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Traders checklist: Will your FX platform give you that edge?

By Heather McLean

Before potential customers evaluate an FX platform, they should first evaluate the providing broker themselves, claims Farooq Muzammal, head of foreign exchange and bullion at MAREX Financial. He states: "Success in this area relies on ensuring you have done comprehensive due diligence on your broker, ensured that you have evaluated your own trading style, and found a broker where you have safety of funds and a good stable platform to execute."

Go for broker

In terms of today's regulatory environment, Hayel Abu-Hamdan, head of business development for North America and Asia-Pacific at MIG Investments, comments that the length of time the broker has been around is important. "As some trading platforms are now relatively cheap, there are forex brokers popping up everywhere. The market is transparent these days so the bad ones are soon found out."

He adds: "Counterparty risk is a big thing in the institutional world but it is far more critical in the professional trader arena. Customers may have great tools to make money with a broker, but they ought to be asking the question as to whether their brokers is going to be around to pay them their profits back. We have seen regulators stepping into the FX field in various countries, but the danger is that some professional customers will be driven to unscrupulous offshore brokers where customers are not offered any protection."

Hayel Abu-Hamdan

"Customers may have great tools to make money with a broker, but they ought to be asking the question as to whether their brokers is going to be around to pay them their profits back."

Muzammal says questions a customer should ask are: Is the broker regulated, ideally by the FSA or NFA?; where is the broker domiciled?; how transparent is the regulation there, can the end customer do his own due diligence?; are client funds insured against fraud?; are the front office staff regulated?; how strong is the balance sheet of the broker?; and can the customer do ongoing due diligence easily?

For many retail FX traders, finding a platform that ticks all of the boxes can take a while, especially considering many of the latest technological advances that have changed the market place in recent years. Owen Ireland, a member of the forex sales desk at ODL Securities, says ODL Securities has recognised that the present day trader has become extremely sophisticated, having many different requirements. Therefore adopting a one size fits all approach simply will not do.

Structure your market

Ireland explains: "So, once you have decided on a list of brokers, you need to decide what type of service you actually need, which will largely depend on your style of trading. For example, if you are relatively new to the game you may wish to use a retail FX account where spreads are usually fixed and you can trade in smaller trading sizes such as mini lots. The benefit here is that you will be able to keep the risks relatively low by trading in smaller sizes and then move up once you feel comfortable.

Owen Ireland

"Once you have decided on a list of brokers, you need to decide what type of service you actually need, which will largely depend on your style of trading."

"Alternatively, if you are a sophisticated trader and are using automated trading systems, then you will probably need an ECN broker who can give you access to the interbank market and will normally give better price execution when dealing at larger sizes. At ODL we offer all of the above across a number of different platforms which allows us to cater for clients of all shapes and sizes," explains Ireland.

Advanced Markets believes it is vital to separate the process of choosing a platform into two steps. The first step is to select the best market structure to use, says Anthony Brocco, the firm's CEO. "This process is analogous to buying a car. Most retail car buyers focus on colour, size as well as their preferred bells and whistles. In contrast, professional racing teams focus on performance, with the engine by far the primary consideration. We see liquidity access as the engine underlying a platform, and believe this component has the most impact on trading performance," he notes.

In terms of market structures available to individual traders and smaller fund managers, the options are dealer models, ECNs and direct market access (DMA), also known straight through processing, states Brocco. He adds: "A few years back, dealers were the only choice and there are still many out there. Dealer firms often support a wide array of products, but many traders have reservations about trading on pricing supplied by a single firm, which in many cases operate dealing desks. This issue has particular relevance in FX, where there's no centralised price discovery available to benchmark prices. However, for market participants that want to trade CFDs and a range of products, and have access to multiple FX price feeds, the dealer model is viable although it should be looked at closely on a dealer by dealer basis."

He says ECNs alleviated several of the transparency and price neutrality issues of the dealer model, so if market participants are looking to trade using a high frequency black box model, they may be the way to go. However, high frequency trading activity, which accounts for nearly half of volumes on ECNs, has had the unintended consequence of pushing bank market makers to widen prices they show via ECNs with the result that bid-offer spreads are not as robust as those available elsewhere, explains Brocco. "Therefore, if you are a position trader, a news trader, or generally anything but a high frequency market participant, the ECN model might not be the best fit."

He continues: "A relatively recent evolution in FX market structures is DMA. DMA provides the transparency, centralised pricing, market depth and anonymity that drew traders to ECNs, but in an environment that incentivises banks to provide tight deeply liquid markets on a continuous basis. We think DMA holds powerful advantages for traders who are keen to trade on a centralised, neutral pricing, and on tight bid-offer spreads.

