Tag: ECN

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Forex Assets

What Should You Know About USD/CAD Forex Pair?

Introduction

Introduction

Introduction

USDCAD is the short form for the US dollar against the Canadian dollar. USDCAD, just like the EURUSD, GBPUSD, AUDUSD, etc. is a major currency pair. In this pair, the US dollar is the base currency, and the Canadian dollar is the quote currency. Trading this currency pair is known as trading the “loonie” because it is the name for the Canadian one-dollar coin.

Understanding USD/CAD

The exchange price of USD/CAD is basically the value of 1 USD in terms of CAD. It is quoted as 1 US dollar per X* Canadian dollars. For example, if the value of USDCAD is 1.3300, it means that it takes 1.3300 Canadian dollars to buy one US dollar.

*X is the current market price of USDCAD

USD/CAD Specification

Spread

The difference between the bid price and the ask price mentioned by the broker is the spread. Typically, this differs from the type of account.

Spread on ECN: 0.7

Spread on STP: 1.2

Fees

There is a fee (commission) on every trade a trader takes. This again depends on the type of account registered by the user. There is no fee on the STP account, but a few pips on an ECN account.

Note: We are considering fees in terms of pips, not currency units.

Slippage

Sometimes a trader is executed at a different price from what he had intended. This variation in price is known as slippage. Slippage takes place when orders are executed as a market type, and it depends on the volatility of the currency pair and also the execution speed of the broker.

Trading Range in USD/CAD

Trading analysis is not all about predicting when the prices will rise and fall. Sometimes, even though a trader knows the prices are going to rise/fall, it might not be ideal to jump on the trade without the knowledge of volatility of the market. Volatility range plays a major role in managing the total cost of a trade. Hence, it is vital to know the minimum, average, and maximum pip movement in each timeframe to assess the trading costs.

Below is a table that depicts the minimum, average, and maximum volatility (pip movement) on different timeframes.

USD/CAD PIP RANGES

Procedure to assess Pip Ranges

  1. Add the ATR indicator to your chart
  2. Set the period to 1
  3. Add a 200-period SMA to this indicator
  4. Shrink the chart so you can assess a large time period
  5. Select your desired timeframe
  6. Measure the floor level and set this value as the min
  7. Measure the level of the 200-period SMA and set this as the average
  8. Measure the peak levels and set this as Max.

USD/CAD Cost as a Percent of the Trading Range

With the min, average, and max pip movement, the cost range is calculated in terms of percentage. This percentage has no unit and determines if the width of the cost. That is, if the percentage is high, the cost is high for the trade, and if the percentage is low, the cost is low too.

Below are two tables representing the range of cost for an ECN account and an STP account.

ECN Model Account

Spread = 0.7 | Slippage = 2 | Trading fee = 1

Total cost = Slippage + Spread + Trading Fee = 2 + 0.7 + 1 = 3.7

STP Model Account

Spread = 1.2 | Slippage = 2 | Trading fee = 0

Total cost = Slippage + Spread + Trading Fee = 2 + 1.2 + 0 = 3.2

The Ideal way to trade the USD/CAD

As mentioned earlier, the higher the percentage, the higher is the cost for a trade. Applying this idea to the above tables, it can clearly be inferred that the percentages are high on the minimum column. This means that the costs are high when the volatility of the currency pair is very feeble.

Similarly, the costs are considerably low when the volatility is quite high. However, this does not mean that trading during high volatility is the ideal way. This is because the volatility is quite risky to trade volatile markets. Therefore, one must trade during those times of day when the market volatility is around the mentioned average. The costs are decent enough, and the risk is maintained just fine.

Another point of consideration is that costs are reduced significantly when the slippage is made nil. This can be made possible by entering and exiting a trade by placing a pending/limit order instead of executing them by market.

Below is the same cost percentage table after making the slippage value to 0.

Now it is evident from the above table that slippage eats up a significant amount of cost on each trade. Hence, limit orders are the way to go.

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Forex Course

38. Two Types of ‘No Dealing Desk’ Brokers

Introduction

Introduction

Introduction

In the previous lesson, we have discussed the two major classifications of forex brokers – Dealing Desk and No Dealing Desk. In this lesson, we will dig a little deeper and understand the types of No Dealing Desk brokers.

No Dealing Desk brokers can be classified into two types:

  • ECN brokers
  • STP brokers

What is an ECN broker?

