Category Archives: Articles

New method to achieve 90% modeling quality in MT4’s strategy tester

In a previous post I talked about how to achieve 90% modeling quality in your backtests by using Alpari’s databank files. Well I have good news! You no longer have to go such great length to get 90% modeling quality.

The makers of the MetaTrader 4  platform, MetaQuotes Software Corp, have decided to provide a data feed for everyone to use. The process of downloading history data from MetaQuotes’ servers is very simple. Just follow these easy steps:

1) Open up whatever MT4 platform you use

2) Go to Tools –> History Center (or press F2)

3) Select the pair you wish to download history data for and press the “Download” button

It will warn you that you are download history data from MetaQuotes Software server instead of from your broker and that there will be differences between the data provided by MetaQuotes and your broker.

That should do it! I would still highly recommend that you dedicate one MT4 platform to backtesting only. That mens do not load up any charts on  your platform. Just download the history data via the method I’ve outlined above and only use the strategy tester.

Short Term Trading Techniques for the Forex Market

Short Term Trading Techniques for the FX Market

Given my background as a scalper in the equities market for eight years I am often asked if those same techniques are applicable to the FX market. First, it is important to define how one defines scalping. First, recalling my days as a floor/screen based trader of equities in 90’s the definition was a technique whereby a trader could profit from very short-term moves in the marketplace by using a combination of 1 & 5-minute charts as well as a keen sense of tape reading.

When I made the transition to the FX markets exclusively back in 2001-02 I was keenly aware that this type of hyper strategy had 2 shortcomings:

  1. It was not scalable
  2. A scalping technique may not be conducive to the FX markets

While point 2 may be open to debate, one cannot argue that short-term strategies have a finite amount of capital you can deploy at any point in time without disrupting the market.
So with that in mind, the angle I decided to take on this article was to illustrate how some of the techniques and indicators used in a scalping strategy can still be overlaid on to a swing trading approach in order to maximize entry and exit points.

First some assumptions for the forthcoming analysis:

  • Trade selection is done using one of or a combination of a 60 & 240-min charts as well as a daily chart. A weekly chart is used merely as a way to identify long-term support and resistance areas.
  • I will discuss several indicators, mainly stochastics, fibonacci retracements and extensions, trend-lines and RSI, Elliot Wave analysis
  • Trade duration average is several days
  • I rely upon not only the G10 pairs but also several crosses
  • Risk is defined in advance of each trade and lot size is calculated based on stop-loss

There are limitations, as with any technical approach that combines a fair degree of discretion as rigid entry guidelines may prevent a trade from being executed. However the effectiveness and precision of the entry techniques will typically avoid costly draw-downs while the trade is playing out

Here is an ideal example of using a big picture viewpoint/analysis, but drilling down to a lower time frame in order to pinpoint the entry in an attempt to execute at a price that will perhaps provide immediate validation.

Japan Yen

In this instance I am anticipating that a retest of the bull trendline will fail, however, the ‘ideal’ scenario is to have the daily stochastic pointing down in order to have bearish momentum at our back. As you can see from the daily chart above, this is not the case. However, what if we could speed up the analysis in terms of drilling down a time frame or two and essentially forecast the turning of that stochastic lower?I rely heavily upon on the 60 & 240-minute in order to execute trades while frequently doing the analysis on the daily chart. Referring to the 240-minute chart below, it provides an ideal example of using the lower time frame for execution. Note the following:

  • Spinning top suggests a reversal is imminent
  • Stochastic cross lower igniting bearish momentum
  • Trend-line break (115.53) triggers ideal entry

If there is one question mark on this entry it is that the current trend on the 240-minute chart that is up. Trend is defined by 2 parameters:

  1. What is the slope of the 20-period ema over the last half a dozen bars?
  2. Are price bars above or below the ema?

Ideally, for shorts, price bars are below a downward sloping moving average and vice versa for longs.

 

 

Swing High

So now what, where do we take profits? In this case, given that the trend is up on the time frame that we used for execution there is not the luxury of letting the trade ride. In this instance, the logical exit points are seen at either the 50% fib retracement at 115.12 or the swing high at 115.24. These levels are easily achieved.AUD/NZD ShortThis cross has been ‘in play’ this year and continues to be a cross I have relied upon frequently. In this scenario we have a situation where the daily chart suggests a possible short, but does not provide all the points on the checklist for a high probability short.

 

AUD/NZD Short

 

AUD/NZD Wave 3

  • Wave 4 completion is confirmed by a stochastic cross lower and a trend-line break
  • Price targets are calculated by a simple fibonacci extension of wave 3 using a 1.25 and 1.50 setting

 

AUD/NZD Wave 4 and 5

Regardless of the trade, I always respect the time frame that the trade was executed on. In this case, the execution was based on analysis of the 240-minute chart, as a result, exit points also need to be calculated from the same time frame.Given that our first target was 1.1740 we still want to give the chance for the trade to play out, however, given that the trade is in roughly 100 pips in the money and the stochastic suggest that the selling pressure is waning, it is prudent to take some of the trade off and adjust stop-loss to either break-even or some price that suits the traders risk tolerance, a trailing stop is ideal.

