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I've traded FX for almost 10 years now and the truth about the Retail Forex FCM/Market Maker Business Model(s) has never been fully told, nor fully understood by the general trading public. So, I appreciate your post.
The sad fact of the matter is that the vast majority of Retail FX, is ruled by Retail Bucket Shops who willfully engage in unethical behavior with respect to their customers and the do it in plain sight, regardless of the CFTC/NFA "watching" (not really) over their respective shoulders. Bucket Shop antics are nothing new in Retail Trading - we've seen it for decades in other markets.
The difference in Retail FX has everything to do with the amount of leverage offered and the unsuspecting "newbie" who really hasn't developed enough of an understanding about how to manage/use such leverage, or adjust for it within their own trading strategy/tactic/methodology. Therefore, the Retail Forex Business has earned a reputation for washing-out more than 90% of those who start out believing they will reach a consistent level of profitability. This reputation is very well earned and both Broker and Trader have done almost everything within their power to cast as negative a light on Retail FX as possible over the years, since its initial release to the public at large.
The spreads you see on your Retail platform, have little to nothing to do with actual Interbank Rates. The trades you make on your Retail platform never see the light of day on the real Interbank. A Retail Trading Platform is equal to a Private Liquidity Pool engineered (designed) by your Retail FX Intermediary (Broker) to be a virtual Money Machine for both them and their LPs. This is true in the vast majority of cases. They all use a Pricing Engine that contain algorithms they use to manipulate the Bid/Ask that ultimately makes it to your desktop.
Within that algorithm they have embedded their profit margin for every trade that you make, in the form of a delta within the spread. So, the vast majority of them are literally "fixing" the market price at which you get filled on a routine basis. This is part of what a Bucket Shop does. This is how their business model works and this is what makes them hugely profitable on a per customer/per trade basis. This is also the reason why you can see such a differential from one broker to the next, on any given day and at any given time of day.
Built-in latency, platform connectivity disruptions, trading platforms that hang just before a news release, slippage, re-quotes, partial fills, spread widening and monster spikes near an aggregate cluster of stop levels, etc., all part of the Retail Forex Bucket Shop Game. Some of the worst offenders are also some of the biggest and most well known FCMs in existence.
Yet, the fact of the matter is that unless the FX Newbie has enough capital to start their trading business on an Institutional platform through a Prime Broker arrangement (completely antithetical to how we understand a person getting involved with FX for the very first time in their trading career), then one must endure the inefficiencies of trading on Retail FX Platforms. But, those platforms do not have to be run by Bucket Shop Pimps.
In the United States of America, if you are a Retail Forex Trader, then you really have only two (2) options to avoid a *full-on* Bucket Shop experience:
Everything else outside of those two Retail FX houses will land your funds in Retail FX Bucket Shop Hell. Pure and simple. If you happen to live in the United Kingdom, Australia, Japan, or somewhere else outside the United States, then your opportunities expand a little, but only a little. That is because the Bucket Shop Business Model is what primarily drives all Retail FX Transactions. It is also the reason why said business model has exploded in popularity over the past 10 years.
However, having said all of that - Bucket Shops in Retail FX do have their proper place.
- They offer free trading platforms and free "market" data
- They offer free demo/training accounts
- They offer tightly integrated trading account reports
- They offer little to no hassle set-up and installation requirements
- The allow one to open an account with relative peanuts
- They give the Trade an opportunity to learn how to manage highly leveraged trades
- They teach the Trader the importance of getting out of Retail Bucket Shop FX Hell as soon as humanly possible
For these reasons alone, Bucket Shops can be absolutely wonderful places to learn, develop and grow trading skills that ultimately allows one to finally graduate from Retail FX Bucket Shop Hell. Unfortunately, the vast majority of new to FX Traders don't approach Retail Bucket Shops with the right attitude towards furthering their own education and they get caught-up in the online world of Commercialized Forex Trading Forums where Brokers pay Trolls to help keep them in the dark about how to truly become a successful Forex Trader, by steering threads and conversations that should be about the Business of Trading, into a black pit of all too predictable personal ego, misinformation, disinformation and outright lies and distortion about what Retail FX is all about behind the scenes.
There are handful of highly successful FX Traders still lurking from time-to-time and who have always tried to extend a helping hand to those seriously interested in improving their skill as an FX Trader. But, those faces are now far, few and in-between these days, as the commercial interest who pay their trolls to confuse and beguile the newcomer to FX, far outnumber those who have truly developed an Edge in their trading.
Much thanks to Big Mike, for not allowing his forum to become of the black-holes of the Retail Forex online establishment.
So, there you have it. The spreads are sometimes ridiculous, no doubt. But, the reason you use a Bucket Shop is not to build a platform for future Production level trading. You use a Retail FX Bucket Shop to develop the skills necessary to get yourself onto a genuine Institutional Trading Platform with a serious Prime Broker arrangement.
Hope that provides at least some insight into the Retail FX Game.
Can you help answer these questions from other members on NexusFi?
How about TDAmeritrade/ThinkOrSwim for FX? One can choose spread or by commission also.
Yes, there was an article or something posted with a screenshot of Metatrader4, the "broker version" where
the broker had lots of "options" to do a lot of shenanigans with the spread and fills, and other features such as spying on each client's MT4 onscreen data.
I scalp forex all the time. You just need to pick more active pairs (some of the top ones are EUR/USD, USD/JPY, GBP/USD) and trade them during their respective market hours. Your broker could also be bending you over on spreads. I use Oanda and 99% of the time (the other 1% is when spreads spike for a few minutes on news) I get 1pip spread on EUR/USD during the london and new york sessions.
I'm not a big Oanda fan (though I have used them and still keep a small account with them) but you're right, even with scalping the spreads shouldn't be too bad during peak times. If your spreads are the size of a 5 minute bar then something is VERY wrong. Either you are trading in an off-time where the market is absolutely dead or your broker is giving you ridiculous spreads.
I swing trade a small account at FXCM and the average spread will be around 2.5 pips during regular trading hours which equates to about 25 cents on a 1 lot micro account, you cant make it scalping with that big of a spread but if you swing trade wich I am terrible at and still profit here with at least a 1-3 risk for reward scenario and never risk more then 1.5% of your account you can profit here if you can trade. I am a price action scalper on the TM and would love to scalp FOREX but so far I dont see it possible at least at FXCM.
Your comment highlights the importance of becoming a specialist in the product you're trading. FX can be highly profitable but it has it's own peculiarities and you can't necessarily trade it the same way as futures or shares.
Spreads, commission and slippage can vary largely by broker so it's important to find one that is competitive...and there are some who are. These costs must be overcome before profits are made so it's very important to consider them.
Liquidity at times of news events can vary widely by broker. If a broker doesn't have good liquidity sources you can get stopped out by the widening spreads. This is also important to consider.
There are a lot of great things about trading forex. In my opinion the three best things are:
Better able to manage risk - trading is continuous, except for weekends, allowing you to get out at the planned maximum loss almost all the time and not some larger amount. Can take advantage of multiple trading sessions - continuous trading allows you to devise strategies that take advantage of trading opportunities in all three major trading sessions, Asia, Europe/London and US. This also means that you don't have to live locally to take advantage of those price movements. High leverage - a high level of leverage can be a real advantage for an experienced trader. Broker risk can be minimized and returns maximized on funds applied to a trading account.
