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Understanding Forex Commission Structures

Unlike most other exchange-driven markets, forex has an enticing feature that brokers take full advantage of in their continual bid to lure in investors: no exchange fees, regulatory fees, data fees, or commissions. To many first-time traders, this gives it a major advantage over other markets, but accepting such a bargain doesn’t always mean that you get the best deal available.

Read on to discover how to choose the commission structure that will work best for you…

Three Forms of Commission

Forex brokers offer three different forms of commission to their traders: fixed spread, variable spread, and commission based on a percentage of the spread. These options each have their advantages and disadvantages, which means that there’s no simple answer when it comes to choosing which of them will work best for you.

However, before you can make an informed decision, you need to understand what spread is. Spread is the difference between the price the market maker will pay you for buying the currency (the bid price) and the price at which they’re prepared to sell it to you (the ask price). It is calculated in pips. If your broker quotes you EURUSD – 1.5550 – 1.5552, the spread would be two pips, for example.

To work out how this translates into real money, it can be useful to use the trading calculators that some brokers provide.

Fixed Spreads

If you choose a broker offering a fixed spread, then the difference between the bid and ask price, and thus the spread, in the above example would always be two pips. This would not be affected by market movement, either positively or negatively. At first glance, this can seem like the best choice, as it provides you with certainty. For some people, it will be, but for others, it is worth considering the other options available to you.

Variable Spreads

For those who are not averse to risk, variable spreads can prove a wiser choice. These spreads will change in accordance with market movements. On the one hand, this could mean that they rise to as much as five pips; on the other, it can see spreads drop to as little as 1.5 pips.

Commission

There are also brokers who will earn money through charging a small amount of commission. The benefit of this type of broker is that they often have a good relationship with a large market maker who can pass tight spreads onto you.
Each type of commission will have a different effect on your trading. Of course, part of this will be influenced by your individual broker, but that doesn’t mean that it isn’t worth considering their individual merits and pitfalls. Which one do you think would work best for you?

US Department of Justice Expands Probe Into Forex Deals – Major Banks Involved

We’ve seen numerous inquiries over the last couple of years by government departments looking into the world of forex trading, and this past weekend saw the United States Department of Justice open up its own probe to include two additional banks, and those are Barclays and UBS.

Forex is an increasingly popular investment option for investors of all levels these days, and some may argue that current rules and regulations are struggling to keep up, which is one of the reasons we so often see these investigations. It’s not that the investors or smaller brokers that deal with investors, such as ThinkForex, that are doing anything wrong; it’s almost always been major banks either misleading or miss-selling products.

That is exactly the same case this time round, as the Department of Justice has reason to believe that both Barclays and UBS have been selling a variety of structured products without making it clear how much they were making on each of the forex trades. In this case, these products were not small-market; there’s reason to believe some major Swiss hedge funds bought into the products, and they may well have been the ones to alert the authorities that something was amiss.

Knock-On Effects

To the day trader, these kinds of investigations probably don’t appear all that important, but there is of course an interesting question to be raised – who is your broker’s broker? Many of these major banks are enabling the smaller brokers that you might be used to dealing with day-to-day, and they’re not invulnerable to knock-on effects. At the beginning of the year, we say major brokers including Alpari UK and LQD Markets go bust because they lost their liquidity. The situation isn’t exactly the same, but it certainly is worth bearing in mind.

As already mentioned, this isn’t exactly a new investigation. Several other banks are already under scrutiny by the Department, all with the same charge of simply not disclosing the relevant information properly to their clients involved in the forex markets.
In the coming days, we’re likely to see more information coming out, but at this stage we’re mostly in the dark in regard to specifics. The Financial Times first broke the news story on Sunday, but since then there has been no comment made by the Department of Justice, or indeed Barclays or UBS.

What Exotic Currencies are Saying about the US Dollar

One of the most confounding mysteries currently confronting the forex market is the dramatic drop of the US dollar. Few recent trends have continued for as long, or proved as lucrative, as the enduring fall of the currency since a new low was first reported on in summer 2014.

Forex brokers and traders watched, cautiously, as the EURUSD pairing broke the 2010 low, threatening to hit levels not seen since 2005 at 1.1640. Simultaneously, USDJPY’s 2007 high began to draw attention at the next upside target, at 124.41.

