Price shading is a strategy used by forex brokers to try and gain an advantage over traders when they feel that a particular currency is showing an increasing trend. In such examples, a broker may opt to add a ‘pip’ to the real market price in an attempt to increase their profit margin.
But whilst brokers use shading as a tactic to increase their profit margins, price shading can in some cases be beneficial for traders, allowing those who are selling a currency to benefit by trading at a better price.
How does Price Shading Work?
When looking at how price shading works, it is important to understand the role of the forex broker.
Forex trading is essentially an inter-bank market. Banks trade currencies against other financial institutions and the rates at which trades are completed between these banks are the prices that you see listed on financial news websites such as Bloomberg, Reuters and the BBC.
Brokers act as an intermediary or “middle man”. With the majority of traders, particularly in retail market, not having trading accounts with the various banking institutions, the job of the broker is to effectively complete the transaction on the trader’s behalf. For acting as this go-between, the broker obviously places a mark-up on the price that he trades with the bank and the price that he trades with you.
For example, if a broker receives a price of 78 – 79 on 45 when trading the euro, it means that their bank will sell them €1 for $1.4579 or buy it from them for $1.4578. However, the broker will add a margin of around three-points when he trades with a retail customer, he would typically offer to sell it for $1.4580 or to buy it for $1.4577.
However, with shading, the broker can use trending data to attempt to determine whether or not a currency is likely to keep attracting a disproportionate number of either buyers or sellers. If a currency is, for example, proving to be particularly desirable and attracting a large number of purchasers, then the broker may attempt to increase his profit margin by adding an additional pip to that currency’s buy price.
Why do brokers price shade?
Quite simply, brokers price shade in an effort to cash in on market trends. If there is a particularly strong demand for a particular currency, the broker can usually get away with adding a pip to his price and increase his profit margin.
How can I make it work?
Price shading doesn’t always work in the broker’s favour however and, by going against the trend, that extra pip can work to your advantage.
Brokers shade because they know that the majority of retail customer traders are usually wrong, meaning that they can bias their pricing strategy towards either buyers or sellers. If there is a large demand for buying a currency, this creates an order flow imbalance and the broker will up their price to suit. Because the majority of retail traders are usually wrong, there may be an opportunity to trade against the bias. This would mean selling, if the bias is on the buy side, or by buying if the bias is on the sell side. By going against the bias you would also be going against the majority of the other retail traders. If they are mostly wrong, you, in theory, will be mostly right.
In addition, because the broker has moved the spread to disadvantage the majority of traders, your broker will have created an advantage for traders who want to go against the trade. If the shade is on the buy side, you will make greater profits by selling.
Source: Worldforextrader.com
But whilst brokers use shading as a tactic to increase their profit margins, price shading can in some cases be beneficial for traders, allowing those who are selling a currency to benefit by trading at a better price.
How does Price Shading Work?
When looking at how price shading works, it is important to understand the role of the forex broker.
Forex trading is essentially an inter-bank market. Banks trade currencies against other financial institutions and the rates at which trades are completed between these banks are the prices that you see listed on financial news websites such as Bloomberg, Reuters and the BBC.
Brokers act as an intermediary or “middle man”. With the majority of traders, particularly in retail market, not having trading accounts with the various banking institutions, the job of the broker is to effectively complete the transaction on the trader’s behalf. For acting as this go-between, the broker obviously places a mark-up on the price that he trades with the bank and the price that he trades with you.
For example, if a broker receives a price of 78 – 79 on 45 when trading the euro, it means that their bank will sell them €1 for $1.4579 or buy it from them for $1.4578. However, the broker will add a margin of around three-points when he trades with a retail customer, he would typically offer to sell it for $1.4580 or to buy it for $1.4577.
However, with shading, the broker can use trending data to attempt to determine whether or not a currency is likely to keep attracting a disproportionate number of either buyers or sellers. If a currency is, for example, proving to be particularly desirable and attracting a large number of purchasers, then the broker may attempt to increase his profit margin by adding an additional pip to that currency’s buy price.
Why do brokers price shade?
Quite simply, brokers price shade in an effort to cash in on market trends. If there is a particularly strong demand for a particular currency, the broker can usually get away with adding a pip to his price and increase his profit margin.
How can I make it work?
Price shading doesn’t always work in the broker’s favour however and, by going against the trend, that extra pip can work to your advantage.
Brokers shade because they know that the majority of retail customer traders are usually wrong, meaning that they can bias their pricing strategy towards either buyers or sellers. If there is a large demand for buying a currency, this creates an order flow imbalance and the broker will up their price to suit. Because the majority of retail traders are usually wrong, there may be an opportunity to trade against the bias. This would mean selling, if the bias is on the buy side, or by buying if the bias is on the sell side. By going against the bias you would also be going against the majority of the other retail traders. If they are mostly wrong, you, in theory, will be mostly right.
In addition, because the broker has moved the spread to disadvantage the majority of traders, your broker will have created an advantage for traders who want to go against the trade. If the shade is on the buy side, you will make greater profits by selling.
Source: Worldforextrader.com
0 comments:
Post a Comment
No SPAM Please.. Thanks :)