An ECN broker is a forex broker expert that uses electronic communication networks to provide clients with direct access to other participants in the exchange market. Also, since these brokers consolidate prices from several other market participants, they usually offer their clients tighter bid/ask spreads. However, this tight spread is compensated by a small fixed commission charged by the brokers.

ECN brokers are NDD brokers, who do not pass the clients’ orders to market movers. Instead, they find participants in a trade electronically and then pass the orders to liquidity providers.

Understanding ECNs

As the name suggests, ECNs provide a network for buyers and sellers to participate and execute trades in the market electronically. These brokers make this possible by providing access to information on the orders being entered by the participants, and by facilitating the execution of these orders.

This network is designed to match the Buy and Sell orders currently traded in the exchange. And when the price requested by the client is not available, it provides the highest bid and lowest ask in the market.

What is an STP broker?

STP brokers, or Straight Through Processing brokers, are the ones who pass the clients’ orders directly to their liquidity providers. As discussed, the liquidity providers include banks, hedge funds, investment banks, etc. In this system, no intermediary or such will be involved in the execution of the order. Hence, the unavailability of the Dealing Desk makes the broker’s electronic trading platform Straight Through Processing (STP).

Moreover, with the absence of an intermediary (Dealing Desk), the brokers will be able to process orders of the clients much faster and without any delays.

Looking it the other way, STP brokers benefit from having many liquidity providers, because an increase in the number of liquidity providers increases the chances of the orders being filled for their clients.

Additionally, each time a client places a trade through an STP platform, the STP broker will make a profit. As STP brokers do not take the opposite of the clients’ trade, they add a minimal extra spread when quoting a bid/ask rate. And this small markup to the spread is passed to the clients via its electronic platform.

This completes the lesson on different types of No Dealing Desk brokers. Take the quiz below to know if you have got the concepts right.

[wp_quiz id=”54414″]
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Forex Assets

Everything You Should Know To Trade The GBP/USD Forex Pair

Introduction

Introduction

Introduction

Currency pairs are classified as major, minor, exotic, etc. Major currencies pairs are those pairs that involve the US dollar as one of the currencies. These currencies typically have high liquidity and volatility. GBPUSD is one such example. It is the currency pair where Great Britain Pound is traded against the US dollar.

In this article, we shall be covering all the basic fundamentals which are essential to know before trading this pair. And before getting into the specifications of this pair, let us first understand what actually the price of GBPUSD signifies.

In GBPUSD, GBP is the base currency, and USD is the quote currency. The value (price) of the pair determines the units of USD required to purchase one unit of GBP. For example, if the current value of GBPUSD is 1.3100, then the trader must possess the US $1.3100 to buy 1 Pound.

GBP/USD Specification

Spread

Spread is simply the difference between the bid price and the ask price. The spread depends on the type of account.

Spread on ECN: 0.7

Spread on STP: 1.3

Fees

Again, the fee depends on the type of account. Typically, there is no fee charged by STP accounts. There is a trading fee on ECN account, which depends from broker to broker.

Slippage

Forex is very liquid and volatile. Hence, this causes slippage. Slippage is the difference between the price requested by the trader and the actual price the trader received. And this depends on the broker’s execution speed and volatility of the market. The slippage in major currency pairs is usually within 0.5 and 5 pips.

Trading Range in GBPUSD

As a trader, it is vital to know the number of pips a currency pair moves in a period of time. This is basically the volatility in the currency pair. And volatility is one of the factors which are helpful in risk management.

The volatility is measured in terms of percentage or pips. For example, if the volatility on the 1H timeframe of GBPUSD is 15 pips, then one can expect to gain or lose $150 (15 pip x $10 per pip) within a time period of few fours.

Below is a table that depicts the minimum, average, and maximum volatility (pip movement) on different timeframes.

EUR/USD PIP RANGES

Procedure to assess Pip Ranges

  1. Add the ATR indicator to your chart
  2. Set the period to 1
  3. Add a 200-period SMA to this indicator
  4. Shrink the chart so you can assess a large time period
  5. Select your desired timeframe
  6. Measure the floor level and set this value as the min
  7. Measure the level of the 200-period SMA and set this as the average
  8. Measure the peak levels and set this as Max.

