DOES YOUR BROKER
SEGREGATE YOUR FUNDS AT TIER-1 BANKS FOR SAFETY?
You enjoy forex trading.
Your skills match nicely with the demands of this medium. You understand
that it involves high risk, but you are the adventuresome type. You like to
experiment with new approaches, such as digital options, but it seems that
the brokers that favor this new vehicle are either in the Caribbean or
Cyprus. You have checked them out and chosen one on Cyprus. Your strategy
has produced immediate gains, so you transfer more funds to your account.
After more favorable trading results, you log on to find out that your
account has been frozen. Your broker claims that Cyprus is in crisis.
Does this scenario sound
plausible to you? Many currency traders awoke in March and were greeted by
this very reality, through no fault of their own. For brokers that followed
good business practices, their client account balances were held offshore,
far from the possibility of seizure. For other brokers, many of them may
never be able to restore the full balance of their customer accounts,
leaving you holding the bag for their incompetence and attempting to assert
your legal rights in a foreign jurisdiction.
The recent events in
Cyprus have shaken the forex industry, which is doing everything it can to
repair its battered image and reputation. Many brokers did follow best
business practices by segregating their client account balances offshore in
Tier-1 banks, leaving only operating funds for the local subsidiary in
Cyprus. For the others, they are scrambling to save their collective lives,
searching for additional outside capital or support, or winding down their
presence entirely in Cyprus.
What exactly happened in
this thriving island community of 1.2 million people, revered as a global
financial center for the past decade? This story may soon be included in all
forex tutorials to illustrate another aspect of risk that must be addressed,
but this basic principle could apply to brokers of stocks, commodities, and
other securities, as well. In this case, the financial crisis had nothing to
do with currency trading, but forex brokers were suddenly impacted by
mismanagement at the two largest banks on the island.
The Bank of Cyprus and
the Laiki Bank were guilty of investing far too heavily in Greek bonds.
Remember those? Remember the bondholders receiving a major “haircut” when
bailout agreements demanded that they be devalued? These two banks had not
been prudent investors, and local regulators had not questioned their
actions or demanded that capital adequacy standards be met with new rounds
of capital funding. The result was that enormous losses on the bonds put
both banks in jeopardy.
The terms of the
subsequent bailout agreement were draconian. The Bank of Cyprus was to be
re-structured. The Laiki Bank was to be closed. Supporting funds were to be
seized from all accounts over 100,000 Euros, suggesting a 40% “haircut” by
most estimates. For forex brokers, totaling some 80 in number on Cyprus, the
ones that combined operating and client funds in a single bank account were
immediately impacted. They had chosen to use bookkeeping reports as a form
of segregation, an unwise choice.
The reason why brokers
of all forms locate in the Caribbean or Cyprus is due to tax breaks given,
the flexibility of local laws, the willingness of the local governments to
work with them in return for jobs for their inhabitants, and, unfortunately,
for a regulatory environment that may be more easier to work with than in
larger countries, where regulators are determined to enforce compliance and
safety and soundness principles.
A good resource for
forex broker information can be found at Forextraders.com. If you would like
to read more on this topic, please
Is your broker
segregating your account balances with Tier-1 banks?
“USD/JPY” CURRENCY PAIR TREND ANALYSIS
down 38% as Housing Bubble bursts. Housing prices fall 90% in some cities
as consumers and businesses alike are underwater on mortgage debt. Bank
balance sheets balloon with toxic assets awaiting write-downs. Consumer
confidence is eroding. Sound familiar? But these are not our news
headlines from a few years back. These were the news headlines in Japan in
1990, some twenty years ago.
the model for super successful business strategies, was in full economic
breakdown. The stereotype of the “Salaryman” working five and a half days a
week for one company for a lifetime was in jeopardy. Newer generations
wanted no part of this work ethic, nor did they procreate enough to support
future social security and tax liabilities. The resulting recession lasted
fifteen years, ending in 2007 when the rest of the world found itself
hanging on a precipice similar to Japan’s 1990 version.
To many, the
“Great Recession” has replayed many of the same scenarios as in Japan some
twenty years back, but on a global basis this time around. Advanced
economies of developed nations have been mired in tepid recovery plans,
trying every monetary and fiscal trick in the playbook to turn their
respective economies around. As Japan sat on the sidelines, most analysts
expected the U.S economy to pull out of its ditch and speed past Japan.
