The forex market is arguably the largest financial market in the world. Approximately, the market has over $5 trillion daily transactions.
It’s indeed an exciting market for every individual looking to accumulate some profit, right?
Unfortunately, almost 95% of traders lose money only a few months after getting into the business. So, if the market is indeed as good as it looks, why do most folks lose?
Interestingly, large companies and institutions go live, announcing enormous profits from the same forex market most retail traders find it hard to deal with.
Perhaps, there have to be reasons, and as much as some of the reasons for the failure is down to the trader’s doing, there’s also the big picture of the trade dynamics.
Several market factors affect the forex market, which surprisingly is unknown to a plethora of retail traders.
The Type of Brokers
The first scenario is that of the broker type that most institutional and individual brokers use. There’re two main broker types: the market makers and the Electronic Communication Network (ECN).
The ECN brokers provide direct market access to traders to the pricing as it is from liquidity providers, which means that traders get what they see.
Besides, as there’re several providers, the trader picks the price, which is suits them the most.
Moreover, with the ECN brokers, there’s nothing like the intervening dealing desk, meaning all orders get direct to liquidity providers for execution, hence no slippages, no re-quotes, as well as no price manipulations.
Unfortunately, maintaining to work with ECN brokers comes at a premium. When using the platform, a commission has to be paid on trades, and spreads are variable.
Therefore, individual traders get it a little bit more expensive to participate with the ECN traders, and hence large institutions get the upper hand.
Unlike ECN brokers, market makers serve as a bridge between liquidity and the volume of trades. Therefore, retail traders find it a lot easier with market maker brokers.
They offer fixed spreads and don’t charge a commission. These brokers, however, trade against the trader, meaning if the trader loses a trade, the broker makes money, and vice versa.
Under these brokers, a trader may be subject to conditions that are out there hands, and hence, making traders who trade with ECN brokers the real winners.
In the forex market, time and speed are crucial to being successful, especially during the news releases. Latency is the delay time of communication from the servers of the broker to a trader and vice versa.
Therefore, it means that with low latency during such times of releases, a trader has a potential for entries as well as gaining from spikes at such moments.
However, getting closer to the broker servers to reduce latency has a price to pay that only huge companies and institutions can afford.
Therefore, once more, a retail trader will get the information too late when institutional traders have already placed orders and executed their trades, as they can’t afford the money to reduce their latency.
The Dark Pools
This is a scenario whereby institutional traders can trade large volumes anonymously and get away with it without effects of the price fluctuations.
Ideally, the price quotes, as well as the various parties that hold interests in an asset, have to be available for every trader in level II models; however, the dark pools hide such information, hence masking liquidity as well as the market depth information.
Therefore, retail traders have no access to such information, and hence, can’t tell when there’s a shift in demand. Fortunately, for dark pool members, they have the information and thus plan trades accordingly.
What Now for Individual Traders?
With such trade dynamics in the forex market, it looks as if those with the money have the advantage. However, retail traders have to learn the game and know how to play in a similar league to have a chance as well.
Therefore, all they need is money and start trading with ECN brokers. Furthermore, get a virtual private server near the broker server.
Also, come up with a trader’s collective for pool funds and join an independent dark pool. Once you decide to swim in waters with the big fish, you must actively try and act like one; otherwise, you may lose the game.