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Professional Versus Self-Taught FX Traders; A Long/Short Hedge

Following a guest post yesterday I was either deservingly or not hit with a few comments that spoke to the tone of questioning abilities so today I'm going to show you why none of it even matters in the first place:

One thing that has always bugged me about the way that self-taught traders are treated is that they are made to believe that they are somehow inferior or behind an iron curtain in terms of the inner workings of larger participants.

This is a myth, and below I'll explain why and show you where to get started.

The biggest problem I see is that they are inundated with a never-ending stream of talking heads attempting to capitalize on their willingness and unknowing expectations.  Throwing fear and building an unneeded hate in them towards larger participants is just a very unfortunate part of the process.

I'm speaking at a workshop later this month in Florida, as many of you know.  While I don't need to be self-defensive and in response to feedback in terms of this I feel the need to say a few words:

The shop is intended to build a foundation, or what most self-taught traders lack but professional traders get from the moment they step foot in the door of their workplace.  In terms of my own profit, there is none (yes, seriously).  Anything that comes in after breakeven is going to fund a new free project for traders that I have been working on for quite some time.  But it takes some money, not a huge chunk, to get off the ground.  The last thing I can do is lose the trust of people that have been so loyal to this site for so many years, so this is just another step.  I have said it many times before but I will say it again: I do this because I enjoy it, which is said to be the same about many other bloggers / writers.  Those that assume the worst I understand why: when you are facing constant inundations from those that regularly do otherwise so it comes as no surprise to me.  But such is life.

Back to focus:


When you are trading for alpha, you are trading for alpha.  So whether you are a major hedge fund or a retail trader the ballgame is still very much the same.  How can you come close to getting on the same level as the professional trader?  Here are some steps, without breaking the bank:

Myth: Professional traders deal with practically zero spread.

Truth: Dealers trade with smaller spreads, and they jump all over the map.  They are battling for best execution all day long, looking for prices to satisfy the bulk of their clients.  They make their money by charging a spread to their clients, aka professional traders.  Hedge funds and others like them (anyone on the second tier) is getting charged for the services of their bank.  Trading through Reuters or EBS is free but your bank is always going to want a cut.  A rough standard is $5 per million traded plus the spread, which can vary greatly.

For the retail trader:  Get as close to the market as possible when it comes to execution.  This usually means just dealing through an ECN or other type of electronic network that doesn't have you passing through a dealing desk.  Only settle for fast execution and the cheapest spreads. Simple.

Myth: Professional traders know where all the orders are, all the time.

Truth: Banks know only (fully) what's on their own books, and oftentimes share that information with each other.  Many times these orders are “touted” over professional feeds (such as IFR or Market News International, each only about $150/month each or less, and available to anyone).

I have seen people selling this same information to the retail crowd for as much as $800/month.  Dealers trading through Reuters or EBS also have access to added depth (volume), but only on a very short term and still limited basis.  Many open electronic platforms are even designed with functionality to mask order size.  Retail brokers are making money off of you in one of two ways: 1. introducing you through an ECN, taking a portion of your spread, or 2. both charging you a spread and taking the other side of your trade (dealing desk).

By passing through an ECN you could literally be matched with anyone that is using that platform.  Dealers have credit lines extended with one another in order to do business.

For the retail trader: Subscribe to a professional feed. IFR or MNI are two very trusting services that offer this information to anyone on the planet.

Myth: Hedge funds make a killing in this market.

Truth: Those that do it well follow the same, simple logic that anyone else would.  From experience I know that the alpha generated from trading currencies can be very slim if it is not a fund's core focus.  Others excel at it extremely well. They ALL maintain buoyancy by controlling their risk.

But what's the norm?  A post a scribbled together a while back goes into great detail.  You can find a link to it here:

For the retail trader: You stand the same chance as anyone else out there in this big, open ocean.



Foundation.  Basics.  Arduous work and efforts and looking at the market for what it truly is:  understanding it's D.N.A. and trading in line with it.

People might listen to the wires but how many of those people do a quick google search when they don't understand something?  How many of those people understand the basics of cross market analysis, what news rattles the market versus what doesn't, the implications, usage and ways of determining key economic indicators, and most importantly, how professional traders react.  This last point alone is where most traders and rookie (or just bad) analysts simply get it wrong.

Part of understanding the market's D.N.A. is understanding where professional traders most heavily put their focus, how they react, and in what timeframe.  Get past this hurdle and you have just skimmed a few years off of your education curve.