NZD/SEK Short

The chart below provides a perfect example of two time frames coming together that isolate a fantastic short opportunity. In this case, the daily chart is already confirmed as bearish, now, it is just a matter of isolating the entry point as a way to avoid the trade going against you while waiting for the downward trend to resume.Until the 60-minute charts stochastic roll back over prices are likely to drift higher. The better entry is to wait for pullback into fibonacci resistance at 5.2450-5.2500 and waiting for bearish momentum to resume by way of a stochastic cross.

 

NZD/SEK Short

AUD/JPY Long

 

AUD/JPY Long

  1. Bear trend-channel is broken.
  2. Prices fail at swing low at 85.00 and form right shoulder of inverted head & shoulders pattern.
  3. A fibonacci retracement of the move higher from 5/23 offers the ‘ideal’ long entry point for a test to break the neckline.
  4. Stochastic is expected to pullback; turn higher confirming point number 3.
  5. If all points above are confirmed the target price has a solid chance of being hit.

All of the above points were met and prices did move right into the target price at 85.60

By Dave Floyd

Dave Floyd is a professional FX trader based in Bend, OR and the President of Aspen Trading Group. Dave’s approach to FX combines technical and fundamental analysis that results in trades that fall into the swing trading time frame of several hours to several days. Aspen Trading Group provides managed FX accounts and FX research to institutional and retail clients.

http://www.aspentrading.com

5-Step System to Evaluate Any Forex Broker

Here is a very good article written by Felix Homogratus about how to evaluate forex brokers before you open up an account with them.

Step #1: Does forex broker provide natural trading environment?

First step is to determine whether the forex broker provides natural trading environment or artificial trading environment.

Let me explain…

Bids & Offers Example. Let’s say you are trading the GBP/USD pair. Let’s say you want to buy GBP/USD. Let’s say you login to your forex broker account, and you see that the price is 1.9950/1.9953.

That means that somebody out there is willing to buy GBP/USD for 1.9950, and somebody else out there is willing to sell GBP/USD for 1.9953. So if you wanted to buy GBP/USD, you would have to pay 1.9953 for it. If you wanted to sell it, you would have to pay 1.9950.

Let’s say you want to buy GBP/USD, and you do not want to pay 1.9953 for it, but you would be willing to pay 1.9952 for it. So you go ahead and you submit a limit order to your broker to buy GBP/USD at 1.9952.

If that forex broker has natural trading environment, you should immediately see the price on GBP/USD change from 1.9950/1.9953 to 1.9952/1.9953. Why? Because someone else was bidding 1.9950 for GBP/USD and now you are bidding 1.9952.

Your bid of 1.9952 is higher than 1.9950, so in natural trading environment, that should immediately be reflected in the price, and the spread must shrink.

Please watch the following video to see example of this:

[youtube iXOmR1XjQmk]

There are two major benefits that come from natural trading environment. First is that you get to benefit from true spread which can often be as low as ZERO. And second is that your stop/losses will get hit less often. Let’s look at each benefit in greater detail.

ZERO Spread Phenomenon. The ZERO spread phenomenon is a very interesting one and is only possible in non-centralized markets such as forex. Let’s discover how ZERO spread is possible in forex market.

In my opinion the goal of every honest forex broker should be to provide traders the best possible price available. The way they can do that is by choosing the best possible price from several different banks and from every trader on their platform.

So let’s say Bank A has price of GBP/USD as 1.9950/1.9952, and Bank B has price of GBP/USD as 1.9948/1.9950.

So what your broker does is it takes the lowest bid price from Bank A, which is 1.9950, and it takes the lowest offer price from Bank B, which is also 1.9950. Because bid is from one bank, and offer is from another bank, they can stay on your broker with ZERO spread without executing against one another.

Getting screwed on Stop/Losses. Let’s now discover why the stop/losses will get hit less often if you use a broker with natural trading environment.

Well…first of all, if the environment of the broker is not natural, it means that they constantly need to worry about the accuracy of their price.

Many forex traders trade during news, and when price gets very volatile during news, the forex broker with not-natural environment becomes afraid that the traders will take advantage of their price feed and will get filled on much better price than the real market price.

Because of that, the broker is forced to artificially raise their spread during news. It happens quite often that the spread is raised from 2 pips to 30 pips and sometimes more.

So if your stop/loss is 20 pips away, and the spread just got raised, even for 1 second, you will get stopped out on a price that you would never be stopped out on if you traded with broker that provides natural trading environment.

Every day is filled with many different news announcements, so if you do not have a broker with natural trading environment, you can get screwed on spread and stops very often.

Step #2 Does forex broker charge commission?

At first you may think that I am crazy. Why would I want to pick a broker that charges commissions over a broker that has only spread with no commissions? Let’s discover the answer to this question together.

Forex brokers are not charities. Their purpose is to make money. There are two ways brokers can make money. First is to charge commission. Second is to collect spread.

Charging commission is the only honest way a broker can make money. If the broker does not charge commission, that means they are making money from spread.

