Introduction: FX Broker Created Perceptions
Most prospective forex traders unfortunately think successful trading works exactly how the forex industry promotes forex trading.
The forex industry's promotion of their product is 100% based on the forex brokers' total dependence on high volume trading from a limited client base. The client base is limited because of the huge competition from other forex brokers and their white label partners and introducing brokers and affiliate marketers who all get a slice of the trading fees pie.
The trading fees, either spread & commissions for ECN brokers or spread only for dealing desk brokers are also under pressure as spreads have narrowed considerably over the last decade. (Dealing desk brokers also have other legitimate ways to make money.)
The cost to acquire clients is too high for brokers (and particularly all their marketing add-ons) to have a bunch of passive traders trading low volumes a few times a week.
We have said about Forex brokers that the most important conflict of interest between brokers and traders is the brokers' need for their clients to trade in high volumes, irrespective how small their account is. (Small accounts get refunded much easier than depleted bigger accounts).
Since brokers chase mini and micro accounts predominantely these days the total message is skewed to a certain way of trading or trading type that overshadows the broader different approaches to such an extent that most people think about forex trading as just one type of activity:
Extremely short term intra day trading. |
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Extremely Short-term Intraday Trading on Charts
The forex broker industry promotes in every possible way extremely short term trading in order to satisfy their need for trading volumes.
Here are the combination of "stealth" factors to achieve this:
- Integrated charts dominate the trading platform
- Sub-60 minute chart intervals (timeframes) dominate data availability.
- Five decimal pricing and "milli-second" execution
- A stream of intraday price analysis, technical indicators on minimal timeframes
- Never ending intraday news feeds
- Very small accounts is by definition very short term, high leveraged trading
- "Risk management" = very close stops due to high leverage
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Assumptions and Evaluation
In order to accept this trading style promoted by forex brokers and their hordes of marketers a trader should make the following assumptions:
- In this miniscule timeframes price changes are very predictable.
- Historical price data is an excellent source for price predictability.
- Price changes are "smooth" and "averages" a workable toolset, therefore
- Repetitive price patterns and setups are highly predictive of price direction.
- Not only price direction but the extent of a price move is higly predictable;
- therefore stop losses can be fractions of profit targets.
- Trading cost as percentage of profit is low. (Because you trade a lot).
- Risk can be increased because all the above. (I.e. you can utilize high leverage)
- Skills to combine this in a wealth generating strategy can be learned quickly.
All of the above assumptions have been tested over and over again and not one of them can be proven as valid.
In summary the assumptions are that prices behave very predictably in this extremely short term (intraday) and that the free tools provided by the forex brokers in their trading platforms and trader education programmes are highly adequate to exploit this predictable price behaviour.
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It is common cause that most forex traders don't make money and turnover in the industry is high.
Studies of real trading accounts in several well regulated jurisdictions have shown that the majority of losing accounts are very small and trade way too high volumes ...
Too high volume = a combination of too many trades in too short a time period and too big trade sizes relative to capital. (I.e. the accounts are undercapitalized, overleveraged and overtraded).
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