Monday, March 8, 2010

Why automated trading is a broker's dream come true

During my research on automated trading I noticed that more and more online brokers (Forex brokers in particular) encourage automated trading or offer it as an option in their trading platform. Providing the clients with different trading plug-ins for their system in the software of their choice. Many of them touting to have found a near 'holy grail' solution that will make you consistent returns. It always sounded very tempting and I often wondered how that worked so I tried it out with a demo account, of course not putting my real money on the line before I completely understood the concept.
The fact is that most brokers make money on the amount of trades you make (called the spread, the difference between the bid and ask price). I often trade the EUR/USD pair, that has a 2.o spread (high I know, but I have my reasons :) So that means for example right now I can buy (ask) 1.3629[9] or bid (sell) 1.2627[9], the difference being 2.o pips. If I buy or sell, automatically I'm out 2 pips no matter where the markets are heading, that money is the broker's fee. Whether my trade is profitable or not. So the more trades I put in, the more money the broker will make. So in a sideways market (when the market isn't very volatile and is looking for direction, meaning the price change is only a little bit over the course of a time frame you want to trade in), you will pay more in brokerage fees then you will actually make! ( I wrote an article about automated trading and how you can actually use it towards your advantage here.) Be very careful about automated trading and keep in mind that this is likely only profitable for your broker if you let it run its course.

Disclaimer:

All opinions expressed, trade recommendations/advice on this website are solely of John van der Munnik and are not affiliated with any investment firm or any other organization. You should not make an investment only based using this website VDM Trading for your trading needs without seeking help from your own financial advisor.