It should be impossible for forex broker to make money from spread in natural and honest forex trading environment.

The purpose of a forex broker should be to connect traders and banks. The purpose of the traders and banks is to compete with one another for best possible price. That competition is what determines spread in real trading environment.

The only way forex brokers can make money on spread is if they set their own “fixed” spread or add “extra” spread to natural spread. In either case it means manipulation of price.

There is only one party that can have control over prices. It’s either the traders or it’s the broker.

When traders control the prices, there is honest environment of supply and demand. When broker controls the prices, there is dishonest and artificial manipulation that is the root of many problems.

Manipulation of spread and prices is how most forex brokers screw their traders every day, and most traders don’t even know it. Most common way is to take out their stop/losses a lot more often than they should be taken out in normal trading environment.

But remember, many brokers that charge commissions also manipulate their spread, so they make money both ways.

The only way to know if the spread is real is to see if you can change prices with your orders as shown in video above.

Step #3 Is forex broker regulated?

What good is forex broker that you can trade and make money with, but when it comes time to take your money, they don’t give it to you, because they don’t have it?

Forex Broker Bust Story. Refco was the biggest forex broker that was worth around $4 billion dollars. In October of 2005, Refco shut down its operations and every trader who had money with them got screwed big time.

Refco was not regulated and for some time they were spending not only their profits but also deposits of their clients. The amounts of money that traders saw on their trading platforms and the amounts of money Refco had in their bank accounts were different by $400 million.

So when the news hit the wire that Refco is running at such deficit, traders panicked and started asking for withdrawals. The only problem was that Refco was $400 million short of what it owed to traders.

There was a trial of course, and whatever assets the company had the court ordered to distribute among traders. I knew some people that had money with Refco. As far as I remember, after all assets were sold they got around 10% of what was owed to them. That means if person had $10,000 in his trading account, he got only $1,000 of it.

Moral of Forex Broker Bust Story. What is the moral of this true incident? The moral is that we have to remember that every time we deposit money to any forex broker, the money goes into their bank account. Whatever balance we see on our platforms is not real.

The broker can spend all of our money, without us knowing it, and they can still run their operation for a long time by robbing Peter to pay Paul. But when there are no more Pauls to rob, Peters get screwed.

The purpose of regulatory agencies is to constantly audit forex brokers and make sure that they are running their business properly and that the funds that belong to their clients are in place.

There are private regulatory agencies and there are government regulatory agencies. Private agencies are usually less strict and not as serious as government regulatory agencies.

I suggest doing business only with those forex brokers whose parent company is regulated by at least one regulatory agency, preferably government one.

List of 5 Regulatory Agencies. Here is the list of some popular financial regulatory agencies in the US:

Name: US Securities and Exchange Commission
Abbreviation: SEC
Status: US Government
Website: You can find out whether a forex broker’s parent company has a filing with SEC by going to: http://www.edgar-online.com/. There is also a search function on SEC website, but it does not go beyond 1994. Here is the link: http://www.sec.gov/edgar/searchedgar/companysearch.html.

Name: Commodity Futures Trading Commission
Abbreviation: CFTC
Status: US Government
Website: You can find out whether a forex broker’s parent company is a member of CFTC by going to this link, opening most recent PDF file and searching by broker’s company name: http://www.cftc.gov/marketreports/financialdataforfcms/index.htm.

Name: National Futures Association
Abbreviation: NFA
Status: Private
Website: You can find out whether a forex broker’s parent company is a member of NFA by going to this link and searching by broker’s company name: http://www.nfa.futures.org/basicnet/.

Name: Financial Industry Regulatory Authority
Abbreviation: FINRA
Status: Private
Website: You can find out whether a forex broker’s parent company is a member of FINRA by going to this link and searching by broker’s company name: http://brokercheck.finra.org/Search/Search.aspx?PageID=1.

Name: Securities Investor Protection Corporation
Abbreviation: SIPC
Status: Private
Website: You can find out whether a forex broker’s parent company is a member of SIPC by going to this link and searching by broker’s company name: http://www.sipc.org/who/database.cfm.

Step #4 Does forex broker have good reputation?

Before doing business with any forex broker, it is very important to check on their reputation. When checking on reputation of a forex broker, you should ask three questions.

How long has forex broker been in business? First Question is how long the forex broker has been in business. First you should search their company name on their local government website, and see date of their incorporation.

Second you should check and see when their domain name was registered. You can check on the domain by going to this link: http://www.networksolutions.com/whois/index.jsp.

If either their company name or their domain name has been around for less than 3 years, I think it’s very risky to be doing business with that forex broker.

Media Coverage. Second Question is whether the forex broker had any articles in any major financial newspapers. The easiest way to check that is to ask them. Most companies that had positive media coverage will save that information and post it on their website.

I think that doing business with forex brokers that did not have any articles in major financial newspapers is risky, because that usually means that they are either too small or haven’t been around long enough.

Reviews of Clients. Third Question is what do former and current clients say about the forex broker. Best thing you can do is go to http://www.forexpeacearmy.com/public/forex_broker_reviews, find your forex broker in the list and read reviews about them.

