You will have to do your due diligence in finding
out. For the most part, these brokers and banks are not in the
There is yet another hope on the horizon for
traders who want to trade forex in a regulated venue. You
can trade forex on Globex at the CME, in a regulated
environment and with uniformity of prices..."
Used with permission
I can attest to what he is saying here. Once when I was
testing an FX system I subscribed to, I had to get an eSignal
data feed. When I compared the eSignal price action to the
chart from the FX broker, it was like night and day. eSignal's
feed was much more active and the prices moved in a broader
range than my broker's charts.
RECOMMENDATION: TRADE FX FUTURES, NOT
Want Some Proof?
Take a look at the chart below. It has the British
Pound March07 futures (BPH07) on top and the British
Pound forex (GBP/USD) on the bottom. It's a 60 minute
candlestick chart, but it could be any timeframe - the results
are the same. Do you see the similarity? The trading
volume is not shown, but check for yourself and you'll see that
there's no reason to trade forex and take all the risks
mentioned above, when you have virtually the same price action
in the futures with fewer risks and much lower costs.