Despite this move higher, traders have remained unwilling to trust in the recovery of the currency, which has not been supported by a firm multi-percentage correlation. As a result, more and more of them are turning to foreign currencies in search of clues as to the future of the US dollar.

The Significance of Exotic Currencies

Although there is a tendency within the forex market to overlook them, exotic currency trends can provide a useful tool in the determination of the true state of the US dollar, helping to uncover whether it’s favoured across the board or only against low-yielding FX.

At the current time, a depressed interest rate environment largely defines the world economy. With interest rates having been lowered around the globe in line with the aims of quantitative easing programs, an assessment of the performance of individual currencies can be distorted. This is where exotic currencies come in useful, as the economies whose interest rates have remained high provide a unique look into the performance of the low-yielding US dollar.

For those with an understanding of the bond market, parallels can be drawn between the role of these exotic currencies and the section of the junk bond faction. The junk bond faction is made up of companies with lower credit ratings than the blue chips that most people are familiar with. The performance information they provide is unique, and can be used to provide a more coherent picture of the market in terms of rebounds in risk and fluctuations in risk sentiment before they become obvious through comparisons with other sections. Similarly, exotic currencies provide a unique insight into the position of the US dollar, and could thus provide an early opportunity to cash in on this.

Recent Events

The US dollar’s recent gain is largely attributable to an announcement made by the Federal Reserve, which claimed that the country was ending its multi-year quantitative easing program. With many other central banks not yet embarked upon or in the midst of their own programs, this saw the dollar gain against low-yielding currencies like the EUR, JPY, CFH and GBP.

This trend was all that certain factions of the market took note of. However, by widening the lens, we see that higher yielding currencies, such as the ZAR, did not respond in the same way.

A second statement by the Federal Reserve, a commitment to ‘patiently’ raise rates over the course of 2015, has also been instrumental in fuelling USD fever. Yet if we look to the story told by exotic currency rates, the tale is very different A Bearish Engulfing Pattern is evident for the USDMXN pair, suggesting that something could be amiss. Indeed, a break below the 17th December figure of 14.37 could catalyse a drop against other higher-yielding currencies such as the AUD, NZD and ZAR, amongst others.

So what does this mean for the forex market and the position of the USD going forwards? With high-yielding currencies showing strength against the former currency, a charge against it could well be in the offing. Indeed, should certain levels fail to provide continued support, a real correction may be on the horizon.

Currency Wars: Winners and Losers

Source: Merk Insights

Who is winning the “currency wars”? Our take on the greenback, yen, sterling, euro and gold:

The U.S. dollar. All the great things a couple trillion dollars in quantitative easing can buy:

  • The stock market is reaching new highs. Except that investors have a rather difficult time diversifying as stock prices are highly correlated to the perception of more quantitative easing. Or shall we say Bernanke’s health?
  • The average yield on US junk-rated debt falls below 5 per cent for the first time. Except that our bubble indicator is screaming: in our assessment, investors should be concerned when any asset or asset class exhibits volatility below its historic norm. Think stock prices “always” going up in the late 90s. Housing “always” going up pre-2007. Or Treasuries in recent decades until now. Or junk bonds.
  • The economy is “healing” with unemployment down. Except that the “improving” employment picture is masking the fact that companies hire more workers, so that they can cut the average hours worked per employee to under 30 per week to avoid having to provide healthcare under the incoming Patient Protection and Affordable Care Act (Obamacare). Indeed, U-6 unemployment, which includes persons employed part time for economic reasons, just ticked up for the first time since July of last year.
  • In our assessment, the U.S. dollar may be as vulnerable as ever, with economic growth possibly the biggest potential threat to the dollar. That’s because should growth be priced into the markets, the bond market might be at serious risk. Aside from then causing major headwinds to the consumer, what we believe is an unsustainable U.S. government deficit might come into focus. We don’t need to wait for the cost of borrowing to move higher; what’s relevant is whether the market’s perception will change. And should the Federal Reserve double down by keeping borrowing costs low, it might make the greenback all the more vulnerable. This isn’t about whether the dollar will fall; it’s about whether there’s a risk that the dollar will fall and what investors do to prepare for it.

