Zulutrade - Food Chain

Greetings Zulu-Traders-

I said in my first post that Zulutrade is a fascinating on-line economy. Every economy has it winners, losers and more to the point, its food-chain. Its important to understand where you fit into the food chain to surmise your odds of making a profit.

At the top of the Zulutrade food chain in the Foreign Currency Merchants (FCM) themselves. Tops among FCM's is FXCM - by size many times larger than all the other FCM's combined. Their resources, tools, and staff are unmatched in the retail FX market.

The FCM is compensated for making a market in the currency by the spread - or the difference between the rate at which you buy and sell. FXCM originally started with a fixed-spread going down the 1/100'th of a cent per currency. For example for EUR/USD, they would sell to you at 1.2745 and buy from you at 1.2748 or a 3-pip spread or 0.03 of one cent.

After some pressure from the competition, FXCM went to a 5th decimal place and the spread started to look more like 1.36117 by 1.36153. But while they added a decimal place, they also introduced the "dynamic spread." Instead of the spread being a fixed amount, they changed it to a dynamic spread that could be widened when activity was slow and narrowed when activity and competition was more acute. I haven't studied the spread and its variance because it doesn't play heavily into my figuring as to how I can profit from FX. Even so, its good to be aware of the spread and it's always implied as the cost of doing business in FX.

While the FCM can sometimes be your enemy in the FX market, for the small trader like myself they are a benevolent dictator. They are available 24x5 to execute a position electronically. While the market is open, the will honor stops on your positions, even if the market gaps through your price. For example, if you are long EUR/USD at 1.3550 with a stop at 1.3420, and news comes out and the market gaps down to 1.33, they will honor your stop at 1.3420. Try to find that type of treatment in stocks, options or futures! Forget about it, doesn't exist!

The FCM works against you in slow markets when using tight stops. Let's say you see a quiet, low volume and downtrend in EUR/USD and you short at 1.3550 with a stop at 1.3570. Even though there's little activity, and not much going on, it's typical to see a quick (one tick) gap up to 1.3570 to take out the stop followed by a quick return to the downtrend. Bottom line - don't use tight stops especially during slow times, because the FCM will pick you off.

Next in the Zulutrade food-chain is Zulutrade themselves. They are the true pioneers in FX-autotrading and I owe my ongoing interest in FX and this blog to them. Zulutrade takes a part of the spread normally taken by the FCM. In other words, instead of the FCM taking 3.5 pips per trade, FCM gives 1.5 pips to Zulutrade for acting in the capacity of a "referring broker." Zulutrade's cut is the 1.5 pips per trade, and they profit whether the signal provider makes money or not.

Next on the Zulutrade food chain are the Signal Providers. They are the worker-bees the Zulutrade system and they take 1/2 pip per lot or 50 cents per mini-lot or $4 per full-size lot. I suspect a small set of Signal Providers make most of the money on Zulutrade. Their goal is to entice as many Zulutrade users as possible to follow their signals. They make money per-transaction (as opposed to profit earned) so they have incentive to make many trades and show the maximum profit when reviewing their trade history.

Unfortunately, signal providers often stick with losing positions for days, weeks, or even months. Classic example, is provider Auto-fx who has an incredible ROI, and an incredibly high profitable trades (87%). He will put on a trade, and then just wait, days, weeks or months for it to become profitable. Looks good on paper, but its a lousy system in reality. A classic rookie mistake is to review a provider's Zulutrade history, be enticed by their performance, then be unpleasantly surprised by a 300 pip gap down - usually first thing in the morning.

Next on the Zulutrade food chain are the affiliates. These are people who have signed up to promote Zulutrade to their contacts, friends and family. I signed up to be a Zulutrade affiliate and as a result, I would get 0.4 pips (about 40 cents US) per transaction for people I signed up. Not a bad deal overall considering the entry costs are nil. Just sign up as an affiliate and ZT will give you a web site like mine at http://zulumon.zulutrade.com/. It's a great concept in multi-level marketing. But if you can't make money from Zulutrade yourself, referring your friends and family is a sure way to sour relations with your friends and family. As Suze Orman says, People first, then Things, then Money.

Finally on the bottom of the Zulutrade food chain is you the Zulutrade auto-trader. Money from your trades pays everyone else up the food chain - whether you make money or not.

I don't deny that Zulutrade auto-traders have made money However, I haven't found anyone who has actually made money using Zulutrade so I suspect they are scarce. Don't get me wrong, I like Zulutrade and wish them success. Perhaps I have a future as a Zulutrade signal provider - up 2 levels in the food chain from my current spot as a (defunct) Zulutrade investor!

Go slow and be careful!