"Our DMA structure is a low latency, streamlined smart order router to the bank or banks showing the best price for the desired quantity," states Brocco. "It's important when looking at DMA to find out if the broker operates a dealing desk, which in effect makes their offering a hybrid dealer-DMA model and can compromise the DMA model's advantages."

Anthony Brocco

"The more analysis a trader can do into the market structure and liquidity source underlying a trading platform, the better the trader will be able to understand its behaviour under various market conditions, which will result in better trading performance."

Brocco says in Advanced Markets' experience, and that of its more experienced clients, the market structure selection is much more significant than the trading platform choice. In fact, like many firms, it offers a choice of front end platforms as well as API access to clients, so they can use their preferred interface to trade on Advance Markets' DMA model. "Unlike the equities markets, where market structures are defined, FX market structures can vary greatly firm by firm. The more analysis a trader can do into the market structure and liquidity source underlying a trading platform, the better the trader will be able to understand its behaviour under various market conditions, which will result in better trading performance," continues Brocco.

Platform checklist

Before choosing a trading platform, Abu-Hamdan would recommend traders try out several platforms by downloading demo accounts from various FDM's. He says testing different trading software allows the user to determine which is easiest to navigate and use, and which platform has the most useful key features and functionalities that are most suitable to their style of trading.

As a rule of thumb, Abu-Hamdan would suggest the following check list for the platform itself:

• Reliability of price feed, as if the price feed is unreliable then the user may be re-quoted, and limit and stop orders would be missed or filled with extreme slippage;
• Uptime of platform;
• What spreads are offered, as the wider the spreads, the less likely the user is to make a profit;
• Level of customer service and knowledge of customer service agents with regards to features and functionality of platform;
• Use of a charting package;
• Use of a reliable news feed, as it is always good to know what is happening in the markets before entering a trade;
• What are the overnight SWAP rates, as high charges can wipe out profits and equity very quickly; speed of execution;
• Margin requirements, as he would not recommend using more than 20:1 leverage.

Muzammal agrees offered margin is important: "The higher the gearing, the more likely you are to be stopped out of your position. You have to consider, are you really going to trade on 400:1 or is 20:1 sufficient enough for your trading style?"

Other additional areas Muzammal states are vital to consider include: is it transparent at which point you will be closed out of your positions by the broker?; is the spread fixed or variable?; are there any charges, or is it just the spread?; are orders manually or automatically executed?; what is the maximum trade size before you have to request a quote?; does the platform provide various order types such as OCO, IF done, Stops, Limits, and Trailing Stops?; does the platform offer algorithmic orders?; and how many different currency pairs can you trade?

Additionally, Abu-Hamdan adds: "Is the platform sufficiently future proofed to cater for continuing innovation and development in online FX? As many FDM's are offering the same or similar platforms, they are looking to differentiate through added value that their platforms can offer. If your broker is using an off the shelf platform with no plans to offer another with innovative functions and features, they will not be around for long as traders are demanding more from their brokers."

Robust and stable

With the NFA in the US cracking the whip and many firms already forced to close, Muzammal says there is a newly defined platform checklist that should be at the forefront of traders' minds. His thinking list consists of: a consideration of the platforms key features and functionality and how it relates to the individual's own trading style; whether it is scalable and can support trading of new instruments; whether it is easy to navigate and use; whether it offers a wide range of value added services such as training and support; and whether the platform is robust and fault tolerant, particularly during fast market conditions.

Robustness and stability are two major points in the technology choice process, says Muzammal. "A professional trader tends to trade on fast markets and wants a technology allowing him to do so. In this respect, a professional trader will not tolerate what an institutional trader will. Professional traders tend to refuse slippage or rejected orders. A professional trader will always tend to go for a platform offering a user friendly environment combined with an attractive look and feel. The reporting is an extremely important point, it has to be as clear as possible and as real time as possible."

Farooq Muzammal

"A professional trader tends to trade on fast markets and wants a technology allowing him to do so. In this respect, a professional trader will not tolerate what an institutional trader will."

David Stuart, chief operating officer at Alpari (UK), agrees that overall, the two most important issues with any trading platform are reliability and functionality. "Any trading platform must be exceptionally reliable and stable to make sure the user has full control over their exposure," explains Stuart. "Functionality is also important, with navigation, a wide variety of order types, analysis tools and news feeds being just a few examples of things that can provide the user an edge in the market. Any function that adds flexibility is beneficial because being able to adapt to changing market conditions is important."

