Good day.
As we do every weekend, we are going to analyze the market and review the success of our techniques over the past week.
As we have commented many times in this weekly review, we aren’t perfect, we have both positive and negative trades, but our operations ALWAYS HAVE A STOP. We could have a 400 pip DD or more but, over time and little by little, our techniques will make gains by taking advantage of opportunities and trying to minimize DDs that will always exist. But what we will never stop doing is putting stops on our operations which would, in effect, leave our success to luck and we could lose our shirt in the process.
Why are we commenting on this? Because, as we have mentioned before, by trading without stops one is assuming that the price for the pair will return to our entry price but keep in mind this may happen up to 5 years later! A noted web site provides Forex recommendations operates without stops and their results show practically 100% positive operations. The problem comes when the market is particularly volatile and what happens is, for example, what happened yesterday: two operations for the Gbp/Usd over one and a half months, without counting Roll Over, have lost more than 2000 pips. Keep in mind that I’m referring to two operations we happened to notice. You can imagine how many such operations they are holding in a volatile market like the current one.
We want to bring out this point because, although we have both positive and negative streaks (we can typically have a DD of 200 to 400) we know what we are risking and that what’s most important is your account and ours.
Secondly, we want to talk about brokers and recommend that you use Interactive Brokers to follow our operations. We have used it for years for futures, stocks and Fx and, without a doubt, it is by far the best as demonstrated over the last several days when we have experienced a little bit of volatility in the market. FROM THIS DAY ON, OUR OFFICIAL OPERATIONS WILL BE THOSE WE EXECUTE WITH IB, the best broker without a doubt, in our opinion. The only problem is that Ib requires a deposit of 10 thousand dollars to open an account and they also require minimum lots – 25,000 for Eur/Usd – which are too high to enter in the market, too much leverage if our account is not a lot higher than the $10,000 minimum.
On Thursday, we commented about what happened to the Gbp/Usd with Fxcm and we imagine that the same thing happened for other brokers but look what happened on Friday for the Eur/Jpy. The entry price for the short was 115.85 and, with Fxcm, it was triggered by 0.4 pips. Doesn’t it seem strange that this always happens?
With IB, it hit the 115.87 level and did not hit the entry price by 2 pips.
If you remember, two weeks ago we sent an analysis regarding brokers. Today, we want to begin our weekend review by covering Slippages because over the last week some users experienced a slippage 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 slippage 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.
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 currently recommend that you use INTERACTIVE BROKERS AS YOUR BROKER OR THAT YOU ADD SEVERAL PIPS AS A MARGIN TO ALL ENTRY PRICES.
FOREX
With regard to Forex, here are our results for the quarter thus far. They are not the best numbers in the world but, as you can see, the market hasn’t been favorable and we are trying not to force our trades.
If you remember, on Thursday we gained approximately +150 Pips with the USA FX. For the European Morning on Friday we lost approximately -240, and had it not been Friday and had we not had the potential conflict with the morning long, we would have traded and gained 300 Pips for the USA Morning techniques. As you can see, things go very fast.
Therefore, do not leverage excessively and next week will be a good test of the effectiveness of our signals and hopefully we will return to the profitability we experienced in past years thanks to the current volatility.
MINISP FUTURES
Now let’s discuss the Sp. Last week we commented that some volatility had returned to the market, although since this past Thursday afternoon the Sp went crazy, as you can see in the chart below. There we see how on Thursday the Sp went down from 1155 to 1057, almost 100 points in two hours, only to later recover to remain during the entire morning in a 20 point range with 15 minute bars of up to 10 points.
Take a look at an example of how positions were on Friday. Normally, we would see 800-2000 contracts per Sp position. But, since Thursday afternoon, we saw less than 100 contracts per position which signifies a lack of traders in the market and devilish volatility. Therefore, starting Thursday afternoon, we ceased to trade which turned out to be a good decision because, with movements of 8-10 points in minutes, trading would be like flipping a coin in the air, especially when our target is 4-6 points per operation.
As you can see below, this quarter we have made a $287.50 profit per contract with very, very few trades and, as you know, this is the opposite of how we like to operate but we have had to be very selective regarding our trades. As you can see, the problem has been the Evening Technique which has experienced several stops.
Be happy and enjoy your weekend. We will also try to even though this past week has been a difficult one.
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