I would avoid forex brokers that have less than 20 reviews, because it means that they are very small. I would also avoid forex brokers with a rating of 2 stars or less.

I suggest reading through the reviews with great discretion, and look for reviews with specific details about certain issues and problems

Step #5 How much does it cost to withdraw money?

In my practical experience as a forex trader for quite a few years, I think it is very important to find a forex broker that allows you to withdraw money as often as you like at no cost or very little cost.

Perhaps you are different, but for me one of the keys for keeping my profits was to constantly withdraw them. If I left profits in my trading account, I had a tendency to take more reckless trades and lose them much quicker than normal.

But when I was back to core balance or below, somehow I would get more conservative and more careful and bring the balance to positive again. Even if you want to grow your account by keeping the profits there, I suggest withdrawing them first, and then re-depositing them. This way, mentally your profits become as core balance.

I have dealt with some brokers that charged a lot for withdrawals and even penalized for frequent withdrawals. Even if I had thousands of dollars in profit, and it cost $30 for a withdrawal, psychologically I was not inspired to withdraw profits. I would wait, and try to consolidate my withdrawals, and every time I did that, I usually regretted it.

So to make the long story short, before opening an account with a forex broker, call them and tell them that you are planning to withdraw money 10 to 15 times per month, and ask them how much it would cost.

You may be surprised to find out that with such withdrawal activity, you may be losing extra $500 to $1,000 per month just in withdrawal fees.

I believe that we as human beings are conditioned to efficiency, so if we have to pay money to withdraw profit, we won’t do it as often as we should, and it can end up costing us thousands and tens of thousands of dollars in lost profits due to psychological effect this will have on us as forex traders.

So I think it’s best to find a forex broker that will allow you to withdraw money as often as you wish. In addition to that, they must have at least one withdrawal option that costs under $10 per withdrawal, and takes 1 week or less to receive.

Dollar Rises Against Euro, Yen as Oil, Commodity Prices Decline

Guess what. I’m long dollar and liking the pips 🙂 BUT I’m bearish on the dollar for the long term.

Checkout this interesting and relevant article from Bloomberg:

–begin quote–

The dollar rose to its strongest in a week against the euro as speculation a global economic slowdown will reduce demand for raw materials pushed gold and oil lower.

Europe’s common currency declined after Credit Suisse Group said it may have a loss this quarter because of writedowns on debt securities. The dollar climbed to the highest level in more than a week versus the currencies of its major trade partners as crude, which is priced in the U.S. currency, dropped after a government report showed weaker demand for fuel.

“The main driver is the liquidation of long commodity positions, specifically crude oil,” said Lee Hardman, a currency strategist in London at Bank of Tokyo-Mitsubishi UFJ Ltd. “That’s potentially been a positive for the dollar on the back of the drop in commodity prices.”

The dollar advanced to $1.5443 per euro as of 7:55 a.m. in New York, the strongest since March 12, from $1.5626 yesterday. It gained to 99.66 yen, from 99.03 yesterday. The European common currency weakened to 153.87 yen from 154.80.

The U.S. Dollar Index traded on ICE Futures in New York, which compares the currency to those of six trading partners, rose for a third day, to 72.76, the highest since March 12, from 72.144 yesterday. The gauge fell to a record 70.698 on March 17, when the dollar slumped to $1.5903 per euro, the lowest level since the European currency’s debut in 1999.

The dollar may rise to $1.5280 per euro in coming weeks, where it will meet resistance, a level where sell orders may be clustered, Hardman forecast. He predicts the U.S. currency to resume its drop, to $1.60 per euro, citing a “continued erosion of the dollar’s yield advantage” as the Federal Reserve keeps cutting interest rates.

Gold Slumps

Gold headed for its biggest weekly drop in 25 years, plunging 12 percent from its record $1,032.70 an ounce. Oil fell below $100 a barrel for the first time since March 5, and copper had its biggest two-day decline in seven months.

The euro also weakened after a report showed today growth in Europe’s service and manufacturing industries slowed more than economists forecast.

A preliminary estimate of Royal Bank of Scotland Group Plc’s composite index fell to 51.9 in March, from 52.8 in February, Reuters Plc reported. Economists expected 52.4, according to the median of 14 forecasts in a Bloomberg News survey. A reading above 50 indicates expansion.

The single European currency declined after European Central Bank council members Yves Mersch and Guy Quaden said yesterday financial-market turbulence caused by the U.S. housing slump will last longer than expected, weighing on Europe’s economy.

U.S. Influence

“The weakness in the U.S. will be felt in the euro zone and by the third quarter we are expecting the ECB will be cutting rates,” said Tim Condon, head of Asia research at ING Groep NV in Singapore, a unit of the biggest Dutch financial-services company. “Right now, the markets are very bearish on the U.S. and less bearish on the euro, but as time passes, that is going to change.”

ECB policy makers have refrained from cutting borrowing costs as they weigh the risk of slowing growth against accelerating inflation. Investors still expect at least one reduction in the 4 percent benchmark rate this year, futures trading shows.