Added extras

The additional tools available on most platforms are relatively similar from broker to broker, says Ireland, with charting, news feeds and mobile dealing a must these days, and most platforms providing these basic requirements. He adds: "I think clients need to focus much closer on the performance of a broker's platform, such as, does the platform freeze whenever economic information comes out, and does the broker provide sufficient technical support? One thing that does help is having multilingual support; there is nothing worse than starting to trade with a broker that cannot help you in your mother tongue."

Ireland states one area his company has seen huge interest in is the use of automated trading programmes. "Our clients use these systems to automatically trade 24 hours a day according to a predetermined set of trading rules," explains Ireland. "For example, the most popular types used by ODL customers are expert advisors (EA) which are available on MetaTrader 4, that allow the user to programme a set of trading rules into the platform that will execute trades whenever the currency price has moved through a particular trigger point."

Yet the value of added extras are up to the individual, says Abu-Hamdan. He comments: "Our software provides an optimal range of features for the serious trader with all the bell and whistles, or a scaled down version with the essentials. If you are a trader who uses expert advisors for instance, then research would not present a value proposition.

"Regarding research, it is not just about the research, but more about the background of the person who has written it," he continues. "With so much information available today and equally questionable sources, reputation and a proven track record are key to finding your ideal source for research. In the interest of best practice, I would always recommend finding out the profile of the analyst who has written the research before taking in what has been said. Research is simply an analyst's opinion of where they believe a market has the highest probability of going according to their methodology. They do not have a crystal ball. I would therefore suggest reading various research and making one's own mind up about what analysts to follow depending on which one most suits one's style of trading."

Stuart is in agreement that the importance of specific tools and services offered by platforms such as research, support for mobile trading and more, depend on the individual trader. He explains: "It all depends on the trader and the strategy being used at any particular time. Some traders like to be able to access their trading accounts via portable devices such as mobiles and laptops, whereas others prefer to disconnect from constant monitoring of the market as this can often lead to self doubt and uncertainty in your own positions. A broker offering mobile services is certainly beneficial although it shouldn't be a deciding factor.

"In terms of research, staying informed and aware of market events is pivotal," adds Stuart. "Even if your own opinion is different from the information you are receiving, being able to gauge the opinion of other market participants is valuable because it can help you make better trading decisions yourself. Traders should have access to a variety of research tools at any one time including third party material which ensures complete impartiality."

Strategy, style, success

Traders must ensure that the platform they finally choose provides what they need to support their trading strategy and style, states Brocco. "We work with our clients to provide the right mix of tools. Some services, such as technical analysis charting packages, can be accessed independently of a trading platform, enabling a trader to optimally mix and match his favourite tools with his desired trading platform."

An area often ignored but that is the most important to trading is risk management, warns Stuart. Any trader, regardless of the level of experience, must have a strong understanding of what is required from a money management perspective, he says. "Many aspects of trading are important, but simple, strict risk management can make a bad trader into an average one and an average trader into an excellent one."

One crucial dimension to risk management is emotion, states Stuart. This area is one of the hardest to negotiate, he claims: "Successful traders are able to extract emotion out of their daily routines, regardless of how successful they are on that particular day. Emotion can be a trader's worst enemy because it can induce bad trading decisions leading to severe losses. The trading tools on our platform can help make more informed and responsible trading decisions."

David Stuart

"Many aspects of trading are important, but simple, strict risk management can make a bad trader into an average one and an average trader into an excellent one."

Abu-Hamdan's tip for success in this area is also focused on the user defining their own style of trading, and working out from that point. He explains: "The first step is to determine your style of trading and what tools would add value to it. There is no point choosing a feature rich platform, if none of these added tools add any value to you. A platform is only as good as the service that supports it. Choose a reputable broker with a history, which offers a platform that, is robust and a price feed that is reliable that is always looking to differentiate themselves from the field with new innovative features or services that add value and security. Educational support and research are also useful if you are starting out in forex or any other financial instrument or asset class."

Also, Brocco states: "The most important key to successful trading is rigorously analysing your trading strategies and tactics, staying disciplined in your chosen approach, being smart about risk management and leverage as well as keeping aware of innovative tools and structures that provide better market information, liquidity access and trade execution performance."

Trading volatile markets can be very rewarding, but as ever, when the rewards go up so do the risks, states Ireland. At the end of the day, the person controlling the technology, starting with the choice of platform, has the ability to make their trading career work or fail. "Ultimately, I believe that most successful traders make money not because they get every trade right, but because they are not afraid to admit when they have made a mistake," Ireland claims. "Rather than running a huge loss on a bad trade, they will often cut a failing trade early, usually using a stop loss order.

"One of the biggest reasons people lose money when trading is the effect their own emotions have on their trading decision; nobody ever likes losing money so it is important to use a strict trading strategy and stick to your rules," concludes Ireland.