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Retail Brokers May Take Away 10% of Account Equity Every Month

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The two most overlooked parameters when choosing a fx broker are rollover and foreign exchange costs. Many are not even aware of them, even if such costs may be equal 2-3 or even 10% of account equity per month.

Usually a potential client looks at spreads, user interface and technology to choose an account. There are other things to consider and those are so important that can easily be a deal-breaker.

Rollover cost is one of such. And such rollover cost may not be obvious until one starts to trade. You receive interest for long currency positions in your account and pay interest for short currency positions. Say, if interest rate for Australian dollar is 5%, you should collect this interest on you long positions and pay interest at the same rate for short positions. In practice, those rates are set by the broker and, in a typical case, you are likely to receive 3% and pay 7% rather than 5% both ways. It is systematic to abuse interest rate setting and a real life example is that clients pay as high as 30% rollover cost. In other words – if you have a short position over a 12 month period and the currency duly declines 30%, you make nothing, just because your profit is taken away as rollover cost, if taxed at rate of 30% p.a.

Another issue is foreign exchange cost (for any type brokerage account, not only FX). If there is a clause in the account agreement that all P/L is converted to account base currency at the end of the day, all you P/L balance in foreign currency will be converted to base currency at close of business day at bid price and bought back at ask price at the beginning of the next business day. Such bid-ask spread may be as wide as 0.5% and your P/L will be continuously taxed at this rate daily. Say, if the account base currency is EUR, but half of the account equity consist of profits denominated in GBP – half of the account equity will be taxed through currency conversions – even if no trades are placed in the account, account equity can decline by as much as 8-9% per month as a result of foreign exchange cost as imposed by brokers.

Those are very unfavorable odds to trade against – as much as 10-11% of account equity per month may accrue as imposed transaction costs. Thread carefully and better avoid retail brokers.

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Written by A.S.

July 16, 2014 at 9:50 am

Beyond PIMCO Analysis of What If? There is a Strike on Iran Nuclear Facilities

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This question pops up in my mind every day for the last few weeks. What impact this will have on foreign exchange rates, if there is a strike on Iran nuclear facilities. Will it be like every time before with USD and CHF stengthening on safe haven buying? Or will this time be different and USD will weaken? Or will USD strenghen in line with a historic pattern initially and then plummet? PIMCO has given their opinion about the impact of such strike on oil prices, but it says nothing about currencies.

The argument for weaker USD may be that any such strike is, effectively, imposible without US support. Meanwhile, once unbeatable technological supremacy of US (and other developed nations) is slowly fading away. There are countries with highly uncertain, by Western standards at least, way of thinking in disposition of nuclear weapons. India, Pakistan have some, probably Iran, North Corea has some (let’s hope Kim has enough submissive girls around him so he does not feel and urge to prove his manhood with nukes). It is highly likely that certain groups (aka terrorist groups) have them and, if not, certainly can obtain them in various ways with sufficient financial backing they have. And they have a way to take the material onshore US (if no other way, then the same way as large shipments of drugs are taken into US — remember Kevlar-covered submarines confiscated from Colombian drug cartels).

All this is bad for, first of all US. The risk is there more than anytime before and US is one of the first targets. Unfortunately, system trading can’t handle such black swan events,  like attack on Iran, well. System trading is the most succesful when there are repetitive patterns in the price action; it is the least useful when there is once in a lifetime event like a major attack of any kind.

However, my bet is that, if such attack takes place, the USD strength, if any, will be short-lived and safe haven buying will be directed mostly to Swiss frank, Norweginan kronor and probably AUD and NZD.

Written by A.S.

December 2, 2011 at 3:46 am

Trading forex on fundamental data

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Is it possible to trade on fundamental data? Some are highly sceptical about it, call it funny-mentals … The key problem seem to be timing the entry and measuring stoploss levels. Fundamentals may tell that the financial instrument is ¨cheap¨ or ¨undervalued¨, but it tells nothing about entry points. The fact that something is cheap doesn´t mean that it can´t get even cheaper. If somebody buys something based on fundamental analysis and the price goes down, the lower price makes the buy argument stronger while the account carries unrealised loss.

Common wisdom tells that trading forex on fundamental data is almost impossible. Too many factors at play, some of those hardly measurable – the noise is likely to be too overwhelming and the probability of mistake so high that any findings are rendered useless.

Nevertherless, we find one simple fundamental model fairly reliable predictor of exchange rate. The model analyses the interaction of several fundamental factors such as GDP growth, inflation, money supply to project exchange rate direction. The rationale is that, although the exchange rates may divert from the fundaments to a great extent, sooner or later the exchange rates will correct to reflect the fundaments of the underlying economies.

This particular fundamental model has been noticably precise. It needs some non-fundamental, technical input to identify entries and exits, but it is a great tool to improve the odds of long-term trend-following trade being profitable.

Attached here is a reseach summary back in Y2008 calling for ¨doomed GBP¨. The chatter was positive for the cable at the time and there was little to suggest a sharp downtrend in GBP. The rest is history.

Empirical evidence suggests that this fundamental analysis model can be applied to predict long-term currency moves. Yet, conventional technical analysis is required to identify entry and exit price levels.

Written by A.S.

February 23, 2011 at 8:36 pm

Sources of Trading Systems

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The ecosystem of automated trading develops fast. Capital allocated to system trading through industry leaders, such as Covestor or Collective2, reportedly grows by 50% annually.