A technical gauge that had in recent weeks indicated the euro may have risen too far and too fast against the dollar fell below the level that signals a reversal for the first time since Feb. 26. The Relative Strength Index was at 62 today, from 75 yesterday. The 70 level indicates a currency may be overbought.

Credit Suisse

The Swiss franc declined against the dollar and the euro after Zurich-based Credit Suisse said writedowns of $2.65 billion, caused by deliberate mispricing by traders, will be spread over the fourth quarter and first three months of 2008.

The franc traded at 1.5651 per euro, from 1.5595 yesterday. Against the dollar, it declined to as low as 1.0168, the weakest since March 13, from 0.9982 yesterday.

The pound surged against the euro after a government report showed retail sales in Europe’s second-biggest economy rose more than forecast last month. Retail sales increased an annual 5.5 percent, compared with an increase of 3.6 percent anticipated by economists in a Bloomberg News survey.

The U.K. currency rose to 77.92 pence per euro, from 78.76 pence yesterday and compared with a record low of 79.12 on March 17. It traded at $1.9819, from $1.9843.

Iceland’s Krona Rebounds

The Icelandic krona rebounded after slumping to a record low against the euro yesterday as risk-averse investors sold higher- yielding assets and widening losses at financial services companies pushed up the cost of insuring the country’s banks against default. Iceland’s key interest rate of 13.75 percent is the second-highest in the developed world.

Iceland’s currency traded at 121.599 per euro, from 122.0864 yesterday, when it plunged to a record 127.985 per euro. It extended its decline against the dollar, dropping 0.8 percent to 78.74, from 78.12 yesterday, when it touched 81.61, the weakest level since September 2003.

Traders may also be reducing bets that the dollar will decline in case of large currency swings during the Easter vacation, said Daniel Katzive, a New York-based currency strategist at Credit Suisse Group, in an interview on Bloomberg radio today.

“We think that the dollar is benefiting from profit-taking on profitable shorts heading into the long weekend but we don’t think it marks a turning point for the dollar beyond the very short term,” Katzive said. “Fed policy is very accommodative. While U.S. yields remain low relative to the rest of the industrial world the dollar is going to struggle to recover.”

Futures on the Chicago Board of Trade indicate a 54 percent chance the U.S. central bank will cut its rate by another half point by its June meeting. The odds of a quarter-point cut in April were 38 percent.

–end quote–

Advantages of non-dealing desk brokers

Check out this very informative article I found on the “Non dealing desk” blog over here:

http://nondealingdesk.blogspot.com/ 

Enjoy!

1. No Inherent Conflict of Interest. Non-dealing desk brokerage firms do not trade against their clients. As facilitators of trading, they do not take positions that may from time-to-time conflict with the interests of individual traders.

2. Market Access. Non-dealing desk brokers offer every trader, big and small, equal access to the interbank market. The rates (bid and ask prices) on a non-trading desk platform are not those set by an individual broker but those derived from active trading between participating banks, institutional investors, FCM’s and individual traders. The process itself makes every trader regardless of size an independent market maker.

3. Anonymity: Trading is done in total anonymity – the non-dealing desk broker does not know or have a need to know your positions so stop loss orders are not/cannot be targeted for takeout when a broker has a need to meet liquidity requirements.

Note: There is a growing suspicion that dealing desk brokers spike rates to take out trades when it suits their purposes. An insider a friend of mine talked with recently, a key programmer working for a dealing desk brokerage firm on the East coast, acknowledged that brokers spike rates of up to 10 pips on a routine basis and for a variety of reasons. Whether used to fill unbalanced trades, leverage the broker’s own account, or to meet immediate liquidity requirements, spiking is a fact of life and difficult to prove. Sooner or later he believes the NFA will find a way to document the practice, but until then a lot of dealing desk brokers will continue to manipulate rates to their own advantage. At this point, they don’t have any compelling reason not to.

4. Pricing Intervention (Bias). Non-dealing desk broker rates as well as bid/ask prices come directly from the interbank system. They are not filtered or otherwise manipulated to maintain established (undisclosed) profit margins or spiked by the broker to gain a trading advantage.

5. Reorders. Non-existent. Traders never get “reorders” from a non-dealing desk because they serve no purpose – the broker has nothing to gain or compensate for.

6. Full Disclosure. The non-dealing desk broker’s fees are limited and clearly disclosed.

7. Transparency. No mind games. What you see is what you get.

PERCEIVED DISADVANTAGES OF THE NON-DEALING DESK

1. The Cost of Trading: A large number of traders still believe that there is such a thing as commission free trading, a myth that continues to be perpetuated by a large number of dealing desk brokers. Make no mistake, the so-called “commission free” broker generates a transaction fee every time a trade is executed.The difference is that the non-dealing desk fee is fully disclosed; the dealing desk broker’s “fees” are not. What’s more, the dealing desk’s offer of fixed spreads also affects the individual trader’s profitability because he/she is locked out of trades when market spreads drop below the broker’s fixed differential. Instead of executing a market order, the broker responds with a reorder which guarantees that broker a fixed, undisclosed profit while at the same time depriving the trader the opportunity to take maximum advantage of a pricing move.

