Lot size, slippage and execution speed for non-major forex pairs

[alexander1994]

I am somewhat confused. I sifted through older threads in this and other forums on the topic of liquidity, order execution and lot size.

While one might think that this should not be an issue for an beginner, there is still an observation that confuses me.

With a misconception that I had about position size calculators like the one of Myfxbook out of the way, I played around with it, putting in different numbers and applying them to different currency pairs. For the following let's assume a risk ratio of 0.5% and a stop loss of 50 pips, account balance of $10.000.

Applying these numbers to major pairs and the calculator gives back small lot sizes, like for example USD/JPY with the above figures 0.11 lots. However, switching to exotics like USD/HUF with an exchange rate of about 1:250 the lot size incresases dramatically to about 25 lots.

While this is not the surprising part, the implication of that for me is: Some say that problems with your order getting filled can already occur with 10 lots. For this USD/HUF example that is more than twice that, so I used to wonder how you could actually put on a major trade (assuming a greater account balance than 10.000) in an exotic currency pair if already with not too big an account and a conservative risk you end up with 25 lots for USD/HUF or with 1.8 lots for USD/MXN or with 1.2 lots for USD/ZAR, also taking into account that for exotics liquidity is not as high as for majors.

I have to say that I don't really have a good idea of liquidity and order filling in relation to lot size at this point, that is why I ask here. The fact that even with as little as 10.000 bucks and a conservative risk ratio you can end up with quite a few lots led me to ask this question.

 

[Xela]

I have to say that I don't really have a good idea of liquidity

Respectfully, Alexander, you're thinking about it and talking about it as if it's a real market, and it just isn't.

There is also a real market, of course, but that's not the one in which you'll be engaged: you're going to be trading spot forex against a counterparty market-maker. No currencies will actually change hands at all, when you do a "trade" like this. You're simply having a bet against a counterparty.

The normal market concepts just don't apply in the normal ways. They do, more or less, with EUR/USD and Cable, but not so much with what you're asking about.

Having made my living trading spot forex for several years (admittedly a little while ago), personally I'd urge you not even to think about betting on "exotics" like HUF, MXN and ZAR against a counterparty market-maker, with a $10k account.

It's possible to do it, of course, and there are people who do - but whether there are any long-term, successful, retail spot forex traders who do it is another matter. Personally, I doubt it. Maybe one or two experts in the economies of those countries, who are trading principally from fundamentals??? But in reality, for the most part, it's simply a way of stacking even further against yourself (for the reasons you're referring to, among many others) a deck which is already very adversely loaded in the first place.

Be very aware, at all times, that you're not dealing with a broker, within the normal meaning of the term: you're trading directly against a counterparty who holds all your funds, makes up and interprets all the rules governing the transactions, and against whom there's little recourse, in practice, in the event of any of the many unpleasant surprises and accidents from which they make most of their own livings.

I'm trying to be helpful, not critical - but I'm really wondering why you're discussing trading obscure currencies with both enormous and hugely variable spreads in the spot forex market, rather than something with which you have a much better chance, given adequate knowledge, experience and risk-management skills.

Apologies for sounding "negative" (which I realise I must) but threads like this one fill me with vicarious misgivings on your behalf, and I really do find it very difficult to envisage fortuitous developments for someone of your experience-level, in such markets. I hope I'm wrong ...

 

[Scataphagos]

Respectfully, Alexander, you're thinking about it and talking about it as if it's a real market, and it just isn't.

There is also a real market, of course, but that's not the one in which you'll be engaged: you're going to be trading spot forex against a counterparty market-maker. No currencies will actually change hands at all, when you do a "trade" like this. You're simply having a bet against a counterparty.

The normal market concepts just don't apply in the normal ways. They do, more or less, with EUR/USD and Cable, but not so much with what you're asking about.

Having made my living trading spot forex for several years (admittedly a little while ago), personally I'd urge you not even to think about betting on "exotics" like HUF, MXN and ZAR against a counterparty market-maker, with a $10k account.

