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As in other investments, the FOREX trader may open a wide variety of accountsOpening a FOREX Account In the Fall of 1974 I accompanied a friend to the local Denver office of E.F. Hutton to open a new commodity futures account. The broker handed my card. On the front side one was to enter Name, Address, Telephone, Social Security Number, Employer, Position, and Estimated Net Worth. On the reverse, a two-paragraph disclosure requiring a signature and the date. After filling out the form my friend handed it back to the broker, opened his briefcase and counted out $30,000 in one hundred dollar bills. The broker calmly recounted the money, handed it to the cashier along with the account card. The cashier issued my friend an account number, wished him good trading, and we were done. Times have changed. Opening an online retail FOREX account is easy business, but the information required is much more extensive than it was in the halcyon days of 1974. Dont open an account until you have completed a thorough duediligence of the broker-dealer and worked several hours with their Demo trading platform. Sadly, you will need to follow this entire process even if you are opening a $100 micro-account. Fortunately you will not need to redo the process if you decide to open your full trading account with the broker-dealer in question. Account Types As in other investments, the FOREX trader may open a wide variety of accounts: for self-directed trading: Individual Accounts, Joint Accounts (with different flavors), Partnership Accounts, Corporate Accounts, and Retirement/ Investment Accounts (also with multiple flavors). The easiest to open is, of course, an individual account or a joint account. All the others require extra documentation: Retirement/Investment accounts the most; and you must confirm the account is eligible for FOREX tradingmany are not. Should you desire to have your account managed by a third party, such as a professional money manager, that also requires additional forms. The due diligence required to select capable money managers is a book in and of itself; beyond the charter of this tome, which assumes you want to make your own trading decisions. Professional accounts may be managed by individual managers or placed in a FOREX trading fund. Many hedge funds now trade currencies, either with other investment vehicles or FOREX-only. Please see Chapter 13, The FOREX Marketplace, for FOREX management resources. Be sure you are opening a FOREX spot account and not a FOREX forwards or futures accountunless of course one of the latter is your choice. Almost all FOREX dealing is in the spot market, both at the institutional and retail level. The forms for each dealer do vary, in number and in specific contentif only slightly. It goes without saying: read carefully any document before signing. If you have questions, ask the broker for clarification. If in doubt, ask your attorney or your accountant. Like all legal forms today, they are wordy and complex. FOREX can be a dangerous game, and the broker wants to protect your interest and, especially, theirs. As the regulatory environment firms, you can expect forms to get wordier and longer to incorporate the requirements of new laws, rules, and regulations. Opening the Account: Steps Attorneys are not cheap, but they are plentiful. You can be assured your brokerdealers account forms generated substantial fees or hours for their legal team. Account forms are online and may be printed out in hard copy. The broker may request two sets, one of which is returned to you, or should be. If they only request a single set of account documents, verify you will receive a copy. Print an extra clean copy for your records in case the online forms change or are modified. Forms are usually in Adobe Acrobat PDF format. If so, the brokerdealers Open an Account page will have the link to the PDF reader if it is not already installed on your computer. TIP: Grab a screenshot of each page you view on your brokers web site for the account registration process. Do this by holding down the ALT+ Print Screen keys. You may then copy it to a Word document with CTRL+V. You will generally encounter four steps to opening an account although they may go by different names or phrases: . Select an Account Type: As stated, you must first select the account type. Because most forms are online, the selection of an account type tells the automated registration module what to dish up next. 2. Personal Information: This is the bread-and-butter name, address, telephone, fax, e-mail, employer, position, social security number. Forms beyond Individual and Joint will require more kinds of personal and account information. . Financial Information: This step is getting more and more involved. The broker wants to make sure you are qualified to trade currencies even if it is a $100 mini-account. I am even seeing broker-dealers requiring what could be called mini financial statements from prospective customers. If you want to play the game, there is no way out, at least legally. A tax form is usually included in this step, also. 4. Review: You will be asked to review the documents carefully before submitting. Againask the broker any questions you might still have or query your attorney, accountant and/or financial planner. Review your documents twice. If the broker finds something wrong at Step 5 you will have wasted a great deal of time. Two threads run through these documents. The desire of the broker to protect both parties and the NFAs Know Thy Customer Rules, which are getting stricter. TIP: Start a folder and keep copies of everything! I like to keep a time log of all communications with the broker including correspondence, telephone conversations, and e-mail. I have not seen electronic signatures appear in the industry. Given the NFAs Know Thy Customer emphasis of late, I doubt they will appear at all. You will be asked to mail or scan-and-mail the forms with appropriate information and signatures to the broker. You will need to include a scan of your Drivers License or other picture ID. I dont like this either, but it is the way things work with electronic registration; there is a downside to everything. 1. Acceptance: Once your documents are accepted, you will be notified that your account is ready to fund and trade. Typically acceptance takes only one or two days unless there is a problem. 