Yen. If we think the dollar is the risky proposition, then the Japanese yen may be outright toxic. Did I say that we are short the yen (and generally put our money where our mouth is)? The one thing going for the yen is that neither Prime Minister Abe’s government, nor the Bank of Japan (BoJ) have doubled down in recent days, but that “rally” the yen had, veering away from 100 versus the dollar appears to have already broken down. For those looking for a catalyst, Japan’s upper house elections are coming up in July. While Abe already enjoys a two thirds majority in the lower house, his populist policies might get him a majority in the upper house as well, paving the way for changes to Japan’s constitution. Having said that, such changes may mostly be symbolic, as Japan has long found ways around Japan’s pacifist constitution to ramp up military spending. The only good news for the yen is that the currency’s rapid decline may temporarily halt the deterioration of its current account deficit. The current account matters, as once it is firmly in negative territory, Japan can’t rely on financing its huge debt to GDP ratio domestically anymore.

British Pound. The final straw in the glass half empty category may be the British pound. Mark Carney, outgoing head of the Bank of Canada, will lead the Bank of England (BoE) starting this summer. That may be great news for the loonie (Canadian Dollar), but not so much for the sterling. While Carney’s greatest achievement at the Bank of Canada might have been his ability to compete with former Federal Reserve Chairman Greenspan’s obfuscating talk, he has made it clear that he might engage in nominal GDP targeting or introduce a higher inflation target at the BoE. Moving the inflation target may simply be an admission of reality, as the UK has suffered from stagflation for some time.

Euro. The European Central Bank (ECB) President appears desperate of late: the euro’s persistent strength may be one of the many reasons holding back growth in the Eurozone. Whereas “everyone” is “printing” money, the ECB has been mopping up liquidity. They can’t help it, as their printing press is more demand driven than the presses of the Fed, BoJ or BoE. As banks in the Eurozone return loans from the ECB, there is little the ECB can do about it. Last week, the ECB cut interest rates. And, sure enough, for about a day, rates fell. But after a few days, short-term German Treasury Bills, as well as longer-term Bonds are roughly about the same. Similarly, spreads in the Eurozone, i.e. interest rate differentials between periphery countries and Germany, are roughly the same. A rate cut was nonsensical as one has to buy two year German Treasuries to get a zero yield; anything shorter and investors pay a negative yield, i.e. pay the German government for the honor of lending them money. There are many problems in the Eurozone, but a low benchmark interest rate isn’t one of them. We continue to believe the euro is cursed to move higher, destined to be the “rock star”, albeit it is likely to continue to be a rocky road.

Gold. Is the ultimate currency the ultimate winner in Currency Wars? So as to ensure that no good deed goes unpunished, gold had a rather volatile ride of late. And not surprisingly: as the price of gold moved up 12 years in a row, speculators decided that a good thing is even better when leverage is employed. And, as such, good things come to a screeching halt when margin calls force selling. We now have many investors sitting on paper losses. Some that bought gold because of a meltdown in the Eurozone are selling their positions. On the other hand, not everyone buying gold because of future inflation is on board. Our reason to buy gold has always been motivated by what we believe is too much debt in the developed world. While Eurozone members are trying to address their debt loads through austerity – with rather mixed results – we believe the U.S., U.K. and Japan are more likely to resort to their respective printing presses. In that environment, we believe gold should perform rather well over the coming years.

So why not hold only gold? Any investment depends on that investor’s perspective on opportunities, but most notably also on risk tolerance. Just as investing in a single stock, investing in a single currency or in gold alone can be quite volatile. What we like about investing in currencies is that currency wars can be tackled at the core, without taking on equity risk and while trying to mitigate interest and credit risk. We may or may not like our policy makers’ decisions, but more importantly, those decisions may be rather predictable. As asset prices appear to be chasing the next perceived move of policy makers, the currency market may be the right place to express such views. Gold can play an important part in such a strategy, but as the recent past has shown, one needs to have a good stomach to get through the patches when there is substantial volatility when gold is measured in U.S. dollar terms.

Please make sure you sign up for our newsletter to be the first to learn as we discuss global dynamics affecting the dollar. Please also register to join our Webinar; our next Webinar is on Thursday, May 23, expanding on the discussion herein.