2. Spreads are Variable, Not Fixed. The Forex is an extremely fluid market. Spreads are in a constant state of flux and when traders trade through a non-dealing desk, they may see a dozen or more banks posting rates – the most attractive appearing above all the others.

During peak trading hours, spreads can drop to zero, a fact most traders using a dealing desk are not aware of. During off-peak hours, spreads can be considerably higher.

Non-dealing desk brokers don’t offer or execute trades based on fixed spreads. They charge a nominal transaction fee. Such is not the case with the dealing desk broker. Whether interbank spreads are high or low, they just boost their rates to guarantee the profits they have imputed in their fixed spreads. They also generate an undisclosed amount of income trading against their trader clients.

The Beauty Of Leverage In Forex Trading

When was the last time someone handed you a bundle of cash? If you’re like me, that hasn’t happened in a long time, if ever. This is why Foreign Exchange Trading is such and exciting opportunity. Forex brokers are literally giving you money to trade with, up to $200 for every $1 in your account!

If you’ve traded stocks, you know that you can get up to a 2:1 margin on your account value through most brokers. Put a different way, most stock brokers will let you buy $2000 worth of stock for every $1000 in your account…loaning you $1000 in the process. That sounds like a pretty good deal, right? Buy $2000 of stock, let the stock rise 10% to $2200, sell the stock and pay your broker back the $1000 (plus a bit of interest) and pocket your $200, 20% gain. Not a bad way for things to turn out, a rise of 10% in the stock value gives you a gain of 20%.

Imagine a different scenario. You sign up with a Forex broker and commit $1000 of your account value in a $100,000 trade on the EUR/USD (Euro to US Dollar). You’re using 100:1 leverage in this case. When the EUR/USD exchange rate moves 1% in your favor, you exit your trade for $101,000. After paying the $99,000 (plus a bit of interest) back to your broker, you’re left with about $2000. Starting with $1000 and ending with $2000 is a 100% profit, triggered by a 1% move during your trade!

Think about the effects of leverage for a minute. This is the reason why it’s no joke when I say trading Forex can turn $300 into $10,000 in less than a month.

Now that I’ve got you excited, let’s throw a bit of water on the fire. If you’re using 100:1 leverage, a trade that moves 1% against you can be devastating. This is why you absolutely must get educated about trading Forex before you commit money. With the proper strategies to set up your trades, you minimize the risk of having losing trades. Even more importantly, with the proper money management and trade exit strategies, you eliminate the possibility that a couple of bad trades can wipe out your account.

A good Forex trading system EXPECTS TO LOSE some of the time. Anybody can make money when they’re winning all their trades. Only someone with the proper education and discipline can make money when they only win half their trades…everyone else gets wiped out.

Don’t get wiped out. Forex is an amazing money making opportunity. Get educated, do it right, and build your wealth safely.

A day in the life of Dr. Richard Olsen – founder of Oanda

Chairman and CEO of Olsen, Dr. Richard Olsen holds a Licentiate in Law from the University of Zurich (1979), a Masters in Economics from Oxford University (1980) and a Ph.D. from the University of Zurich (1981). He worked in banking as a researcher and foreign exchange dealer before founding Olsen in 1985 and becoming the firm’s Chief Executive Officer. He is also CEO of OANDA.

Richard Olsen is involved in several companies, OANDA, OFT (Olsen Financial Technologies), Olsen Ltd and Olsen Investment Corporation. The companies have one theme in common – they contribute to his underlying objective of transforming finance into a ‘high tech’ industry and making it into a true engineering science with the same standards of quality and sophistication as the most advanced technology in the computer or pharmaceutical industry. For a number of reasons, modern financial markets have failed to evolve and continue to rely on primitive engineering tools. To illustrate this point, risk management in banking continues to use daily data for its risk computation, even though we know today that the daily computations have a large error term. Or another example, in the hedge fund industry a large fraction of the investment managers rely on traditional technical analysis for their trading decisions. Currently, most of my time is dedicated to Olsen Ltd and Olsen Investment Corporation. Olsen Ltd develops quantitative statistical trading models for trading currencies. Olsen Investment Corporation offers managed currency accounts, markets a hedge fund called High Frequency Data Fund and other currency related investment products.

Dr Richard Olsen

Every morning, Richard Olsen hops on his bike, buckles on his helmet and glides down the hill to his office in Zurich, Switzerland. In the evening, he pedals uphill to his home. “It takes about eight minutes to get to the office,” he says, “but I need 16 or 20 minutes to get home – depending on the weather.”

In his head, however, the uphill journey takes many times longer than on his watch. “That’s the difference between intrinsic time and physical time,” he laughs, referring to one of the epiphanies that got him hooked on “high-frequency finance” – his term for an approach to markets that, in part, measures time in terms of volatility instead of seconds. “It’s the same concept that’s behind point-and-figure charting, except we do it mathematically instead of visually, which is not an insignificant achievement.”

Olsen heads Olsen Ltd. (www.olsen.ch), which is a combination hedge fund and open research project that has attracted some of the most inquisitive minds in finance – among them Benoit Mandelbrot, whose 1967 article “How Long is the Coast of Britain?” launched the field of fractal geometry.