2. Funding: Now you are ready to fund your account and begin trading. Funding is either by cashiers check or bank wire. Personal checks may be accepted by some brokers, but they take a long time to clear, and they add a step to the process. Better to take the 30 minutes for a trip to your bank for a cashiers check or a wire transfer. Some brokers have been accepting PayPal and eGold. Yes, they deduct the fee from your opening balance. Again, the KTC rule is probably going to send these methods to the sidelines. Note: Hotspot FXR does not guarantee exchange rates for clients who attempt to wire non-USD deposits. Clients are urged to speak with their bank to obtain their US Dollars conversion rate. **A branch address is not necessary for a transaction that is destined for an account that is maintained with Deutsche Bank New York. If the sender advises that a branch address is required, Deutsche Banks New York office address is provided: Before actually trading, spend one last hour with the Demo account. Keep at the ready a small notebook with the following information at your side; it may either be handwritten or copied from the broker web site: The brokers hours of operation The bid-ask pip spread for the currencies you intend to trade The amount of margin and leverage ratio you are using The minimum trading unit size All other primary concernsrequoting practices, pip ballooning, platform features, and stability should have been completed long before you decided to open an account. Summary Just one more chapter before you are ready to at least get your feet wet with a mini- or micro-account. You need to understand thoroughly how the various basic FOREX calculations are made. You will want to know them so that they are second nature. The time you spend at the computer should be directed 100% to trading decisions, not trying to figure out how many pips equals $100 or what your leverage factor will be on a trade. Your goal here is to open a mini- or micro-account and get your feet wet. Since you do not have a trading method developed as yet, think in terms of finger exercisesgetting familiar with basic FOREX calculations, order types and entry, all the platform featuresall with a small quantity of real money on the line. The basic functionalities you will want to learn. They must become second nature to you. It is also important to understand how to manipulate the platform, create charts and indicators, and adjust time scales, colors and other features. Before trading a full account you should finish reading this book. It will assist you to develop at least a barebones approach to trading. After you finish Chapter 9, you will be ready to trade a Demo account and thereafter a miniaccount with small amounts of real money in play. Pulling the Trigger With the completion of this chapter, you will be ready to open a few Demo accounts and see for yourself why the FOREX markets are so exciting and popular. Orders An order is an instruction with defined parameters to your broker to take a specific action in the market, either now or in the future. The number and types of currency trading orders that can be used with broker-dealers has expanded substantially in the past few years. Customer demand for more flexibility and trade execution options and competition have been the main driving forces. Broker-dealers, especially market makers, are happy to oblige, since a large palette of orders helps them manage their book. Orders may be broken down into three primary categories of functionality market, limit, and stop (see Table 9.1). All broker-dealers offer the basic three, and some brokers have unique in-house specialty orders. Because orders can be classified according to different criteria, they are cross-category. Some orders are not mutually exclusive and can be combined. The traders guiding rule should be to keep it simple. Dont use an order simply because it looks fun or interesting. Your trading method should be your primary guide to selecting an order arsenal. Complex orders distract from the primary job of watching and analyzing the markets, are difficult to execute, and increase the chances for error. Most broker-dealers delineate the various orders they accept in their trading platform documentation; please look there before e-mailing them. Order functionality is typically integrated into the trading platform but some of them can still be difficult to execute. You can Google FOREX orders and variations thereof to find some listings of broker-dealer web sites, FOREX portals, and learning web sites. The exact definitions of many orders may vary slightly from broker to broker. Be sure you know your brokers terms before making any order. Market Orders A market order is an order to buy or sell at the market price. The buy may be to initiate a new position or liquidate a previous sell position. The sell may be to initiate a new position or liquidate a previous buy position. A market order may not be at the current price since like a river, prices are always flowing. Most market makers show you the price you will receive before you execute the order. In requoting, you do not get that price. Large orders, slow, fast, and illiquid (thin) markets affect the price you will receive on a market order. A buy adds to aggregate demand and pushes prices up, if only slightly; a sell adds to aggregate supply and has the opposite effect. The bid-ask spread in FOREX reflects this, as well as protecting your broker and helping him maintain an orderly bookand make a fair profit by serving you. Limit Orders A limit order specifies a specific price to execute your order. It may also specify duration; how long you wish to keep the order active. If the price is touched within the specified duration, your order becomes a market order. There is also a stop-limit order. You specify a price and also a maximum range beyond that price for which the order can be executed. The advantage of a stop-limit order is that you will get the price you want if that price is reached. The disadvantage is that if prices do not trade in your specified range, your order remains unexecuted. In a fast market a stop-limit order may be a complete waste of effort; it simply will not be executed. Suggested Rules of Thumb: Use market orders in normal markets; use limit orders for large orders and in fast, slow, and thin markets. A market order in a fast market, such as after the release of a news item, can be a disaster. A Good Till Cancelled (GTC) order remains active until the trader cancels it. A Good For The Day (GTD) order remains in the market for the duration of the trading day. Insofar as FOREX is a continuous market, the end of the day must be for a set hour. Be sure to keep track of all open orders you have in every market. It is your responsibility to cancel them, not the brokers. Stop Orders A stop order is the terminology used for a limit order that