Daily Signals for Wed 4 June 2008

USDJPY - SHORT @ 104.77

USDCHF - SHORT @ 1.0402

GBPJPY - SHORT @ 204.82




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How financially secure are your Forex Funds?

My first thing to consider when looking for a broker is its financial footing. I thought I would share some information about the financial state of the main forex brokers in the market.

I have sourced the data to help people make a sensible decision. No good making money if some swindler makes off with it!

The following firms are not regulated and as a customer you have no rights in a dispute or if the firm gets into trouble and goes bankrupt:

Unregulated Brokers
Finex
Tradex Swiss AG
ACM
WestCapFX
MIG
DukasCopy
GFX Group (Forex.CH)
Crown Forex
GCI
Northfinance
FXDD


Ok. Now we have wiped out all the extreme nasty brokers off the list. Here is a ranking of the net value of some of the leading retail forex players.

These are CFTC Net Capital figures from December 2007. The US Government recently increased capital requirements of forex brokers to $5 million.

The US Government is close to passing a law which would require firms to have a minimum of $20 million to stay in business. Should it pass the industry may only have about a dozen firms left.

The Big Six (Above $20 Million)

1. Oanda $156 million
2. RJ O'Brien $92 million
3. FXCM $75 million
4. GFT $69 million
5. Gain Capital $50 million
6. I Trade FX $34 million

Below $20 Million

7. PFG $19.7 million
8. Interbank FX $19.2 million
9. FX Solutions $17.9 million
10. IFX $15.5 million
11. CMS $13.8 million
12. GFS Futures & Forex $10.2 million
13. CMC $8.7 million
14. Alpari $8 million
15. Ikon $7.9 million
16. Easy Forex $7.6 million
17. Friedberg Mercantile $7.5 million
18. Forex Club $7.4 million
19. MB Trading $7 million
20. ODL $6.9 million
21. Hotspot $6.1 million
22. Money Garden $6 million
23. Bacera $5.4 million
24. Advanced Markets $5.2 million

More figures can be found here: http://www.brokerontop.com/ Read more!

A series of interesting blog articles

I was reading Trader Mike's blog and found some interesting articles I wanted to reference regarding his trials and tribulations.

Of particular interest to me was his stop loss deliberations; similar to the ones I am having.

Pulling stops = big losses

I had 18 trades that were 1.3 or larger losers for a total of -38.31 R. On 10 of those I pulled my stop.

The seven biggest losers all got so large because I pulled my stop.

I gave away about 16 R just b/c I couldn’t take the small loss and pulled my stop.

I guess the message he's trying to give us is DO NOT REMOVE STOPS.

A very good article on Position Sizing and another one on Expectancy. I will grab some quotes from them when I get a chance later. Read more!

The Risk of Risk

I have recently become aware of why only risking 2-5% of total account balance on any one trade is vital. Rather then trying to explain the theories behind having controlled risk on trades I have linked readers with a small excel sheet to show the results graphically. The results show that using a risk ratio which is too high will almost always lead to the account being bankrupted. Download it and run it for yourself.



Matt Bowen over at mptrader.com has written a great little excel sheet the shows why having appropriate risk controls are important. Download it here and have a play with it: http://www.mtptrader.com/MoneyExpert.xls

If the excel sheet seems a bit confusing and you can't figure out how to use it; this video should explain it easily: http://www.mtptrader.com/videos/MoneyExpert.html

After playing with the risk variable it should be noticeable that the rate of account bankruptcy dramatically increases above 5%. At 10% risk exposure per trade it is more likely then not you will blow your account, unless returning a good amount of timely winning trades.

Why is this the case?

Effectively by having a high risk ratio the trader is trading too large a quantity of currency. That effectively is making the trader 'under capitalised' for the position he is taking. The problem with under capitalisation? - it reduces the Trader to that of a gambler and the gambler's ruin problem (http://en.wikipedia.org/wiki/Gambler's_Ruin) whereby the participent in the game with the most money (the market) send the other player (the trader) broke.

From these two observations I have strictly limited myself to exposure of 2% on any given trade. I have begun to develop a website with calculations on how many lots to purchase on a trade. Until I finish that and post it up for others to share, I suggest you check out this website to help you calculate how many lots you should purchase given the currency, account balance and stop loss level http://www.forexcalc.com/ . I have used this for the basis of my calculations for position size. Read more!

Know when to walk away, know when to run.

In my demoing, I would also hate to close positions that were down. And of course they would always get worse before resulting in a margin call; the position being closed, and the market gobbling my money all up.

If this happens with my real account; the couple of thousand dollars that are invested could be wiped out very quickly. Must be what happens to the unlucky 90% when they are losing their $15,000 each.

When I went reading about money management and position sizing I found a very strange, paradoxical information which goes against preconceived ideas many people have.



The first is that people are more likely to be risky with losses, and safe with wins. David Silverman wrote about the strange occurrence in an article here: http://www.sfomag.com/homefeaturedetail.asp?ID=290489088&MonthNameID=July&YearID=2007

He writes about two scenarios that are presented to people. Both give a choice between two possible outcomes.



Scenario 1:

You have 100% certainty of getting $3,000
or
You have 80% chance of getting $4,000 and a 20% chance of getting nothing.

Scenario 2:

You have 100% certainty of LOSING $3,000
or
You have 80% chance of LOSING $4,000 and 20% chance of breaking even.

Silverman states that 92% of respondents chose certainty in scenario 1, and risk in scenario 2.

This 92% of people choosing these strategies ignored the expected return of the scenario. In scenario 1 the expected return of the bet is profit of $3200 ($200 more profit then the certainty). In scenario 2 the expected return of the bet is loss of $3200 ($200 more loss then the certainty).

It should follow logically, that betting should obtain you (on average) a better outcome when in the positive scenario 1 and certainty should obtain you (on average) a better outcome when in a negitive scenario 2.

Why do people seemly respond to these quandaries opposite to expected?

Silverman thinks that the results show that rather the hating risks, humans hate losses. The fear of taking a loss can make us behave irrationally. It appears people in the test are only focused on the negitive outcome and are willing to do anything to try and avoid it; even something irrational and silly.

In conclusion Silverman gives traders the following advice:

[Traders] sell winning trades too early, satisfying the desire to be right, and hold losers too long, hoping that the market will turn around, saving Trader from taking a loss.


If you have convinced yourself that you must grab a profit at any cost, because a sure thing will always be better than the uncertain future or that realizing a loss constitutes failure, you have passed into the realm of irrational thinking.

I have yet to develop a system of existing profitable trades that is comfortable (profitable???) for me, however one thing I have taken from Silverman's article is not to be afraid of stopping out. It is a bigger sin to hold on for a market pull back. Accepting losses psycologically is a big battle it seems for Forex Traders. I know it was my thinking as a novice.

Is it co-incidence that 90+% of forex traders go bust and 92% of people answer that question 'irrationally'? Read more!