Forex Methodology

Written by Trade Team | 13 February 2010

Discipline & Practice

Trading Methodology  Part 1 of a Series

In most cases when one goes through the different market outlook of most broker dealers, what could be seen are almostly market presentations in a short time trading frame. From a 15min chart, 30min to 4 hours interval. 

Not that there is something wrong with these presentations. but mostly these type of orientation is meant for short term traders from scalpers, short speculative trades meant to trade in between 10-50 pips trading objectives for profit or loss. And for the obvious reason, that if one traders makes more one trade this is where broker-dealers make their revenue from between the spread.

Retail forex trading is focus on small speculative investors purely to enable them to trade hopefully like the professionals in the interbank market while offering the same liquidity market through each company's trading platform. But did you ever think why do they have their own platforms to offer? And how each company can offer so much rebates, bonuses and even affiliate programs that provides commissions and cash backs as promotions?

These is where the revenue stream comes from! Sure enough, since the trades made are smaller but is larger volumes with huge leverage opportunities of course it will be very attractive. Specially if and when they would be presenting a profitable side. But what about the down side. As some accounts would have certain clauses that would indicate that the account would not inccur more losses than the actual investment made. True enough as stoploss points are marked automatically in the market price when it hits or triggers the price level.

Although, almost all trade practices are than electronically matched and all trades are netted out overall. Meaning that overall net positions established are met during orders and any positions over and above are then passed on to the counter party as a hedge to even out all positions. that is also equally important that the broker-dealers and retail banks offering such FX dealing services would be better of with a straight through process in executing orders that some do just to attract more traders who happens to graduate to the next level of sophistication as they grow more familiar with the ins and outs of Foreigncurrency trading.

On a mathematical stand point there are more numbers of loosers than winners. that is why encouraging traders to be more of a strategist and to do percentage trading by learning how to hedge positions may be the best solution for the investor to equalize or should we say even out the playing field while having existing and open postitions. Having a higher margin requirement would lessen the trading volume as more funds are tied up in maintaining the position while risks are the same or greater.

To minimize the risk will entail using leverage allocation by spreading positions with various majors pairs, cross rates or even utilizing the financial futures and the commodity futures trading. " Account Size " does matter, but retail trading is meant for smaller account holders and it would be difficult for the investors to trade more if the margin requirements and the leverage would set in a minimum as what is being proposed with the CFTC. As a way not to over leverage positions made where each positions tolerance points may ripple through other posiitons that may also affect a profitable trade vs. a loosing one. In worst case scenario, both positions may well loose as the choices made were poorly executed or the choices made were poorly chosen too. One could lead to the other. So one criteria is to do a process of deduction as to which pai goes well with the base currency previously chosen.