liquidates or offsets an open position. An automatic trailing stop is offered by several broker-dealers. This raises or lowers your stop by a fixed value as the market goes in your position, thus protecting some of your profits. You can, of course, mechanically apply trailing stops. They are great in theory, not quite so great in practice. They work better with some trading methods than with others. A major debate has raged for years as to whether traders should use stop-loss orders in the market or simply keep them to themselvesmental stopsand wait for the market to reach that price and then use a market order. Many traders believe brokers use stops entered in the market to balance their book. Brokers are occasionally accused of running or harvesting stopsmoving their data feed specifically to execute the stop order. This does happen; how often is very difficult to say. Beginners should use stops. Once you have some experience in the market and if and only if you have good disciplinethen keep mental stops. It is very easy to ignore a mental stop and hope the market will turn back in your favor and it usually does not. Yes, by using stops the broker can see your order; and, yes, stops may be harvested; and, yes, stop fillsespecially without limitsmay be poor. But we still recommend that the new trader use them. Never leave an open position unattended without a stop. I still remember an incident from when I was a young commodities trader and watched the markets from the local Peavey office. Soybeans were limit up with a profit of $1,000. I left to get a cup of coffee from the cantina, returning in less than five minutes to see the market was limit downa $1,000 loss. Combination Orders Many orders are not mutually exclusive and can, if the broker permits it, be combined. A common one is a One Cancels The Other (OCO) order. The execution of one order automatically cancels the other. You might enter both a buy and sell order in a market awaiting a breakout from a narrow trading range. If either is executed, it cancels the other. Specialty Orders There are perhaps a dozen or more specialty orders; the beginner is advised to stay away from them. A few brokers offer orders unique to their trading platform. Time triggers specify a time when an order should become active and for how long. A Box-Top is a market order that automatically changes to a limit order if it is not executed at the market price right away. Limit On Close (LOC) and Limit On Open (LOO) are executed at the closing price or the limit price if that price is equal to or better than a specified limit price. The FOREX forums are a good place to find out how traders use specialty stops as well as the pros and cons. Order Placement Walk-Through This will vary from broker to broker, depending on how their trading platform is organized. As of 2008 placing an order is a simple and pleasant experience. Your trading platform really does all the calculation for you. Traders can typically see the various parameters of their orders before executingleverage, margins, pips-to-dollars (if the dollar is your account-denominated currency), and other pertinent information. Practice with a brokers order placement system first on a Demo account. When you open a mini or micro account, practice again with very small amounts of real money. I suggest lots of a maximum of 500 units initially. Order Execution Traders using an online trading platform click on the Buy or Sell button after having specified the underlying currency pair, the desired number of units to trade, the price, and the order type. The execution of the order is almost always instantaneous. This means that the price seen at the exact time of the click will be given to the customer. See Figure 9.1. It is possible to place an order by phone in an emergency situation, but almost unheard of today. Order Confirmation Online traders receive a screen message indicating confirmation of an order within seconds after the trade has been accepted and executed, as shown in Figure 9.2. The trade will also show up on the platforms Open Positions page. Traders can also cancel any limit order that has not been executed at any time. Most brokers respond with a message similar to the one seen in Figure 9.3. Transaction Exposure Your brokers trading platform will also inform you of your transaction exposure: how much of your capital and margin you have used for the trade Once your trade is executed, it will show on your brokers Open Trades page. When the trade is closed and complete, a summary will show on the Account Summary page. As far as the order and accounting information you require is concerned, almost all brokers have this down pat on their platforms. One of the purposes of the Demo account is allowing you to become secondnature comfortable with how it all works and ties together. Tip: Before executing an order, close your eyes for a few seconds, take a deep breath. Review all aspects of the order one last time before clicking Submit. The two most common order entry errors are selecting Buy instead of Sell (especially to offset an order) and entering the incorrect number of units. Note what values are preset (if any) on your brokers trading platform. Remember, to offset an order it must be for the identical currency pair and number of units. A Buy is offset with a Sell and a Sell is offset with a Buy. If you initially buy 10,000 units and then sell 15,000 units, you will have a new open position selling 5,000 units. Summary A book could be written about FOREX orders, especially stop orders; how and when to execute them, the pros and cons. The vast majority of traders can fully work their trading method with market, limit, and stop orders. Commodity Trading with Stops by Joseph Maxwell (Speer Books, 1977) is an excellent overview of the subject. It is out of print but typically available on eBay.com and Amazon.com. Know which type of orders you need, and know how they work. Make sure you and your broker are on the same page with respect to what they mean. Test your orders thoroughly in a Demo account. A few trading systems require substantial order manipulation, but your time is generally better spent studying the markets than worrying about how to execute complicated order strategies and techniques. Well, doggies, as Jed Clampett would say, you are ready to trade. At this stage in the game only execute very small unit lots on a micro- or mini-account to get a feel for how things work. You need to develop a trading method and money management parameters before trading larger amounts on a miniaccount or moving on to a full account. |
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