Most traders aspire to turn their few thousand dollars into a million or so. Armed with compounding spreadsheets, perhaps a Blackbox EA robot and an optimistic smile we sail to the millionaire’s club. However, since most retail level traders don’t actually understand how the interbank market structure or the procedure broker’s use to fill their orders, they often don’t understand why that dream will unlikely to come true.
Is it Hard to Trade with Large Forex Account?
The Forex market works the same way your local stock exchange or street market! Someone has to buy your shorts and someone has to cover sell you before your long orders gets filled. Foreign exchange market has the most liquidity compared to any other international market. However, most liquidity is focused on few major pairs. Try putting an order with 50 standard lots to trade a super exotic pair like USD vs. Polish Zloty, or USDPLN. You will probably end up moving the market price few pips!
Because by the time your broker will unload your order to buyers (or sellers, depending on you bought or sold) around the world, price will have to go down (or up). The reason should be covered in your Economics 101. The price is just equilibrium of supply and demand. When you increase supply the price goes down (when you short) and when you increase demand (when you buy or go long) then price will go up. Since market liquidity is low on exotic pairs, there aren’t many buyers or sellers with large enough liquidity to cover your order. Hence, you create the excess demand or supply in the marketplace when you place big enough orders. This is true in every capitalist, open market. However, because the highly efficient nature of Forex market as it is traded electronically, your orders instantly changes price.
Now, let us get back to why your dream of turning few thousand dollars into a billion will probably not happen, AKA why it is difficult to make good return on investment with large amount of money in Forex. When you are going to trade a big account, even trading the EURUSD will be difficult because your orders will create huge demand and supply swings in the market. By the time your orders will get filled, market price would have moved up or down enough that there is no point entering the market at all! That’s why Forex traders often use teams of traders who will use verity of advanced methods to break down large orders and try to trade smaller “chunks.” If you have been trading with an ECN broker who lets you see Level II data, you might have noticed that you can actually see where and what price other traders are willing to trade how many lots and so on. Imagine someone watching your orders on Level II or even at the liquidity provider’s end to “ride” on your large order and get out before market has absorbed it.
Once you start trade with large accounts or trade for big banks who unload millions of dollars of international trade financing (someone has to exchange dollar to Yuan for those ship full of rice or iPods!) it becomes more like a game of cat and mouse.
Your precious little custom indicators and “system” will simply fail to make a dime of profit if you trade big enough because your orders will start to move the market itself. And that is why most retail level traders will not be able to keep making enough profit to multiply their accounts as it will get lot harder to yield any profit with large enough accounts.
However, the sums we are discussing here are so large that 99% of retail traders shouldn’t even bother about the consequence described here. Because most brokers will be able to accommodate your accounts up to 50 million USD. Unless you are Warren Buffett himself and reading this, you shouldn’t worry at all. Keep trading and if your broker is having trouble executing your “large enough” orders, well cheers, you have made it to the millionaire’s club anyway!