Aug 30 2009
Retail forex market is different from the forex interbank market. Retail forex market is full of small traders. The trade size is usually so small that the retail forex broker is at a disadvantage. The retail forex broker is forced to act as the retail trader’s sole counterpart. Learn
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When the liquidity is good, making artificial market for their clients is not an issue for forex brokers since they simply offset their risk in the interbank market. However, in illiquid times this represents a great problem for the retail forex broker and an opportunity for the small traders.
The Big Figure Trade is an example of how you can take advantage of your retail forex broker limitations. As a trader, we all know every now and then the market will test a critical level.
It can be a Fibonacci level, a trendline or maybe even a big figure. The actual level is not important. The forex market will often reach a critical level where most of the traders believe that it cannot go higher during sharp, one sided intra day price moves.
Traders initiate short positions near that level. Don’t forget price moves in the forex market tend to be self fulfilling. Usually there is a big round number that short sellers set their stops above.
This is the time when the forex dealers mount their attack on the stops. The short sellers are confident that the market is overbought enough and it will not have the energy to push past the psychologically important number.
Now this is what happens when the forex broker mount an attack on the stops. The typical price action is for the price to fail near the figure a couple of times before the forex brokers produce a quick coordinated attack on the number quickly setting off the number lying above.
In an instant the rate is below the big figure. Most traders have this happen to them a number of times. A quick blip and your stops are busted. The price action than promptly crashes in the expected direction immediately!
Nothing is more aggravating to a trader than this setup knowing that your money was quickly taken away. This trade works especially well for the retail forex brokers with their fixed spreads and guarantees force them to make a market where there is none.
When the forex broker pushes the rate higher and trips stops above the big figure, the action is so quick and one sided that in the interbank market virtually no trading is possible at those prices.
Spreads widen, typically only the offer side of the quote runs higher since no forex dealer would want to be long above the figure. Although a true bank dealer may not be able to get the fill at those prices but you can.
As long as the rate traded is there most forex brokers would fill you at those prices just as they would have if they were filling your stops instead. Because of the fixed spreads and the guarantees the forex broker is forced to take the order.
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