Mechanics and Order Flows with Support or Resistance

This market is very mechanical.  Technicals, in the form of support and resistance, play a key role because they are the only global reference point that every trader can see and refer to.  The technicals we cover here, I continuously stress, are reference points.  It is a neverending “if” and “then” equation.  “IF” this price gets hit, “THEN” it is likely to fade. “”IF” the top of that range is surpassed “THEN” we are heading to the next one, etc.  From a mechanical perspective, this is how we take shape.

I could write an entire manifesto on general workings of order flows, but just picture a block of price around a key technical zone (support or resistance or 00's).  Ahead or AT or SLIGHTLY ABOVE it you typically have your countertrends.  Directly above the range you have your continuation flows.



From a fundamental perspective, we have short-term and long-term macro variables.  Some people subscribe to both, while others focus on just one or the other.  Short term macro variables come in the form of economic data that doesn't usually serve people a ton of interest or rhetoric by government officials, etc. As an example, recently with Greece, we have seen many impulse moves driven by rhetoric from key officials.  What happens?  Gaps caused by these have been  instantaneously filling.

Long term, we'll use the recent interest rate hike from the ECB as an example.  The moment there was any talk that a rate hike was virtually certain, the pair traded in shock-fashion higher.  In the background and leading up to all of this, there was still an underlying, deep interest rate differential all along.  Greece and others known as PIIGS have been the primaries in terms of any tugs to the downside.


Get a News Feed

Professional traders mainly listen to Reuters and bits of Bloomberg. For a measly 20 pounds per month you can get access to that same exact feed and more through Ransquawk.  They have recently launched a retail service called Talking Forex (  If you are wondering what is shocking USD/JPY or EUR/USD, you're most likely just missing out on a key news wire.

Important: even if you're not in an early development phase, look up anything you don't understand.  Even if you don't THINK you need to know it there is a very good chance that you do.



Advanced Terminals

There are two primary terminals that get used in this business: Bloomberg or Reuter's 3000x (now Eikon).  Each will run you anywhere from (I think on the low end) 800 to a standard 1700 per month, plus any exchange fees if you want them for real-time data.  What's in them?  News, chat, advanced studies, access to all major markets, etc.  Unless you're heavily involved in NDF's or Outrights, Swaps, Options, etc., there is little more available on these for those ex dealers that you can't find anywhere else.

The biggest pro to these are convenience.  If you need something, it's there, but it isn't a golden key, of course. It's just an information portal that's going to add depth to your studies.  If all you're trading is spot FX, much of the information can be found elsewhere and at a much more affordable cost.


Looking up Other Markets

Bloomberg provides quotes for most major instruments for free over their website.  If you're looking for the price of a 10 year Greek bond or 5 year credit default swap just google “Greece CDS bloomberg”. You're trading FX, not CDS, so all you really need is a macro view anyway.  Same goes for major world indices, etc.

Commodity prices you can either access directly through your broker or just by downloading a demo from one that offers the data you seek.

For commonly traded interest rate instruments, there are of course futures.  CME offers a boatload of them and can be found here:

For any others you can think of, please post in the comments below and I'll update this post accordingly.


Running Away from the Retail Herd

Every once and a while I do a checkup on the retail broker analysis and see how they're doing.  I did one yesterday: its frightening and horrible.  There are literally only two people I read with any sincerity from this crew, and even then I question their points occasionally.


They all fail in the same standard department: they are simply NOT GOOD at determining how the market will react to key points and data.  They take data for face value and recommend trading in line with it.  They make bigger deals out of events that few market movers are interest in, and they get amped up over large moves, trying to chase trends to no-end.  Consider this last recession and how many analysts were looking for the market to trade to absurd numbers.  Everyone has an opinion, some much more radical than others.

Having an individualistic understanding of the market is as vital to this business as a data feed. If you don't understand it, it is hard to say how you will succeed.  Listening to others will only get you so far, as we discussed in many past articles.

Getting away from the retail herd also means just as much in the department of not listening to the ideas of others on this level, beyond the brokers.  There are a slew of information providers, forums, etc., that all speak to the tone of unchallenged analysis as anything else.

People will always put themselves on a pedestal to sell you their product or idea. Always question quality and authority.


So Once Again,

NBT stresses the need for hard work and labor, individual efforts coupled with a desire to do well at what interests you the most.  I argue that this is not a zero-sum game nor anything like it, a common quote from those that either don't understand, injected with negative opinion or have been taken down an improper path.  We help in any way that we can, but like anything else, your own decisions and choices are what ultimately drives the car.

Thanks very much and good trading,