(originally posted in our article here)

GBPUSD Cost as a Percent of the Trading Range

A Forex broker usually levies three type of charges for each trade. They are:

  • Slippage
  • Spread
  • Trading Fee

The sum of all the three costs will generate the total trading cost for one trade.

Total cost = Slippage + Spread + Trading Fee

Note: All costs are in terms of pips.

To bring up an application to the above volatility table, we bind these values with the total cost and find the cost variations (in terms of percentages) on different timeframes. And these percentages prove to be helpful in choosing the right timeframe with minimal costs.

ECN Model Account

Spread = 0.7 | Slippage = 2 | Trading fee = 1

Total cost = Slippage + Spread + Trading Fee = 2 + 0.7 + 1

Total cost = 3.7

STP Model Account

Spread = 1.3 | Slippage = 2 | Trading fee = 0

Total cost = Slippage + Spread + Trading Fee = 2 + 1.3 + 0

Total cost = 3.3

The Ideal Timeframe to Trade GBPUSD

Above are tables that illustrate the cost ranges in terms of percentage. Let us now comprehend the tables and figure out the ideal timeframe to trade this currency pair. From the above table, it is evident that the cost is highest (74% and 66%) in the 1H timeframe when the volatility is low. Hence, it is not ideal to pick the 1H timeframe when the volatility is around 5 pips (minimum).

On the flip side of things, the cost percentages are minimal on the 1M timeframe. Traders with a long term perspective on the market can invest with minimum costs.

Intraday traders, on the other hand, can pick the 1H, 2H, 4H, or the 1D timeframe when the volatility of the market is above average.

Another point to consider is that slippage eats up the costs significantly. So, it is recommended to plan strategies that involve placing of limit orders and not market orders.

As proof, below is a table that clearly shows the reduction in the cost percentages when the slippage is made NIL.

Total cost = Slippage + Spread + Trading fee = 0 + 0.7 + 1

Total cost = 1.7

Comparing these values to the table with slippage=2, it can be ascertained that the cost percentage has reduced by a considerable amount. Hence, all in all, it is ideal to trade by placing limit orders rather than executing at the market price.

Categories
Forex Course

20. Brief History and Introduction to The Forex Brokers

Brief History
The economy of all the nations after the end of World War II was at stake. Not a single country saw a growth in its economy during this

Brief History
The economy of all the nations after the end of World War II was at stake. Not a single country saw a growth in its economy during this

Brief History

The economy of all the nations after the end of World War II was at stake. Not a single country saw a growth in its economy during this period. So, there had to be someone to fix this all up. Hence, the major Western banks stepped in to strengthen and stabilize the economy on a global scale. They established the well-known Bretton Woods System, which got Gold into focus, as it got paired with/against the US dollar and other currencies. This system did bring the economy to balance to some extent but slowly started becoming inefficient and outdated as the major countries began to expand at a good rate.

With this under consideration, the system was abolished and was replaced by a much efficient system for the valuation of currencies. Precisely, this system was called the free-floating type system, where currency exchange rates were determined by supply and demand factors. During the final decade of the 20th century, the internet came into existence. This brought drastic changes in the way how trading in the markets works. With the facility of internet, the banks came up with their own trading platforms, and these platforms enabled traders to keep a watch on the live quotes of the currencies and also provided smooth and swift execution of trades.

Taking this forward, as the market began to grow substantially, the so-called ‘retail brokers’ made their entry to the market. With these brokerages, traders with small capital could also participate in the market. Moreover, retail brokers even offered great leverage for trading, which attracted more traders to take part in the market.

Retail Forex Brokers

Retail forex brokers are intermediaries who facilitate transactions between buyers and sellers. Based on how clients’ are fulfilled, brokers are of two types, namely, Market Makers and Electronic Communication Networks.

Market Makers

As the name pretty much suggests, these brokers ‘make’ the market. A market maker acts as a bookie who takes the opposite side of its customers’ trades. So, basically, the trades here are between a retail trader and the broker. Since the broker takes the opposite position of his customers, he is actually trading against them. In layman terms, market makers need losers to profit from. Trading with this kind of brokers, customers don’t really reach the real market, as they’re placing bets on the quotes provided by the broker.

Electronic Communication Network

Trading with an ECN broker is different from that of market makers. Here, the interest of the customer is aligned with that of the broker. An ECN broker passes on its customers’ orders through to liquidity providers or the interbank market. So, unlike the case of market makers, their trades are actually matched with the real market. And as far as revenue of these brokers is concerned, they always make a profit from the spreads (bid/ask price) or trading fees. Since they connect the clients to deal with the interbank market, they form the network where communication takes place electronically.

