Hi Jason,
just a quick question. I have been trading live for 4 years and have an average profit of 9-10% per month for the last 2 years on a £50k account. I recently switched to IG as I heard that there platform is uspposed to be the most advanced on the market. I deposited my £50k along with another £100k in savings and here is the problem: I have been trading with them for 4 months now with no problems during the first 3, and still hitting 9-10% but here is the problem; on month 4 they have started screwing with me in the usual ways with re-quotes and such. I "befriended" a lonely soul in customer services and have now discovered that they do not like anyone taking large amounts from them consistently (suprise, suprise!) which leads me to my question: Can I consistently earn an income of £20-30k per month through your spread-betting platform, and is there a limit to what a SP company will allow you to make before they cut you off? I'm looking over the next year to increase my capital enough to where I can start making £20-30k per month.
Hi Michael,
Thanks for the post!
I’ve heard your story many times from traders that switch from a market maker to FXCM’s NDD forex execution. FXCM uses a different execution model than many traditional spreadbet brokers, and our NDD forex execution removes the conflict of interest that exists when your broker is making the market. The short answer to your question is that you will not have a problem executing trades with FXCM if you are a profitable trader. Nor will you have any problems if you are scalping the market. It’s important to understand why, so I’ll go into more detail.
Trading with a Market Maker
Whenever your broker is making the market and taking the other side of your position, it then becomes you versus your broker. If the broker doesn’t hedge your trade then any profit you make becomes the broker’s loss and any loss you make becomes the broker’s profit. A profitable trader doesn’t always present a problem to a market maker. As long as they can hedge the position to lock in at least the spread, they’re generally happy. What causes problems is when your trading style starts to wreak havoc on their ability to offset positions, whether it be because your trading sizes are unpredictable, you open close trades too quickly, etc.
The broker is in business to make a profit so any traders that are highly successful or cause issues mentioned previously can be problematic. Not every trader loses, so a broker acting as a market maker is generally ok with you making money if they can hedge the position. Problems most frequently start to occur when the market moves quickly and the dealing desk doesn't have enough time to hedge the trade. You’ll probably notice that if you’re trading against the market trend, you won’t have any problems getting into the trade because the brokers dealer can lock in the spread cost and hedge away your trade. For example, let’s say you were trading GBP/USD during UK GDP announcement earlier this week when the number surprised everyone to the downside. GBP/USD starts to drop, but you decide to trade against the market and buy! If you want to buy, the broker will let you buy all day long because your trades quickly turn into losses (gains for the broker). If instead you decide to trade with the market and sell GBP/USD, the brokers dealers may not have enough time to react. If the broker is offering a 2 pip spread on GBP/USD and you place an order to sell GBP/USD, the market could easily move 2 pips in your favor by the time it reaches the broker. In fact, you may even have a profit. Guess what, the broker has an instant loss. The broker can’t accept this type of trading on a consistent basis if it results in losses, therefore you receive a re-quote when trying to enter and exit positions when the market is moving in your favor. Often times the broker will blame the need for re-quotes on latency in your internet connection..."We just need to ensure you're trading on the correct price", but in fact it comes about because your broker can’t react quickly enough to the trader and the market.
We put together a video that gives a very good visual of how all of this is working:
NDD Forex Execution
FXCM’s No Dealing Desk forex execution is different, and you may have heard of it referred to as DMA (Direct Market Access) or STP (Straight Through Processing). The way this works is there are multiple market makers sending prices and liquidity to FXCM. I can’t give the exact number, but it is in the double digits. Let’s say for example there are 10. Our execution engine receives prices from 10 different banks and then streams the best bid/ask price into the dealing rates window with a mark-up ( essentially a commission). For example, if the best bid/ask available from the banks on GBP/USD is currently 1.5928/1.5929 (1 pip spread), you may see it on the platform as 1.5927/1.5930 (3 pip spread). The banks are streaming a 1 pip spread, and the commission added onto it makes it a 3 pip spread. Whenever you click on the GBP/USD buy price of 1.5930, you send the trade to FXCM for 1.5930 and FXCM sends the order to the bank offering the best price for 1.5929. You have a trade at 1.5930 which is hedged by an offsetting order with the bank, and FXCM has earned 1 pip. Every forex trade is offset immediately back to back with the banks, and FXCM is compensated by the pip mark-up.
Charging a commission removes the conflict of interest that exists when your broker is the market maker since the outcome of your trade does not impact FXCM’s bottom line. FXCM’s revenue becomes directly correlated to the amount of trading volume going through our platform. Every trading strategy is accepted, even if you want to open and close the same trade every second. For traders that have a high enough trading volume, we even have a program setup called
Active Trader which is designed to lower overall transaction cost. A common argument you’ll hear from a dealing desk broker is that with NDD you’re still trading against a market maker?! Yes you are, but you’re trading anonymously against multiple market makers. No one market maker can see your positions. No one market maker can control the execution for all trades. Whoever has the best price gets the order, and there can be no re-quotes. Trading is more transparent and fair.
Here’s a video we put together giving a visual explanation of NDD forex execution.
A couple things to keep in mind with NDD forex execution is that the bid/ask price is not determined by FXCM. It is being determined by the best bid/ask prices being quoted by the banks. Therefore the spreads can vary throughout the day depending on how competitively the banks are quoting. With NDD forex execution, it is also possible to experience slippage. If there is no longer liquidity available at the price requested in the order, then the trade will be filled at the next best available price. So please be careful when trading during highly volatile market conditions and be aware of how the different order types can help control slippage and execution (
http://www.fxcm.co.uk/order-types.jsp). Slippage doesn't always have to work against you. You can also experience positive slippage on your limit and limit entry orders.
Sorry for the lengthy post, but I hope it helps !
-Jason
