What makes the perfect trader? Well trader psychology is important, as is risk management, but the real key to trading well is employing the best trading strategies and tools at your disposal. There are a huge variety of different trading systems and methods implemented by traders in the forex market. There are currently no accurate statistics on how many forex trading strategies are actively deployed, but an internet search will quickly reveal that there are probably more than you can count. Remember though it is important to learn how to trade forex in a way which conforms to the T’s & C’s of your broker.
One very important fact that traders should note is this: no trading strategy will ever work without the cooperation of your forex broker. Some forex brokers have a model that seeks to enable their business to progress along with that of the trader while some other brokers will use a business model that enables them to progress at the expense of their clients. Brokers that operate the latter model will not support certain forex trading strategies that will make them lose money as trade counterparties. These include brokers that allow hedging – a way to take both sides of the trade at once, scalping – a way to take profits on small price movements, and the use of expert advisors – a bit of code you programme into the platform that identifies trade signals. We’ll go into more detail on these methods later in the argument, but first it’s important to understand how brokers work.
There are two categories of forex brokers in the market: market makers and direct market access (DMA) brokers. These two broker categories handle their market operations differently and will have different approaches to the trading methods used by their clients.
Forex trading requires a large amount of capital and positions cost a lot of money to setup. A standard lot costs $100,000 to setup. Not many traders can afford this kind of money. Without traders to provide such large amounts of money to prop up liquidity in the interbank forex market, there would be no retail forex participation. This is why forex brokers known as market makers have come into the market. Their job is to provide liquidity by buying up currency positions in the interbank market and using them to fulfil the orders of their clients in-house at the dealing desk level. As a result, market makers are counterparties to trades made by their clients. In simple language, market makers are the “opponents” of their clients. If the trader wins, the market maker loses money.
There is really not much anyone can do about this structure, because the market makers play a very important role in filling liquidity gaps in forex. An unintended consequence is their undesirable position as counterparties to trades. Brokers are out to make money and if a market maker is involved, then any trading systems and methods what will enrich the trader and impoverish the counterparty broker will not be allowed.
ECN (DMA) Brokers
ECN brokers provide a direct market access model. This model connects the end user with the interbank market, where buying and selling of currencies can be done with the major banks that act as liquidity providers. Therefore, ECN brokers are not part of the order execution process. ECN brokers merely provide the pathway that connects traders with the liquidity providers. ECN brokers charge commissions on trade entries and trade exits. These commissions, as well as the spreads incurred on trades, are the two primary sources of income for the ECN/DMA brokers. This model means that these brokers do not act as counterparties and therefore do not need to be bothered by whatever trading style the traders on their platforms use to achieve their aims.
When traders make profit on the ECN model, the brokers do not lose any money. Indeed, there is greater incentive for the ECN brokers to provide support for their traders to get them to keep trading, as this will lead to increased revenue for the brokers from commissions. Therefore, ECN brokers typically provide technology and tools that can be used to perform high speed, algorithmic trading. Some of these tools are provided for free, while others are on a paid-only basis. Therefore, traders can actually deploy any forex trading methods and strategies that will enhance their business when working with ECN brokers. The only snag here, is that the initial trading capital required to trade on ECN platforms is very high (up to $50,000 on some ECN platforms), which effectively locks out a large percentage of retail traders from the ECN trading model.
The Best Forex Trading Systems Supported by Forex Brokers
By trading systems, we are referring to the software that are used to perform trades on brokerage platforms. The best trading systems supported by forex brokers are as follows:
Algorithmic Trading Systems
Algorithmic trading methods are mostly supported by ECN/DMA brokers. Many of these brokers actually have technology and systems to backup this forex trading method and some of these are available for subscription by traders at a fee. ECN brokers do not only provide access to liquidity providers, they also provide algorithmic trading systems that traders can subscribe to. For example, Spotware Systems, the company that makes the cTrader turnkey platform for the ECN brokerage model, also designed the cAlgo platform. The cAlgo is to be used to design forex trading strategies and software that will be used on the cTrader platform. Market makers do not provide the technology required to support algorithmic trading strategies, so you really cannot use algos with market maker platforms. Traders who use market maker platforms will have to devise other forex trading strategies and methods to comply with what is on offer on these platforms.
Use of Forex Robots
Market makers will allow the use of forex robots, designed with the programming language that the trading platform offers. However, the forex robots must only place trades in a manner that is consistent and compatible with what the market maker will allow. This brings us to the point of the trading methods which are allowed or supported by brokers.
Manual trading is the conventional trading system used on most brokerage platforms. These days, most of the manual trading that is performed is done using adjunctive tools such as technical indicators (default and custom) and libraries. Market makers and ECN brokers allow the use of these tools as part of the manual trading process.
The Best Trading Methods Supported by Forex Brokers
Forex trading methods refer to the style of trading that is deployed by the forex trader. It does not matter if the trading system used is automated or manual; the method of trading is what the broker will consider here.
The popular trading styles deployed by traders include the following:
- Straight Through Processing
- Day trading
- Swing trading
- Interests of Margin
- Position trading
Scalpers typically leave trades open for just a few minutes. The principle of trading here is to pick a few pips at a time, and accumulate these to get a good payday. Market makers do not like scalpers as this forex trading method skews the market against the broker. A situation where market makers can potentially lose a few pips every few minutes which can accumulate to produce a huge loss for the counterparty broker, is not something market makers tolerate. Many market makers expressly state in their Terms and Conditions document that scalping is prohibited. There have been cases where brokers have banned traders from their platforms for scalping. In contrast, ECN brokers permit scalping because all trades are charged commissions for trade entry and exit. So more scalp trades mean more revenue for the ECN broker.
Day trading, swing trading and position trading are forex trading methods which are permitted on market maker and ECN trading platforms. These trades typically stay open within a trading day (intraday), a few days (swing trading) or a few weeks or months (position trades).
Hedging as a trading style, is banned in the US and a few other countries by regulations set out by the regulatory agencies in those countries. However, the MT5 market maker platform has been improved to allow for hedging. Whether or not market makers will allow this trading style on their platforms remains to be seen.
Forex Trading Strategies and Methods of Trading: The Trader-Broker Symbiosis
It is clear from our discussion that methods of trading as well as forex trading strategies deployed by the trader cannot be used in isolation without considering how they align with the business model of the broker. The best experience for the trader will only be achieved if the strategy and trading method do not come into conflict with the broker’s business model.
The brokers will only allow a trading method that does not conflict with their business model.
In conclusion, it can be deduced that the choice of the forex trading strategies deployed on broker platforms is not just a question of what is designed on the trader’s end. Design of forex trading strategies has to take into account what is allowed on the broker’s end as well as what is not allowed. Traders who want to practice high frequency trading using algorithmic trading strategies will have to deploy them on ECN brokerage platforms, as these platforms are the only ones which have an allowance for them. Those who want to use market maker platforms will have to use the conventional forex trading EAs as well as other manual trading strategies.
Apart from the strategies themselves and compatibility with the platforms, the method of trading is also a factor that has to be considered. For instance, the period of time that each trade is left open in the market is an important factor that brokers consider when deciding on what aligns with their business model. Scalping is not allowed on most market maker platforms, whereas the ECN platforms can actually support this style of trading.
So it is left for traders to take all the necessary factors into consideration and use them to design forex trading strategies and methods of trading that are compliant with the brokerage platforms that they use.