Axel Merk

Axel Merk is President and Chief Investment Officer, Merk Investments, Manager of the Merk Funds.

Top 3 Expert Advisor Design Tips

forex robot

Almost nobody turns their first EA into a winning strategy. Like any new task, you’re more than likely going to fumble the first few attempts. It takes time and experience to anticipate design mistakes that may lead to trading losses.

I cannot promise that following this guide will turn your expert advisor into a winning strategy. But, what I can promise is that you’ll be less likely to lose if you following these three simple tips.

Time of Day

The forex market has a personality. Each currency pair also acts somewhat differently from all the others.

We’ve all seen the warnings to never trade the Asian session, but sometimes it makes sense. Australia shares that time zone. It’s one of the most liquid times of day for AUD/JPY.

You shouldn’t avoid sessions just because they are generally bad. On the other hand, you shouldn’t be trading all time sessions either.

Adding time restrictions is one of the simplest and easiest ways to only trade when it makes sense.

Choose the right currency

A strategy is more likely to outperform on one currency over another. So, it makes sense to focus your limited trading capital where it stands the best chance of suceeding.

EAs fall into one of of two categories: range trading or trend trading. Forex pairs fall into the same categories, too. Make sure thee currency pair that you’re trading matches the expert advisor’s style.

The GBP/JPY is among the most notorious trending pairs. The EUR/GBP is a total snoozefest. Trying to trade a trending EA on the EUR/GBP is a surefire loser.

Stop trading so much

Everyone wants a scalper EA. Unless you have a compelling reason to scalp, it’s not a good idea. Trading costs a lot of money.

Consider a strategy that trades 1 standard lot once per weekday. That’s about $20 per trade in spread costs on the EURUSD for most brokers. Multiply that by 260 (the number of trading days per year) and you come out with an annual cost of $5,200. That is a steep hill to overcome.

It makes a lot more sense to kick back and let your expert advisor do what it needs to do.

Conclusion

Trading is hard. Making an EA that earns a profit over the long run is even harder.

My advice is to focus on doing the big things right and worry about the little things later. It may seem obvious, but forcing a trend trading method onto a range bound pair is something many people try. As my old boss loved saying, “Remember the 40,000 foot perspective.”

You have to fit the expert advisor into the general environment. Only once that’s done will you be able to start tweaking the finer details.

Author: Shaun Overton

Shaun Overton writes a forex blog on trading with expert advisors for his company OneStepRemoved.com. The company specializes in building automated trading strategies with a particular emphasis on MetaTrader.

Don’t Expect the News to Tell You Where EUR/USD Is Going Next

Retrospective explanations of market moves don’t keep you ahead of the trend

By Elliott Wave International

On December 27, EUR/USD shot up as high as $1.3283. Forex news headlines were quick to comment:

“Dec 27 – The euro slightly extended gains against the dollar after strong U.S. new home sales data last month further lifted the market’s appetite for riskier currencies.”

But after EUR/USD hit that high, it promptly reversed and fell back down to the $1.3200 level, where it had been stuck all week.

You may ask: What happened to that “appetite for riskier currencies”?

Good question, and here’s the answer: That explanation came after the EUR/USD rally, not before.

See, it’s easy to fit the news to market action after the fact: Just grab the news story that best “explains” the move. But retrospective explanations don’t keep you ahead of the trend. To win in forex, you need forward-looking analysis, and you need it before the market moves.

On December 26, the editor EWI’s forex-focused Currency Specialty Service, Jim Martens, posted this comment on his Twitter feed:

EWI Forex Insider: @FX_ElliottWave
Now that we got the EUR rise we expected, the double zigzag rise from 1.3158 to 1.3256 leaves EUR/USD vulnerable to a decline.

Then, on the morning of December 27, Jim updated his Currency Specialty Service subscribers via this intraday forecast (excerpt):

EURUSD (Intraday)
Posted On: Dec 27 2012 10:01AM ET / Dec 27 2012 3:01PM GMT
Last Price: 1.3269
The overlapping rise and possible double top near 1.3309 could lead to a larger correction. A flat or triangle would lead to weakness…

And here’s the decline EUR/USD saw shortly after:

Note that neither of these two forecasts mentioned the news. And for good reason: The December 27 euro-bullish news would have had you buying EUR/USD all the way into the top.

