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Old 04-05-2008, 11:58 AM   #1 (permalink)
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How the Forex Broker Provides Access to Individual Traders


Previous Lesson

In my opinion Forex Capital Markets (FXCM) offers the most comprehensive services, and best trading experience for the active forex trader.




Next Lesson - Full Forex Trading Course

In our last lesson we looked at the structure of the forex market and how the market has traditionally been a very country club type environment where the size and sophistication of the market participant determined the price they received. In today's lesson we are going to continue this discussion with a look at how the internet and the invention of online trading platforms has begun to level the playing field, giving the individual trader much greater access to reasonable pricing.

Before the internet, very few individuals traded foreign exchange as they could not get access to a level of pricing that would allow them a reasonable chance to profit after transaction costs. Shortly after the internet became mainstream however several firms built online trading platforms which gave the individual trader a much higher level access to the market. The internet introduced two main features into the equation which were not present before:

1. Streaming Quotes: The Internet allowed these firms to stream quotes directly to traders and then have them execute on those quotes from their computer instead of having to deal over the phone. This automated trade processing, and therefore made it easier for firms to offer the ability to trade fx to the individuals and still be profitable.

2. Automatic Margin Calls: What is not so obvious but what was perhaps even more key is that the internet allowed an automated margin call feature to be built into the platform. This allowed firms to accept cash deposits from clients instead of having to put them through the process of signing up to trade via a credit line. As we discussed in our last lesson it is very difficult to get a credit line to trade FX and for those who do it is a lot of paperwork and hoops to jump through before they can begin trading. This would have made it impossible to offer FX trading to smaller individual traders as the cost involved in getting them set up to trade would not be worth it.

As the electronic platform allowed clients to deposit funds and then automatically cut them out of positions if they got to low on funds, this negated the need for credit lines and made the work to get an individual account open well worth it to the forex broker from a profit standpoint.

If you don't understand all the ins and outs of margin at this point don't worry as this is something that we are going to go into much more detail on in a later lesson.

For now it is simply important to understand that what these firms did was take all the traders who were not big enough by themselves to get access to good pricing and routed their order flow through one entity that was. This allowed these firms access to much tighter pricing than would otherwise have been possible which was then passed along plus a little for the brokers to the end client.

So now you can see why although the forex market has been around for a relatively long period of time, individuals have only started to trade the market over the last few years.

Anther key thing that it is important to understand here is that the larger a firm gets in terms of trading volume, the greater access that firm has to tighter prices and liquidity and the more likely that firm is to be able to pass on better pricing and execution to their clients.

This is another reason that many traders will evaluate the size of a firm as one of the key factors in deciding who to trade with.

That's our lesson for today. In our next lesson we are going to look at the different categories of participants in the fx market so we hope to see you in that lesson.

As always if you have any questions or comments please leave them in the comments section below, and good luck with your trading!

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Old 06-03-2008, 12:23 AM   #2 (permalink)
 
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Which Broker?


Hello David,

BTW, Great site!

I was curious as to which broker you use. I definitely understand that the ForEx being an OTC, provides for the great possibility of fraud.

Currently, I am just testing the waters using a FXCM demo account. However, I've read a lot of different reviews. Some say it's really bad and others say it's pretty good.

Given the reviews, it is a little hard to determine whether or not I should ultimately use FXCM.

Can you elaborate on your experiences with ForEx brokers and which one you would recommend?

Thanks in advance!

Sincerely,
Bill
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Old 06-03-2008, 10:39 AM   #3 (permalink)
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Quote:
Originally Posted by kawola17 View Post
Hello David,

BTW, Great site!

I was curious as to which broker you use. I definitely understand that the ForEx being an OTC, provides for the great possibility of fraud.

Currently, I am just testing the waters using a FXCM demo account. However, I've read a lot of different reviews. Some say it's really bad and others say it's pretty good.

Given the reviews, it is a little hard to determine whether or not I should ultimately use FXCM.

Can you elaborate on your experiences with ForEx brokers and which one you would recommend?

Thanks in advance!

Sincerely,
Bill
Hi Bill,

Thanks for the note I am glad you like the site and welcome to the community.

You can find my comments on both stock and forex brokers in the post below:

New to Trading Which Platform to Use?

Hope that helps. Please feel free to post if there are any other questions or concerns.

Best Regards,
Dave
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Old 06-04-2008, 09:07 AM   #4 (permalink)
 
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Thanks Dave!

Sincerely,
Bill
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Old 12-22-2008, 08:49 AM   #5 (permalink)
 
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Hi Dave


When the trend of the market is strong and obvious, all the traders will do the common thing .. either BUY or SELL

But to buy a currency pair, we need someone who sells and vice versa




For example, if all the traders wanna buy but there are no sellers, will the broker sell the pair? Or will it reject the buy orders?



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Old 12-22-2008, 12:57 PM   #6 (permalink)
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Hi Prolog,

What you are describing at is very core is what makes the price in the market move. If the market is at a certain price and there are more buyers than sellers, then price moves upwards until it is high enough to bring enough sellers into the market to the point where buyers and sellers are in equilibrium.

Conversely if the market is at a certain price and there are more sellers than buyers, then price moves down until it attracts enough buyers so that buyers and sellers are in equilibrium.

Let me know if that does not make sense or if there are any other questions.

Best Regards,
Dave
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Disclaimer: Trading is risky and can result in substantial financial loss. As always my posts are simply one traders opinion and should not be taken as trading advice. I am not a financial adviser so everyone please do their own analysis and take responsibility for their own trades.
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Old 01-17-2009, 09:51 PM   #7 (permalink)
 
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Hey David,

I know you once worked in FXCM and played a vital role for its success.

Just one question. Do you know whats the cost FXCM charges per contract size of 100K and if it is per side of round trip.

Hope to hear from you soon...
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Old 01-18-2009, 03:27 PM   #8 (permalink)
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Hi Forexer,

Yes you are correct I worked for FXCM for 7 years and was one of the original employees there so I hope that my contribution played a role in their success;-)

FXCM, like most forex brokers, does not charge a commission but rather earns their money from the bid and the ask or the difference between the rate that you can buy at or the rate that you can sell at.

Let me know if that does not make sense or if you have any other questions.

Best Regards,
Dave
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Old 09-06-2009, 10:44 PM   #9 (permalink)
 
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How does the interbank exchange work???


So what does a broker like FXCM do? How do they route their orders to the interbank exchange? What is the interbank exchange? Is it just a bunch of servers taking in orders, some centralized money exchange that all the big banks are hooked into?


It would be great if someone could shed any light on this subject.


Russ
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Old 09-17-2009, 02:06 PM   #10 (permalink)
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Don't understand the difference between credit line and margin deposit


Hello, first off, let me say: GREAT site, I love it!

I have listened to this recording a few times, and in particular the bit where you say "the advent of the internet made it possible to cut traders out of positions when they run low on funds"

The difference, you say, is that with a credit line you can work without automatic closure of positions - basically, I see it like this: If you have a credit line of 10.000.000, you must be stopped out when your accuont value reaches -10.000.000. If you have a MARGIN DEPOSIT of 10.000.000, you must be stopped out when the accountvalue is 0. (Preferably also a lot sooner, which is the case with most brokers today) - so in my view it is EXACTLY the same thing: you can trade until you have lost 10.000.000.

But probably there is something I am not fully understanding here?

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