Olsen’s trading platform (www.oanda.com) uses an automated market-making engine developed by his Switzerland-based team of physicists and a Canada-based team of programmers, headed up by childhood friend Michael Stumm.

“We want to create tools of finance that are as slick and elegant as the most sophisticated tools of technology,” he says. Toward that end, Olsen Ltd. operates a feature called a BoxOption, which allows traders to define a specific strike range in time and price with a mouse click. The system then hedges the position automatically, but trades are limited to just $200 at this point.

Olsen and Michael Stumm began trading stocks in their late teens. Then Olsen went to Oxford to study law and economics, while Stumm went to Stanford for post-doctoral work. In 1974, at the age of 21, Olsen read about a government subsidy to save jobs, and he realized the headline could as easily have said the government bought 10,000 jobs, with the salary of those people as the price. “That got me thinking about what would happen if the government capitalized unemployment so people could invest in new jobs,” he says.

That launched his nimble mind on a series of inquiries such as why some things become assets while others don’t, and how come only some of those assets become tradable. That no one would listen to his ideas about flexibility in the job market got him wondering how many other obvious concepts were being missed.

Two years later, he took a course in growth modeling taught by James Mirrlees, who 20 years later won the Nobel Prize in Economics for his work on the economic theory of incentives in a world where decision-makers have varying information. “I was very impressed by the fact that he told us up front that there was something wrong with the growth models we were learning,” Olsen says. “Basically, the whole system broke down whenever one aspect broke down, while real systems are more self-adaptive.”

After two years of trying to crack the problem, Olsen experienced another epiphany: “In most models, the building blocks were static, and dynamism was introduced as being something that happens to them,” he says. “For models to be realistic, we had to make sure that the basic foundation was dynamic.”

Part of that foundation, of course, is time itself. “Sometimes time goes by quickly, and sometimes it drags on and on,” Olsen says. “When you see the market collapse 5% in a half-hour, for example, physical time has little meaning.”

All these obsessions came to a head during a brief stint as a bank trader, when Olsen discovered technical analysis. “It was fascinating to see these ideas in practice,” he recalls, “but it was also disconcerting to see that the raw data used to construct these precise models often included bad trades and unfilled bids and offers.”

So, in 1985 he set up the company that became Olsen Ltd. and began recruiting physicists to help filter and structure the data. That brought him into contact with Mandelbrot, who now serves on the board of Olsen’s Center of Emerging Finance, which conducts conferences on high-frequency finance.

A Look At Market-Moving Numbers – Literally

By Benoit B. Mandelbrot and Richard L. Hudson

Wall Street, as ever, confounds. But the mysterious behavior of financial markets attracts academics eager to uncover investing secrets. For the past 40 years, Yale University mathematician Benoit B. Mandelbrot, founder of a branch of mathematics called fractal geometry, has applied his academic theories to financial markets. His findings are explored in a book he has written with Richard L. Hudson, former managing editor of The Wall Street Journal Europe, titled “The (Mis)Behavior of Markets: A Fractal View of Risk, Ruin and Reward.” In the following excerpt, Richard Olsen, a Swiss fund manager and specialist in mathematical finance, illustrates Mr. Mandelbrot’s view of the financial markets: They aren’t mysterious, but rather physical systems that ought to be examined scientifically and engineered rationally.

Zurich — THE NO. 4 STREETCAR heads from the city center, down the eastern lake shore, eventually arriving at the Mill Museum, a four-story, century-old factory now housing worthy exhibitions on cereals, the food industry and the age-old human cycle of famine and surplus, boom and bust. Next door, however, is a kind of laboratory for boom and bust — a test reactor, its founder calls it. “What we’re doing is quantum theory for finance,” Richard Olsen says.

His company, Oanda.com, looks like just another small financial house. Barely 25 people man its market-making screens, trade e-mail with customers or work its computers. Its Web site, on foreign-exchange markets, seems humdrum. It has instant currency converters, live quotes, news, scholarly articles on market theory, trading games, downloadable software to analyze the market, and — now something out of the ordinary — a service that lets you bet real money on currency rates. If you open an account, you get what looks like a front-row seat at a forex dealer’s trading screen. On your PC, you can chart the dollar/yen or euro/sterling market, project price movements, work out a trading strategy and then place a bet, with real money. It can be as little as $1. Launched in 2001, the service in early 2004 had about 10,000 customers with trading accounts. Most were amateurs, taking a flutter. But Oanda also attracts some big money. All told, its customers trade about $1 billion of yen, euro, dollar, bhat or pesos a day.

It is, in short, a small-scale model of the real currency market. One problem with almost all economic or financial research is limited information. If you want to study a market, you can get lots of generic numbers — indexes, price quotations, volume. If you are inside a brokerage house, you can supplement that with precise information about what your own clients are doing, and, to some extent, why. But you can never see what other firms’ customers are doing. You can never get the whole picture, the satellite view. That is what Oanda.com provides Mr. Olsen and his handful of math and finance Ph.D.s: the insight, both general and particular, of what people actually do in a market.