Instead of the news, we at EWI look at objective Elliott wave chart patterns. That, and not the news, is what helps us to forecast the markets before they move.

We don’t always succeed. However, as you can tell from this example, our Currency Specialty Service delivers true forward-looking analysis. Get our forecast for the U.S. dollar plus 5 hidden market opportunities for 2013 in a brand-new FREE report >>


Free Report: 5 Hidden Market Opportunities for 2013

In this special 21-minute video report, EWI Senior Currency Strategist Jim Martens looks past the obvious — the “fiscal cliff,” the Fed, etc. — to give you a U.S. dollar forecast for 2013 that would astonish the mainstream experts. Jim then walks you through 5 precise Elliott wave “roadmaps” for 5 key FX market opportunities in the year ahead.

BONUS: You also get Jim’s new 5-minute video update featuring 2 major currency pairs.

All you need to access this video report is a FREE Club EWI profile.

Complete your free Club EWI profile now and get instant access to these special videos >>

Club EWI is the world’s largest Elliott wave community with more than 325,000 members. Membership is 100% free and includes free reports, tutorials, videos, special events, promotional offers and access to the valuable EWI Q&A Message Board.

This article was syndicated by Elliott Wave International and was originally published under the headline Don’t Expect the News to Tell You Where EUR/USD Is Going Next. EWI is the world’s largest market forecasting firm. Its staff of full-time analysts led by Chartered Market Technician Robert Prechter provides 24-hour-a-day market analysis to institutional and private investors around the world.

Best Position Sizing Practices

One of the key elements in risk management in Forex is position sizing. It’s a decision you have to make with every trade, and it’s best if it’s consistent. While many traders believe that the most important element of trading is having a good method and applying it, position sizing can be just as critical in determining your success or failure. We’ll start by looking at the simplest scenario, which is placing trades that you don’t scale up on.

There are many ways to complicate position sizing, but there’s no reason to do so. When you put together your trading plan, you need to figure out how much you’re willing to risk on each trade. When you figure this out, note that you’re considering how much money you can lose if a trade goes against you, not how much you can win if you succeed. Always base your position sizing off of worst case scenarios – losing 100% of your investments. New traders regularly make the mistake of risking way too much money on their trades. It is unwise to risk 10-20% or more on a trade, no matter how confident you are. Successful long-term professional FX traders usually risk no more than 2.5% on their trades. Consider 5% an absolute maximum. 2% isn’t a bad amount to risk, either.

Depending on the way your trading platform is structured, you may need to calculate your risk in a particular way each trade. The factors you take into account should include how much money you have in your total trading bankroll, the percentage you’ve chosen, and the distance between your entry and your stop loss. The pip value is a key element too. You can mathematically calculate your position size as follows:

Multiply the amount of money in your bankroll by your risk percentage and then divide that by the number of pips you’re risking (that’s the distance between the entry and stop loss). Then divide that number by the pip value per standard lot. Check whether your platform can do all this for you. Many trading platforms will do the math for you. With Oanda for example, you can choose your stop loss and the amount of money you want to risk, and it will put up the proper position size for you. Alternatively, you can use a free online position size calculator to help manage your positions precisely. Oanda was also used because it offers flexible lot sizes, which is an absolute must if you have a small account. You can’t do standard lot sizes if you only have $1,000 in your trading account. That’d be way too big a percentage for you to risk. Such brokers like Oanda, AGEA and MahiFX let you wager as much or little as you want, even if it’s just a handful of dollars.

Scaling Up

Scaling up, also called averaging up or pyramiding, is another topic that should be discussed. This is where you increase your position size if you’re winning on a trade. There are different practices for doing this; you should test any scaling up method thoroughly before you use it live since it can complicate your risk exposure. The benefits of scaling up are pretty clear; if your position continues to move in the right direction, you can become more profitable. The hardest part of making a good trade is often the beginning, and if you find that you’re in a trend, you may as well try to ride out the trend and get as much as you can out of it.

