Individual retail traders, most of whom trade in much smaller size compared to
those of banks, generally trade through forex brokers instead of directly accessing
the interbank market. This aspect of OTC shifts the odds of success against
individual traders, especially if the forex broker acts as a market maker. Since
traders have to deal directly with their brokers, the latter will usually hold the
opposite side of the transactions. If a trader is bullish on say, the USD/JPY, he or
she will go long by buying a specific quantity of USD/JPY from the market maker,
who will then effectively be short USD/JPY by selling to the trader. Because of the
inherent conflict of interest that exists, this arrangement does not sit well with many
individual traders as they fear that the market maker will trade against them, and
that is not an uncommon practice in the market making industry.
No information on volume
Since buy and sell transactions are not cleared by a central system, there is no way
of knowing the total volume of trade. Lack of volume data can pose a challenge to
stocks or futures traders who have made the switch to currencies as they may have
become used to checking volume.
No singular exchange rate at any one time
Exchange rates do differ from place to place, screen to screen, depending on which
parties are offering what. Cash transactions take place between countless parties at
any one time, and there is no exchange which records all these transactions.
For example, while the exchange rate of EUR/USD may show 1.2500/1.2503 on
Broker X, the EUR/USD exchange rate on Broker Y may be 1.2505/1.2508 at the
same time. There isn’t a universal absolute exchange rate of any currency pair at
any given time.
Some independent traders are not even aware of this peculiar aspect of OTC
dealings. Since there can be a few different prices for a currency pair at any one
time, you may not be able to see what is the best available price if you trade through
only one market maker. Generally, though, the rates provided by market makers to
retail traders are quite close to the pricing quoted in the interbank market.
Varying spreads
Spreads on currency pairs vary from broker to broker, with some market makers
setting fixed spreads, while ECNs will have varying (usually tighter) spreads in
each currency pair, depending on market liquidity. Spreads and/or commissions
should preferably be calculated in advance before each trade so that you can decide
where your breakeven price will be after taking into account all these
business costs.
No standard data
Exchange rates differ from one market maker to another because there is no
consensus specified by a centralised market. Different market makers have
different rates at the same time although usually not differing by more than a few
pips. A trader would have to accept what is being quoted by his broker unless he
compares prices with other brokers. Price charts from different price feed vendors
will also look slightly different as they each have their own data source. Although,
in general, the currency prices are quite similar.
The forex trading day
Also, being a 24-hour market, boundaries of a trading day are blurred. Traders from
around the world are in various time zones. Traders from, say, Singapore would
display a different timing from their US counterparts – who tend to display EST
(Eastern Standard Timing) on their price charts. As a result, many traders display
GMT (Greenwich Mean Time) on their charts, so that a trading “day” commences
and ends according to GMT.
Source: 7 Winning Strategies for Trading Forex: Real and Actionable Techniques for Profiting from the Currency Markets
