Where is the value?

Forget the spread!

With the advent of platforms where banks deal with each other often using prices “untouched by human intervention”, the element of volatility that used to exist has disappeared. As usual it is those (with respect) at the bottom of the food chain who suffer.

It is an interesting contrast that as the interbank market has become just that available to only to those prepared to make, as well as take prices, those who are users of the market, in particular, corporate entities have become more protected by regulation. The underlying user of the market deserves a degree of protection although he should also realize that a fee should be payable for using the market.

This is a fact that is lost on many traders as well as corporate market users since spread has become a marketing tool for many brokers. To be honest, unless it is totally outrageous, the spread between bid and offer to a retail investor who is anything other than a scalper should be immaterial and should simply be a constituent of his trading strategy.

When looking to exit a position, look for value, placing an order is a more effective way of trading when taking profit since if the market trades at your level you are out, while if you watch the market you can get, greedy, be distracted or simply miss the price action.

Look at the outright price.

If you are trading with a fifty pip stop loss versus a one hundred and fifty or two hundred pip take profit, it if far more important where the bid or offer is placed that you deal on than where the other side of the price that you aren’t interested is set.

This is where trust comes in. You must be sure that the price you see on your brokers platform is the same as the interbank. For example, if you are long and interbank is trading 29/30, certain unscrupulous traders can be showing you, individually, 26/27. “Your market” can lag the interbank!  

Building a solid relationship with a broker is more than listening to the well-rehearsed ad-lib lines of retention clerk whose only job is to ensure that you continue to trade. Quality not quantity is one of the best methods of judgement, particularly when starting out. Does the broker bombard you with phone call and offers? Do you receive emails every half an hour reminding you of a certain product or offer? If you do, he is probably trying a little hard and should probably be avoided. There is no such thing as an indifferent broker but one who appreciates you rather than offers the earth is a good place to start.

Look for value.

How many people look at just at the majors or G7 currencies when starting out trading particularly when testing a new trading strategy? The fact that a very high percentage of trades done every day involve either the dollar, euro or pound mean that spreads will be low, as will daily ranges. It therefore follows that volatility will also be low and that will mean that it can take some time for the trade-off between profit and patience to pay off.

Try looking “outside the box”. Nothing too exotic to start with. The commodity currencies often offer a bit more movement than the majors, particularly around their major economic releases.

The AUD, CAD and NZD are a bit of a throwback. Not quite to the days of a five-pip spread in Gbp/Usd but certainly to the days when trading daily could sustain a traders’ requirements.

From there the “exotics” beckon but beware if you make this step that there are peculiarities to certain currencies and drivers you may not have considered. Always try out using a demo account and don’t risk your capital until you are confident, if not of the outcome of the trade at least that you will understand what happened.