Today we would like to start the weekend review by discussing Slips because during this last week some users experienced a slip of up to 15 pips with Interactive Brokers causing the stop to trigger for the GBP/USD and we are referring to a broker which normally does not experience any slip between the stop and executing price.
Last September, we wrote you about HFT or High Frequency Trading which, although it has not made a lot of noise recently, continues to operate in the market. Let’s review what we wrote then.
High frequency trading programs make up 70% of market volume. Let’s take a look at how they operate. One investor places a buy order for 15 thousand shares of stock X between $10 and $10.07; a limit order with a $10.07 maximum. The order is entered in the market and, at that moment, the HFTP detects that an investor has made a large order and it starts to buy before the large order can and it buys 100 at $10.04 or everything in that position and then they put these shares on sale for 1 cent more than their purchase price so as to make 1 cent per share. These shares are instantly sold to the investor who wants 15 thousand. It appears transparent as the large investor only loses one cent per share and doesn’t even notice. Although this may appear innocent, currently 70% of all transactions in the US
Take a look at the data regarding the impact of these programs: GOLDMAN controls 21% of HFTP trades and, in their latest results, they declared a $21 billon profit from this trade type. Therefore, if the market collapses, the HFTPs will simple stop trading and 70% of the current market volume, which is poor to begin with, will disappear.
Take a look at the data regarding the impact of these programs: GOLDMAN controls 21% of HFTP trades and, in their latest results, they declared a $21 billon profit from this trade type. Therefore, if the market collapses, the HFTPs will simple stop trading and 70% of the current market volume, which is poor to begin with, will disappear.
And why are we reviewing HFTPs. Because now, Forex brokers are doing something very similar in the current low-volume market.
We recommend Fxcm and Ib and, as you have witnessed, we have had quite a bit of slippage. We can’t imagine what traders who use non-regulated brokers are experiencing.
Let’s look at an example of what is happening.
Let’s suppose the prices offered by liquidity providers to brokers are the following:
| Provider 1 | Provider 2 | Provider 3 |
| 1.4364 - 65 | 1.4363-64 | 1.4365-66 |
The broker applies various algorithms and their trading rules to generate the market prices which are sent to traders and are seen in their trading platforms. The formula used to generate prices could be more or less complicated but we aren’t going to focus on that aspect. Let’s suppose, for example, that the trader receives a price of 1.4363-66, with a 3 point spread. The trader sees a clear sale sign, decides to sell and sends the broker a sales order at 1.4363. The broker receives the order, conducts several checks, both internally and with their liquidity provider, and confirms the traders order through the platform. The broker applies probability studies to determine the operation’s risk and they decide whether or not to send the order to the market or to act as the counterpart, internally matching the order with other traders’ orders. Continuing with this example, let’s suppose the order is sent to the market. In this case, the broker requests the sale in EUR/USD to one of its liquidity providers, selecting the best price offered. In other words, they sell to the highest possible Bid. In this case, they will sell to provider 3 who offered 1.4365. With this trade, the broker obtains 2 points of extra profit with regard to the trader’s order price (1.4363).
Having executed the order, the broker covers the spread, in this case 3 points, and the trader’s account is debited 30 USD. The broker’s account is credited 30 USD from the spread as well as 20 additional USD from the price advantage from the sale price of the liquidity provider compared to the trader’s price.
Therefore, we have no other option but to live with this. Now brokers are anything but our friends.
As we do every weekend, we are going to analyze the market and review the success of our techniques over the past week.
FOREX
First of all, the following chart demonstrates the evolution of our Fx account since we opened it in January, 2009. As we have reminded you many times, with us you won’t become rich in two days but you also won’t lose money. You will simply make constant, gradual gains, without large DD in your account as the following chart demonstrates. Obviously, you must be prepared to have both positive and negative trades but, as you know, all our signals have a target as well as a stop so you always know the risk associate with each trade.
As of Friday’s close, we had gained 11.109 pips, setting a new total high last Thursday with a total of 11.121 pips, which will be the new amount to beat next week.
As we said, we advance little by little with the intention of taking advantage of market volatility to really make pips.
On April 1st, we had gained 10.862 pips and, as you can see, we closed the week with a total of 11.109 pips after last Friday’s trades.
As we have mentioned on many occasions, our techniques work best when the
market is volatile.
Take a look at the following data we extracted from the previous chart regarding our account’s progress. This data represents the number of pips we made or lost per day. As you can see, each day we make or lose a very small number of pips.
2010-04-13; -29
2010-04-12; 40
2010-04-09; 142
2010-04-08; 46
2010-04-07; -8
2010-04-06; 38
2010-04-05; -13
2010-04-01; 8
2010-03-31; 38
2010-03-30; -6;
2010-03-29; -5
2010-03-26; -24
On the other hand, look at our results for the same dates last year.
2009-04-22; 100
2009-04-21; 63
2009-04-20; 95
2009-04-17; 127
2009-04-16; 99
2009-04-15; -08
2009-04-14; 97
As you know, our techniques adapt to market volatility: The more volatility, the more aggressive our targets. Having seen market volatility increase on Friday afternoon, we are hoping to now be able to set more aggressive targets for our signals, which would be a good sign for our techniques as well as for our performance.
MINISP FUTURES
Now we will turn our attention to the Sp. The Sp finally began to experience an increase in volatility after 32 sessions of having moved less than 1%. As we have commented, our techniques depend on healthy price ranges as our targets are between 4 and 5 points. We have seen many sessions recently with ranges of 5 points for the entire session.
This week the Sp finally began to move, rising almost 30 points over the week.
One of the best indicators of volatility is the reaction of the markets to news at 10:00 EST, as happened last Friday. Here you can see how the Sp rose from 1201.5 to 1208 in 15 minutes after macroeconomic data was announced at 10:00 EST only to later rise to 1210.25 and then fall to 1201. This is a demonstration of typical movement when macroeconomic data is announced which is why we don’t trade the opening those days but, never-the-less, this is the type of market we like and in which our techniques flourish.
This last week we made the following trades for the MiniSP. As you can see, they were few; a total of 7 of which 5 were positive and 2 were negative for a gain of 4 points.
We continue to be unsatisfied with these results compared to what we are used to but, little by little, as the Sp begins to move to its normal rhythm our numbers will surely improve dramatically.
Have a good weekend.
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