“I have this terrible sense of frustration,” Mr. Olsen says. “We send space shuttles into orbit; we send probes to Mars; but we haven’t studied the financial markets. We literally know nothing about how economics works. I want to break that deadlock. I want to change financial markets into something as efficient as engineering.”

Mr. Olsen is a painfully earnest, lanky 51-year-old with a manner more suited to scholar than trader. In the world of forex, where he is well-known among the big bank research departments, he is viewed as something of a boffin: brainy, dedicated and perhaps a bit eccentric. He has a master’s in politics and economics from Oxford and a Ph.D. in law from Zurich and worked among the financiers of Zurich. But he quickly became a prophet for an important new faith in financial research: high-frequency data. A century ago, even yearly data on broad trends were hard to come by. Then reporting of monthly, weekly and daily prices improved on exchanges and in newspapers. But the real data stream is tick by tick, quote by quote, transaction by transaction — and that was available only in a few places, such as on the New York Stock Exchange. So in the 1980s, news services like Reuters began to see some value in transmitting instant-by-instant numbers to paying clients — and that is where Mr. Olsen and his colleagues in Zurich saw opportunity. They amassed, debugged and began studying what has become one of the world’s biggest databases of tick-by-tick foreign-exchange quotations. For academics, it has been a boon; scores of scholarly finance articles have been published based upon it. But the big banks, to which Mr. Olsen also hoped to sell use of the database, weren’t much interested; his firm was liquidated.

Oanda.com was his next idea for studying the market, which he founded in 1996 with a school friend and computer-science professor, Michael Stumm. And it has been an entirely different story. In 2003, according to its reports to the U.S. Commodity Futures Trading Commission, Oanda’s net capital more than doubled to $4.1 million — a tidy profit. Olsen Investment Corp., a sister company, manages some relatively small sums — 30 million ($36.3 million) at the end of 2003 — for customers in the foreign-exchange market. The funds have performed fairly well. In 2003, the best fund returned 21.05%, the worst, 3.15%, according to audited reports. The performance difference from one fund to the next arises mainly from how much risk, or leverage, each fund tolerates; as is common in forex, the riskiest funds have done the best — so far. But the trading strategy for all the funds is the same, and follows Mr. Olsen’s computerized, quasi-fractal models of the market.

To him, a financial transaction is like a small explosion. Conventional financial theory, as taught in business schools around the world, holds that prices change continuously, and that each investor is as unimportant as the next. Their trades are like the collisions of molecules in a gas chamber — millions of tiny energy exchanges. Nonsense, Mr. Olsen says. His tick-by-tick data show plainly that prices jump. Quotes stutter. And investors vary greatly in importance and impact on the market. A more accurate metaphor is the chamber in an internal combustion engine: Millions of small and large explosions drive the car forward, as the sparkplugs fire and the pistons churn.

As he sees it, in a well-functioning market small investors behave much like big investors, and make profits that scale proportionately. Only the industry’s unfair commission structure and other idiosyncrasies tilt the game. Likewise, short-term traders act much like long-term investors — again, with measurable scaling factors. He can see this, he says, in the computers tracking his Web service, FXTrade. There, fees are abolished and interest is compounded second by second; big and small investors are on an equal footing as they place their currency bets. To keep the system real, Mr. Olsen is registered as a market-maker, like the behemoths that rule the real currency markets. Mr. Olsen’s computers keep his own quotes in line with those of the big banks, and also buy or sell real currency contracts to manage his own risk. Like other market-makers, he earns money on the spread, or the difference between the rates he sets to buy and sell a currency. But to those using his system, all that is invisible: What they see is just a currency market, and they can trade in it as often as they like, with whatever strategy or investment they like.

Mr. Olsen’s fractal notions boil down to a theory he calls “heterogeneous markets.” Orthodox economics is all wrong, he says. People aren’t rational, and they don’t all think alike. Some are quick-trigger speculators who pop in and out of the market hundreds of times a day. Some are corporate treasurers, deliberately buying or selling big contracts to fund a merger or hedge an export risk. Some are central bankers, who trade only occasionally, and at critical moments. Others are long-term investors who buy and hold for months or years. Each one, operating on his own time scale, comes together at one moment of trading, like all of time compressing into an instant, or the entirety of a rainbow spectrum focusing onto one white point. That is where the multifractal analysis comes in, he says: It is a mathematical tool for decomposing the market into its different elements and seeing how they interrelate and interact. And it suggests some real-world trading strategies. Using his models, his computers look for moments when the short-term traders are moving opposite to the long-term investors — and then he bets that the imbalance will correct itself.

In the end, he says, his goal is to make the financial system work better and more safely. If the real market worked like FXTrade, costs would come down, liquidity would rise. “The world economy is like your body,” he says. “Your heart pumps six liters of blood a minute, and so if you weigh eighty kilos it would take about fifteen minutes to pump your body’s weight. By that analogy, the world foreign-exchange market should be transacting $40 trillion every 10 minutes. Today we do $1 trillion or so in 24 hours. My claim is the global economy is close to a heart attack.”