As with many other issues in the forex market, the selection of your forex trading charts requires far more care, thought and consideration than would appear to be the case at first glance – after all, one chart is much the same as another, isn’t it? Sadly this is not the case, and most forex traders simply use those provided by their broker, mainly because they are easy to use, require no thought, and are generally free. Many traders never, ever, question whether these are the best solution, or indeed what lies behind the numbers being quoted by your fx broker, or even if there are alternatives available which may provide a different perspective on the current price action. In the world of forex trading this is a big mistake. Whilst superficially one chart looks much the same as another, beneath this veneer of simplicity lies a complex web of price feeds and market players, all of whom have differing agendas. Whilst the currency market may be very efficient at providing you with a price, whether that price is an accurate reflection of the underlying market action or indeed the true value of the currency, is a very different matter, but one which many traders never question, or even consider.
The biggest problem when applying technical analysis to the forex markets is that of price data, both in terms of live prices as well as historical. As we all know, the forex market is a decentralised one, with no central exchange to bring buyers and sellers to the market in an orderly and managed way, and is often described as an OTC market, or over the counter. The instruments and products traded are not standardized as in the futures market for example, and therefore cannot be openly traded, and so with no central exchange, market participants simply trade directly with one another, behind a veil of secrecy. Since forex transactions are not made public, the resulting currency exchange rates and trading volumes are not available to the retail trader, whilst in the meantime the banks and brokers like 4XFX deliver transactional information to data providers, who in turn then aggregate these prices into a data feeds. By the time the currency price hits your forex trading chart, it has been ‘managed’ through several intermediary banks, brokers and data providers before arriving on your desktop platform. Although data providers source their information from many different places, price gaps and divergences are common and are also immediately apparent when comparing different feeds. This is particularly noticeable when we compare the aggregated feeds of several banks with the feed from a single broker. In addition of course, these same banks are slicing into the spreads quoted, and although the pip margins may be wafer thin, with the transactional volumes being generated each day, the resulting profits are huge.
To put all this into perspective, the interbank market which sits at the heart of the forex market, is dominated by just ten large banks, who between them are responsible for over 80% of the trading volumes each day. In summary these are as follows, of which Deutsche Bank is by far the largest:
Deutsche Bank – 20%
UBS – 13%
Citigroup – 11%
Barclays Capital – 7%
RBS – 6%
Goldman Sachs – 6%
HSBC – 5%
Bank of America – 4%
JP Morgan Chase – 4%
Merrill Lynch – 4%
With the market dominated by such a small handful of players, and with very little freely available information, currency prices are manipulated in a variety of ways, both by those involved in the markets, and those with a vested interest, such as governments and government agencies. At the end of the food chain sits the poor retail forex trader, largely oblivious to manipulation of prices and data, unaware of the profits being made, and concentrating on one chart provided by his or her broker! So how do we improve this, and trade on a more level playing field?
Firstly we need to recognize that there is a problem with our forex trading charts if we are simply using those provided by our forex broker. For us professional forex traders this simply will not do, and if you need to prove this for yourself, then start to research other data providers, and begin to compare how the spreads move during particular trading times. Generally, when the time frame being traded is short, and coupled with increased market volatility, then you will see increasing discrepancies between the various currency rates being quoted on the various feeds, so for short term scalpers and intra day traders, this is an essential area to consider, both for your analysis and also for your trading. As a general rule, the greater the number of banks contributing to a particular data feed, then the more accurate will be the currency spreads quoted, and a truer reflection of market conditions. In addition, this variation in spreads can also distort your charts, leading to incorrect trading decisions based on flawed technical analysis. In addition, if you are trading in the Asian hours, then make sure that your data feed has banks based in the region providing up to date prices, so that your forex trading charts are accurate and again reflect true market conditions. This also applies to cross rates and more exotic pairs, where once again your forex trading charts and data feed will be critical to your success, as these pairs are often less liquid.
In summary, for longer term forex trading, many of the discrepancies between data feeds and forex charts are less pronounced, but for short term forex traders you should consider finding feeds that include inter bank market price discovery, and definitely not use your brokers charts for any trading analysis. Having a second or third data feed provides you with the opportunity to really see what is happening, and provides a way of confirming the ongoing price action, with your forex platform feed only used for placing trades. Most of us, myself included do not have the luxury of trading using an EBS feed or a Reuters feed, as these are too expensive for the average forex trader, but the best option if you can afford them. They generally run to around several hundred dollars a month, so not cheap, but if you are a big size trader on short term timescales then this may be an appropriate investment. For us mere mortals there are plenty of other forex trading charts available and I would urge you to spend time comparing them, and make sure you establish the provenance of the price feed. Finally always look for an independent provider, and if you have to pay for your forex charts so much the better – these should provide you with much greater price transparency and better trading decisions as a result, and will more than offset the relatively small cost in the longer term. Many forex traders refuse to even consider paying for their data – a huge mistake in my view and one which will prevent you becoming a top forex trader. So spend time researching the market, and spend some money on an independent charting package – it will reward you in the longer term.