It's possible to do it, of course, and there are people who do - but whether there are any long-term, successful, retail spot forex traders who do it is another matter. Personally, I doubt it. Maybe one or two experts in the economies of those countries, who are trading principally from fundamentals??? But in reality, for the most part, it's simply a way of stacking even further against yourself (for the reasons you're referring to, among many others) a deck which is already very adversely loaded in the first place.

Be very aware, at all times, that you're not dealing with a broker, within the normal meaning of the term: you're trading directly against a counterparty who holds all your funds, makes up and interprets all the rules governing the transactions, and against whom there's little recourse, in practice, in the event of any of the many unpleasant surprises and accidents from which they make most of their own livings.

I'm trying to be helpful, not critical - but I'm really wondering why you're discussing trading obscure currencies with both enormous and hugely variable spreads in the spot forex market, rather than something with which you have a much better chance, given adequate knowledge, experience and risk-management skills.

Apologies for sounding "negative" (which I realise I must) but threads like this one fill me with vicarious misgivings on your behalf, and I really do find it very difficult to envisage fortuitous developments for someone of your experience-level, in such markets. I hope I'm wrong ...

Somebody suggested that if you're going to trade Forex, do it with futures... where there are regulations and actual brokers.

Whaddaya think?

 

[Xela]

Somebody suggested that if you're going to trade Forex, do it with futures... where there are regulations and actual brokers.

Whaddaya think?

I don't disagree ...

... though it's perhaps an oversimplification: I used to trade spot forex with IB, who are well regulated and an "actual broker", but that's not so easy, these days, especially for US residents (the OP is in Germany, though.)

My own original reason for switching from spot forex to forex futures was mostly to reduce dealing-costs (and because of the reliable availability of volume), but $10k isn't really quite enough for people to be trading futures safely - other than maybe something like a single contract of NQ or RTY at $5 per tick?

In the OP's position (as I understand it, though I suppose I may "have it all wrong") I'd probably be opening an account with Oanda, trading more or less the Euro and Cable only, and trying gradually to build my capital up enough to be able to switch to futures. Just my perspective.

 

[Scataphagos]

I don't disagree ...

... though it's perhaps an oversimplification: I used to trade spot forex with IB, who are well regulated and an "actual broker", but that's not so easy, these days, especially for US residents (the OP is in Germany, though.)

My own original reason for switching from spot forex to forex futures was mostly to reduce dealing-costs (and because of the reliable availability of volume), but $10k isn't really quite enough for people to be trading futures safely - other than maybe something like a single contract of NQ or RTY at $5 per tick?

In the OP's position (as I understand it, though I suppose I may "have it all wrong") I'd probably be opening an account with Oanda, trading more or less the Euro and Cable only, and trying gradually to build my capital up enough to be able to switch to futures. Just my perspective.

Seems to me that trading "against the house as counterparty" is just asking to be abused.

You saying Oanda actually brokers spot Forex trades into the marketplace rather than acting as counterparty?

 

[Xela]

Seems to me that trading "against the house as counterparty" is just asking to be abused.

I agree, in principle.

You saying Oanda actually brokers spot Forex trades into the marketplace rather than acting as counterparty?

No, not quite that (unfortunately).

I'm saying that I believe Oanda has an efficient automated system which offsets their own net liabilities in a genuine underlying market, and that they therefore don't care which customers win and which lose, overall, as they're genuinely making their own living from the spread rather than by being a counterparty to losers whom they've deliberately attracted because they have "loser-demographics" ...

And that I believe them to be ethical, honest and decent, and "about as good as you can get", from the customer perspective, as a counterparty "broker".

I'm not suggesting that Oanda is necessarily the only one of whom this is so: simply that there aren't many, and Oanda's one of whom I'm confident that it's so, and that they're well-regulated, very big, very well established, and that in independently audited and published financial research, they've also been shown to have among their customers a significantly higher proportion of profitable account-holders than is true of many others in the industry.

