module four
Making a Paradigm Shift
(Use desktop for best view)
Forex | CFD Brokers
The Evolution of Forex Broker Models
Forex brokers have undergone significant changes since their inception. Originally, they catered to medium-sized institutional clients and 'small' professionals, requiring 'high' minimum account sizes (ranging from $2,000 to over $10,000). Brokers primarily operated as market makers, benefiting from clients’ losses while charging wide spreads (4 pips for EUR/USD, 5 pips for GBP/USD and USD/JPY, etc.) and high commissions ($3 to $4 per trade). With leverage options reaching as high as 400:1, these brokers enjoyed a risk-free environment due to a high percentage of retail clients losing money.
Market Saturation and its Impact
As the forex market grew increasingly crowded with new retail traders, the original broker business model had to adapt. A price war ensued, leading to:
Despite these challenges, the influx of retail traders continued, albeit at a slower rate. Brokers adapted by employing aggressive marketing strategies to promote frequent trading, which often resulted in faster account depletion. As a result, many brokers transitioned to automated market-making models (B-booking), which allowed them to keep most of the rapidly losing small accounts in-house.
The Hard Truth about Broker Practices
Today’s brokers often rely on high-volume, low-capital accounts. This has led to the use of aggressive marketing tactics designed to encourage frequent trading at high leverage, perpetuating a cycle where traders often find themselves losing their whole account quickly.
FL!P YOUR THINKING
This is how we got to a point where the brokers had to make do with many under-capitalized accounts. Their only option was to use black hat marketing to get traders to do many, big trades, fast. That is the legacy of the industry we have today. I have done it in the past and today, like then I - rather poetically - advise new and struggling 'victims' what the response to these developments should be:
If they say go high, we go low. (Leverage)
If they say go small, we go big. (Perspective)
If they say go big, we go small. (High volume - size of trades)
If they say go fast, we go slow. (Develop a process)
If they say go short, we go long. (High volume - time frame)
If they say cut your losses, we say we'll think about it. (Risk management)
If they say run your profits, we say we'll think about that too. (Risk management)
If they say risk only 2%, we say its more complicated. (Risk management)
If they say one big trade, we say multiple small trades. (Risk management)
If they say technical analysis, we say comprehensive analysis. (Being smart)
If they say price action, we say not fooled by randomness (Being smart)
If they say timing the market, we say time in the market. (Risk management)
If they say trade news, we say understand drivers behind price changes. (Being smart)
If they fool around with randomness, we stay out of the randomness vortex (Being smart)
Mindset for Trading
Luck vs Skill
In the realm of trading, it’s crucial to recognize the role of luck. There's a stark difference between activities where luck plays a minor role and those where it is predominant:
Little Influence of Luck: A sound process yields consistent outcomes.
Significant Influence of Luck: A sound process yields favorable outcomes over time.
Traders must acknowledge the substantial role luck plays in their trading journey and accept that their skill
will become apparent only with time. Developing a skillfully designed process is key.
Embracing the Right Mindset
A proper trading mindset entails:
Acknowledgment of Luck: Understand that you have no control over luck but can develop skills that
may mitigate its impact.
Exploration of Skills: Identify which trading-related skills you can master, such as strategy design,
market analysis, and risk management.
Long-Term Focus
In a luck-dominated environment, your mindset should be oriented towards the long term. This includes looking past immediate setbacks and focusing on a rule-based, holistic trading approach.
Key Aspects of a Successful Trading Mindset:
Intrinsic Motivation: Focus on internal drivers rather than external rewards.
Perspective: Understanding the historical evolution of forex brokers informs your trading decisions and
helps recognize the larger forces at play.
Practical Trading Mindset
Following is a number practical aspects that form part of the right mindset (to trade the 4 x 1 +1 strategy).
'Fundamental' Bias
Successful traders often display a nonchalant attitude towards predicting market movements. They accept that anything can happen and develop a legitimate bias to confidently enter trades.
Emotional Awareness
Recognize that emotions are part of the human experience. Instead of suppressing them, embrace your feelings and incorporate them into your trading process.
Letting go of Perfectionism
Avoid the trap of perfectionism. Be willing to change your mind quickly and accept losses.
Timing
Don’t overestimate the importance of precise trade timing. Instead, accept that market conditions are volatile, and entering trades can be somewhat arbitrary. The mantra “close enough is good enough.”
Flexibility
Adapt to changing market conditions and recognize when it’s necessary to cut losses, thereby maintaining effective risk management.
Conclusion
This module emphasizes the importance of understanding forex brokers' evolution and adopting a robust trading mindset.
By acknowledging the roles of luck and skill, focusing on long-term processes, and cultivating the right mindset, traders can navigate the complexities of the forex market more effectively.