That’s about the introduction to Forex brokers. Take the below quiz to know if you have understood the lesson correctly.

[wp_quiz id=”48281″]
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Forex Market

What Should You Know About Forex Brokers?

Introduction
In the previous article, we have discussed an overview of the financial industry. Now we know that the entire Forex market is about buying and selling of currencies. The

Introduction
In the previous article, we have discussed an overview of the financial industry. Now we know that the entire Forex market is about buying and selling of currencies. The

Introduction

In the previous article, we have discussed an overview of the financial industry. Now we know that the entire Forex market is about buying and selling of currencies. The majority of these foreign exchange transactions are done by major financial institutions and global organizations. But where do the retail traders like you and I undertake Forex trading? We do it through independent companies called brokers. In this article, let’s understand what a Forex broker is and the different types of Forex brokers existing in the market.

What is a Forex broker?

In the Forex market, buyers and sellers can be thousands of miles apart. So there needs to be a mechanism that matches their interest. This is where a Forex broker comes into the picture. A Forex broker is a platform where the buyers and sellers get to buy and sell currencies. It acts as a middleman between a trader and the market. In simple words, to find a buyer or seller for a particular currency, the broker matches your order with the respective buyer or seller. These brokers are also known as ‘liquidity providers.’

Types of Forex brokers

Even though all brokers in the Forex industry provide the same basic service, there is a difference in their functionality and mechanism. The first thing to look for with every Forex broker is whether they have a ‘dealing desk’ or not. In brokerage firms, the dealing desk refers to a team of traders who manage the broker’s inventory and hedging operations. Nowadays, most of the dealing desks consist of hundreds of traders and analysts.

Brokers that work on dealing desk operate in a closed environment wherein they set their own price rates. They fill their client orders by matching the buy and sell orders of their clients. When a broker uses a dealing desk, they are called as Market Makers.

Brokers that don’t use a dealing desk get rates from the interbank market and process their client orders by linking them directly to institutions, hedge funds, mutual funds, and other brokers. When a broker does not use a dealing desk, they are either known as ECN (Electronic Communication broker) or an STP (Straight Through Processing) broker.

Market Makers

Market Makers (MM) are called ‘dealers’ in the interbank market. They charge a variable spread instead of commission, which is why most of the time, they are accused of manipulating the spread and prices of the currency pairs. Theoretically, the spread should widen or narrow during high liquidity conditions, but MM brokers offer a fixed spread and compete based on the spread.

Electronic Communications Network (ECN) Broker

ECN brokers make their profits from spreads they charge on buy and sell rates or from fixed trade commission. The transactions here are mostly interbank. Because the spreads in the interbank markets are dynamic, ECN brokers prefer charging commissions rather than fixed spreads. This is one of the easiest ways to trade, but this requires a much higher investment capital as clients in the interbank markets only trade large lots. Therefore, trading with ECN brokers requires a minimum account balance of $1000. In addition, there is no guarantee that you will find a buyer or seller in the interbank market at your quoted price. ECN brokers sometimes won’t be able to execute orders at that price, so they issue a re-quote or simply reject the order. These are some of the limitations of ECN brokers.

Straight Through Processing (STP) brokers

Like ECN brokers, STP brokers, too, don’t have a dealing desk. But they use some of the practices of Market Maker brokers to provide flexibility to their clients. They display rates similar to the interbank market rates, and their first priority is to process trades directly in the interbank market, like an ECN broker. If the counterparty is not found, they start acting like a Market maker and match the order with their own client. The initial capital required to trade with this type of broker is relatively lesser compared to ECN brokers.

These are the different types of brokers in the market. So when you are choosing a broker, make sure to select the one that suits your trading style and capital available to trade.

Trading Platforms 

The ‘Market Makers’ provide trading platforms like Act Trader and MetaTrader since their orders are executed at the dealing desk. However, non-dealing desk type of brokers uses direct access trading platforms. They display prices directly from different liquidity providers. The platforms which are best suited for this requirement include Currenex Viking software and Level II software. The trading platform should be chosen in such a way that it suits your trading objectives. We hope this article helped you in deciding that. Let us know if you have any questions in the comments below. Cheers!