 

[Scataphagos]

So... does Oanda not charge commissions because they make theirs off of the spread? And do they disclose that to traders so they know what they're dealing with? (There are some brokers who advertise, "Zero commission"... but we know they make theirs off of an artificially wide spread... which they generally do not disclose.)

 

[Xela]

So... does Oanda not charge commissions because they make theirs off of the spread?

Yes (no commissions, just the spread).

And do they disclose that to traders so they know what they're dealing with?

I don't know. They certainly used to, when I was there. It's normal for counterparty market-makers in spot forex to charge "no commissions, spread only", and it's what all their customers expect. The average account-size is tiny.

There are some brokers who advertise, "Zero commission"... but we know they make theirs off of an artificially wide spread... which they generally do not disclose.

This is definitely right.

Oanda's spreads used to be about the most competitive one could find (among brokers with that business model, I mean).

My understanding now - i.e. several years later, and this is all impression from second-hand information only - includes three things:-

1. They're not quite as competitive as they were, overall, but still pretty clearly among the top 5%/10% of such brokerages for spread-sizes;

2. Their spreads are also slightly more variable now than they used to be, but only a little, and at times that will only really be a problem to dedicated "news traders" (and among retail spot forex traders, news traders tend to have only a very limited survival-span anyway, so that's perhaps not too relevant!);

3. Unlike many/most "brokers" of this kind, they're actually willing to listen to their customers and to correct obvious mistakes - for example, if their chart shows a spike which stopped out a customer, at a time when their competitors' charts didn't have any spike (this is a pretty common cause for complaint among retail spot forex traders) they're often willing either to cancel or even to reinstate the trade, "for the goodwill". In this murky industry, that's pretty unusual.

Again, those last three points are second-hand information only, not my own personal experience of dealing with Oanda (which was better, overall, but is now possibly out of date).

I think the third of those three points is actually the most important one. You find out "what your broker's really like" only when something goes wrong.

 

[alexander1994]

Be very aware, at all times, that you're not dealing with a broker, within the normal meaning of the term: you're trading directly against a counterparty who holds all your funds, makes up and interprets all the rules governing the transactions, and against whom there's little recourse, in practice, in the event of any of the many unpleasant surprises and accidents from which they make most of their own livings.

Sounds very much like a market maker model to me. However, if I opened a live account then it would be an ECN broker which - if I understood correctly - basically transfers my trade into the real market. After having scrutinized many brokers I think IC Marekts would be a good choice. I really don't want any market maker to be in possession of my funds. I'd rather have a pip more spread than having a market maker broker. An additional pip for spread does no harm as I am not intending to scalp.

I'm really wondering why you're discussing trading obscure currencies with both enormous and hugely variable spreads in the spot forex market, rather than something with which you have a much better chance, given adequate knowledge, experience and risk-management skills.

At this point it is indeed just discussing. I am in the process of learning and before doing anything on a live account I want to be sure that I understand what I am doing. I am not intending to actually put on a trade on any of the named examples, I just picked them in order to give examples. For the majors you can find plenty of information, but not so for the more exotics (though the USD/MXN isn't that exotic in my mind as the peso is among the top ten liquid currencies if I recollect correctly).

Don't worry about sounding negative, I appreciate your help. This is all education at this point for me. With growing experience I will see what I make out of that.

That all being said I'd like to turn to this thing with lot sizes and order filling again. Is it really that big a problem for bigger lot sizes to get filled? I know it depends on the currencies, currency pairs and trading sessions (Asian, European, North American). Taking all of this into account, above roughly what lot size do you have to reckon with slippage and by what amount? Again, I have delved into that earlier, but up to now it left me rather confused because people tend to give very different answers.

 

[Scataphagos]

You find out "what your broker's really like" only when something goes wrong.

Ain't that the truth! Applies to more than just your broker.