The drawback of scaling up is that if a position goes against you, it doesn’t need to go clear back to your entry to put you at break even anymore. If you doubled your investment and the price retraces 50%, you’re suddenly at break even, even though you’re not back to your entry. If price does go back to your entry level, you’re suddenly at a loss. If you don’t double your investment but choose some other amount, you have to carefully calculate the rate at which you’ll be losing money should the position reverse. So this is as much a trading style issue as it is an objective one. Some traders find this all too complicated and do better if they stick with a simple position sizing tactic. Others excel with scaling and go on to higher profits.

Setting a Target Profit

While we’ve focused largely on where you set your stop loss to determine your risk, it’s worth pointing out that another way you can ride out your winning trades without scaling is by moving your target profit and your stop loss after the trade is going in your favor. One thing traders will sometimes do is enjoy the benefits of a risk-free trade. A trade becomes risk-free when it goes in your favor and you move your stop loss to break even and push your target profit further out. If the trade continues to go in your favor, you can move the stop loss and target profit again. This locks in a small win, and gives you a chance at a bigger one. If you find out you’ve caught a trend, you can do this indefinitely, chasing larger and larger profits with no additional risk.

Why wouldn’t you do this? Depending on your strategy, it could result in a lot of break-even trades. It’s a more reliable and simpler method of riding out trades than scaling is for many traders though, and just one more idea to consider in regards to position sizing. Everything starts with making sure you don’t risk more than a tiny percentage of your account, but where you take your trades from there doesn’t necessarily need to be limited by your initial stop loss and target profit.

How Long Will the Dollar Remain the World’s Reserve Currency?

green dollar sign

We frequently hear the financial press refer to the U.S. dollar as the “world’s reserve currency,” implying that our dollar will always retain its value in an ever shifting world economy.  But this is a dangerous and mistaken assumption.

Since August 15, 1971, when President Nixon closed the gold window and refused to pay out any of our remaining 280 million ounces of gold, the U.S. dollar has operated as a pure fiat currency.  This means the dollar became an article of faith in the continued stability and might of the U.S. government.

In essence, we declared our insolvency in 1971.   Everyone recognized some other monetary system had to be devised in order to bring stability to the markets.

Amazingly, a new system was devised which allowed the U.S. to operate the printing presses for the world reserve currency with no restraints placed on it– not even a pretense of gold convertibility! Realizing the world was embarking on something new and mind-boggling, elite money managers, with especially strong support from U.S. authorities, struck an agreement with OPEC in the 1970s to price oil in U.S. dollars exclusively for all worldwide transactions. This gave the dollar a special place among world currencies and in essence backed the dollar with oil.

In return, the U.S. promised to protect the various oil-rich kingdoms in the Persian Gulf against threat of invasion or domestic coup. This arrangement helped ignite radical Islamic movements among those who resented our influence in the region. The arrangement also gave the dollar artificial strength, with tremendous financial benefits for the United States. It allowed us to export our monetary inflation by buying oil and other goods at a great discount as the dollar flourished.

In 2003, however, Iran began pricing its oil exports in Euro for Asian and European buyers.  The Iranian government also opened an oil bourse in 2008 on the island of Kish in the Persian Gulf for the express purpose of trading oil in Euro and other currencies. In 2009 Iran completely ceased any oil transactions in U.S. dollars.  These actions by the second largest OPEC oil producer pose a direct threat to the continued status of our dollar as the world’s reserve currency, a threat which partially explains our ongoing hostility toward Tehran.

While the erosion of our petrodollar agreement with OPEC certainly threatens the dollar’s status in the Middle East, an even larger threat resides in the Far East.  Our greatest benefactors for the last twenty years– Asian central banks– have lost their appetite for holding U.S. dollars.  China, Japan, and Asia in general have been happy to hold U.S. debt instruments in recent decades, but they will not prop up our spending habits forever.  Foreign central banks understand that American leaders do not have the discipline to maintain a stable currency.

If we act now to replace the fiat system with a stable dollar backed by precious metals or commodities, the dollar can regain its status as the safest store of value among all government currencies.  If not, the rest of the world will abandon the dollar as the global reserve currency.

Both Congress and American consumers will then find borrowing a dramatically more expensive proposition. Remember, our entire consumption economy is based on the willingness of foreigners to hold U.S. debt.  We face a reordering of the entire world economy if the federal government cannot print, borrow, and spend money at a rate that satisfies its endless appetite for deficit spending.

Ron Paul