However, the "USD JPY" (click
to view live chart) currency chart depicted below does not bear out
these sentiments for the past year:
actually peaked back in 2007 at 123 Yen, but has been on a decline ever
since the Lehman Brothers failure. For eighteen months from 2009 into early
2010, the Yen tested the “90” level, finally falling to new record lows and
forming the descending triangle illustrated in the above chart. The
anticipated breakout from that pattern materialized in November, but a new
channel quickly formed, only to witness another brief upward breakout as
shown. Enthusiasts of forex trading hat have gone long on the Yen have
profited handsomely from that strategy for the past several years. The
question now is where will this currency pair head next?
recovered from its prolonged recession without major structural reforms and
was only recently passed by
as the number two economy in the world. The country still imports
basically all of its energy and commodities. Japan’s land mass is smaller
than California, and only 15% of that is inhabitable, which must also be
shared with agriculture. Effeciency and effective use of all resources,
though emblimatic of the culture, are more a necessity than a way of like.
Although officials were slow to respond to the latest global recession,
Japanese businessmen have been quick to adopt Western ways. Personnel
budgets have been slashed at unprecedented rates, including summer bonuses.
Supply chains and distribution channels have been restructured. Corporate
Japan is leaner and meaner these days, and more than ready to face new
competitive challenges around the planet
Although most believe the strong Yen has bottomed, it is never wise to
underestimate the prowess of the Japanese to adjust to new economic
situations. The experience gained during their prolonged “balance sheet
recession” is immeasurable. The fact remains that the “79” level was never
tested during recent pricing behavior, and the market’s inability to gain
ground is worrisome. Sideways market action is too reminiscient of last
year’s long-playing record.
While the United States wallows in high unemployment and ever-increasing
budget deficits, one has to wonder why this pair would ever move north.
Another round of quantitative easing will not help either. Be cautious if
lows are tested again.
traders swear by it. In fact, many claim it to be the most important habit
that they have developed over time to ensure their success. What is deemed
to be a habit that you cannot do without? Backtesting is the consistent
reply by those in the know.
straightforward definition of the word from an Internet dictionary is as
is a process, usually performed with aid of computers, by which traders try
to estimate how financial instruments would have performed in the past had a
particular mechanical trading system been employed to trade them.”
commodity traders observed pricing patterns tied to the seasons centuries
ago, the art of technical analysis has evolved to a level of sophistication
that has produced thousands of signal indicators for the purpose of
prudently guiding a trader’s entry and exit in any market. Everyone,
including those involved in currency trading, seems or wants to believe that
there is a Holy Grail out there that will produce instant wealth, if only it
could be found.
behavior never moves in a straight line, but in zigzag patterns that
resemble waves. These waves, like all waves that occur in the natural
world, are produced by the ebb and flow of buying and selling forces in the
market, searching for a balance point. Technical analysts have studied
these waves and can predict with a high degree of probability the future
direction of such prices when certain conditions exist. The objective then
becomes finding the right “system” or combination of signal generators that
give accurate guidance more times than not.
obviously test out their theories using broker demo accounts and real time
trade data, but that process could take years to perfect. If going forward
takes too long, then going backward must be the answer. By testing a
“trading system” with historical data, a trader can fine tune his
parameters, measure his success rate, and prepare for a real time test using
real money. Sounds like a logical plan of attack, but does it work?
with, it would help if you had a programming background. The first task is
to assemble a database of historical forex trading data. This task is not
as easy as it sounds. The forex market is not centralized. Various data
reporting services “buy” their data from a variety of banking participants
in the interbank market. There are no reliable sources for accurate data.
The data you get is reflective of the point of access, nothing more, nothing
less, and variations are to be expected. In fact, there may be gaping holes
in the acquired data, and depending on the timeframe, you will have millions
of items to deal with, thereby requiring something a lot more sophisticated
than an Excel spreadsheet.
accept the historical data that their forex broker can provide, usually two
years worth, but only for a few trading pairs. The highest volume pair is
the “EUR/USD”, but traders tend to prefer the “GBP/USD” pair since there is
more volatility and opportunity for profitable trades. Assuming that you
get past the historical data requirement, there are three basic methods for
Yes, the old tried and true manual approach is one way to go. It does take
time, as you have to bring up the data elements one at a time, allow your
system to generate signals as you scroll through data, and then record your
results. It is time consuming, but you are building valuable trading
experience as you slog through the data;
The preferred method is to use software designed for the process. It
produces results as if you were in a real trading environment. The product
mentioned most in review articles is “Forextester”;
OK, if you are not a programmer, this is not an option. But if you are,
then you can design something that appeals to your personal needs. However,
the automation of trades does not always replicate how you might react in a
trading environment, so there are more variables to consider.
issue with backtesting is that the past is no guarantee of how the future
will unfold. For example, if you had chosen to use data over the May/June
period of this year, the European debt crisis would have skewed the test
data enormously and given mixed results for backtesting.
The fact is
that situations are always changing and shaping price behavior accordingly
in our markets. However, the general experience and confidence that can be
gained in a trading system by backtesting are benefits that most likely make
the process worthwhile. Confidence leads to consistency, the primary goal
in every trader’s plan of attack.
Read more on back testing at ForexTraders.com