There is still a plenty of room for growth as the investors ¨chop off the old block¨, i.e. disallocate the funds from chronically non-performing and increasingly risky traditional investments in stocks and bonds.

I here list 8 sources for you to choose as a provider of trade signals for your system trading account. Those sources are the ones likely to be used by both emerging system developers as well as investors.

Collective2
Collective2.com or C2 is an internet-based company. C2 collects performance data of various trading systems, independently verifies such performance data and makes the systems available to subscribers to trade in real-life trading accounts. At the time of writing there are about 7’000 trading systems registered on C2.
The way it works is — you go to C2 web site, register as a user, find a trading system which, as an example, shows 88% annual return, make a few clicks to set the system up to send the trades to your brokerage account and, if the systems lives up to the expectations, you have just arranged for an investment with 88% annual return.
C2 promotes itself as think of Collective2 as „do-it-yourself” hedge fund.
C2 works only with hypothetical data, although it checks all the signals in real-time and provides both estimates (slippage, realism factor) and tools for investors to evaluate what performance in live accounts would look like.

Covestor (and cv.im)
Covestor is one of the best-managed and innovative trading system aggregators.
Covestor displays performance data from live trading accounts and is limited to stocks only.

Zulutrade
Zulutrade deals with hypothetical forex signals only.
Zulutrade is probably the fastest growing of all system aggregators. It takes only a couple of minutes to sign up as a system vendor. Zulutrade is equally easy for investors as account opening procedure is straigthforward and easy with any of the selected brokers.
There are no fixed fees for neither system vendors, no investors. Systems can be added and removed from trading in live accounts with just a few clicks and at no cost. Fee for the services is pay-as-you go in form or bid-ask spread markup. Such spread mark-up (about 2 pips round-turn for the most liquid currency pairs) is then shared between Zulutrade and the system vendor.

Tradency
Tradency service is available through selected forex brokers, including several major retail brokers, such as FXCM.
Tradency system performance data is hypothetical rather than based on live account trade logs.

Fxbees
If you´re looking for system aggregator service for forex signals based on live accounts, then Fxbees.com is for you.

Myfxbook
Myfxbook positions itself more than a community of forex traders rather than system aggregator service provider.
Forex traders allow data from live forex accounts to be explained on Myfxbook website. Potential investors can review the data and contact the trader directly for signal delivery terms and conditions.

AlphaClone
AlphaClone compiles data about major equity positions from 200 major hedge funds and institutional investors from their public filings.
There is a time-delay involved as such public filings with SEC are made quarterly. If you feel comfortable to ¨clone¨ positions of, say Warren Buffet, this is the service to use.

Alpari PAMM
Alpari is a Russian-owned forex broker with operations in several countries, including UK and UAE.
Alpari customers may enable their live account performance to be available for public disclosure. If done so, the live account performance is ranked and any investor may open PAMM account to copy the trades of the most profitable traders.
The fees related to PAMM account are structured as performance fee. Under this arrangement, investor pays a share of profits as a performance fee and such fee is shared between the broker and the trader.

Source: free e-book Be Your Own Hedge Fund Manager.

Performance [Misre]Presentation on Zulutrade

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Looks like total geeks or rogue marketers run Zulutrade. I tend to believe that they’re geeks since the site has some whistles and blows and a very good business concept.
When it comes to presentation of the content (i.e. trading systems), it does a good job to display junk prominently and gives no other tools but to dig trough the list manuallly.

This is the recent e-mail from Zulutrade (click thumbnail on the lef). The yellow markings are mine. The system is ranked #7. The average profit per trade are 2.8 pips. 2.8 pips, modelled on 2 pip spread?! Empirically, the spread is about 10. 487 trades. Adjust for fees and slippage and you’re likely to get a deep-loss system. This is a typical representation.

Very likely another system (click the thumbnail for a snapshot) with 35 average profit per trade is profitable, but somehow it’s digged in as #343 after all the “a couple of pips systems”.

As well, the “advanced filter” is of little help as it doesn’t let you filter any basic parameter like return, drawdown, average profit.

Currently Zulutrade lacks pedigree. Something you can’t say about Collective2.com and, particularly, covestor.com. But then, Zulutrade seems to be successful in building customer base and, hopefully, one day they’ll fix the shortcomings.

Written by A.S.

May 20, 2010 at 7:10 pm

Week 52: up 1.19%

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Total test result for the last 2 months is about minus 0.9%. Hectic trading volume and markups are beneficial to intermediaries, but so far there´s little evidence that the service produces positive investment returns. In other words, where are the customers´yachts

During the last week ditched one system which seemed like another 1 pip system, i.e. the kind of which sits through massive drawdowns waiting for the market to come back. It´s really a source of discomfort to watch as system vendor takes, effectively, unlimited risk to gain very limited profit for the customer. Somewhat disappointingly, I´ve found that by far too many systems on the 1st page of zulutrade performance rank are such 1 pip systems.

Written by A.S.

January 6, 2010 at 7:24 am

Zulu/Ava Live Account Testing (ongoing, details soon)

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To open account with AVAFX is a breeze. Fill out an online form, fund the account with a credit card and you’re ready to self-trade the account in, literally, less than 5 minutes.

No need to send original documents, you can upload them.

I’ve set the account up several days ago, but still waiting for either AvaFx or zulutrade to send a message that the account is enabled for autotrading through zulutrade.

Written by A.S.

November 6, 2009 at 12:16 am