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BluFX Trading Parameters Explained

Posted by BluFX on 12-Apr-2018 16:16:16

 

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All about the unique BluFX leverage of 3 - 1 

3 -1 leverage instead of 1000 - 1 leverage - how can that be any good?

Surely the broker offering 1000 - 1 is doing you a favour because you only have a few hundred pounds to launch your trading career?

Simple answer is hit and miss ... trading on 100 - 1 leverage or anything even remotely like it is akin to a novice tennis player taking on Roger Federer with a badminton racket. Even the FCA stepped in to help retail traders by slashing leverage to a maximum of 50 - 1 for pros.

Trading on 50 - 1 leverage (or even down to half that) is more like a school boy driving a formula one racing car in a head to head with Lewis Hamilton, or said novice tennis player after a year of practice and a real racket taking on Roger Federer in a Wimbledon semi final! The leverage is far too high and allows no margin of safety, nor the placement of strategically positioned stop losses but those based solely on financial considerations. In short, trading on such leverage is more like gambling in a casino with no advantage. All it takes is a random price surge and you are done.

This is the single and most significant factor in why 95% of traders blow their accounts when trading with retail brokers. Its only a matter of time before any trader using 50 - 1 leverage empties the account unless nothing unexpected ever happens in the market. When the brokers offering this leverage are also the people taking the other side of the trades of almost every retail account less than $50,000 then the answer to the initial question above is obvious.

Although trading leverage will vary dependent upon stop loss placement and perhaps even the confidence a trader has in a given trading position, as a broad, “rule of thumb” many professional traders will typically operate much of the time on trading leverage in the vicinity of 3:1.

Professional traders will also have the $50,000 account that allows them to open an account with a regulated broker that is required to pass the trades on to market makers AKA liquidity providers such as the major banks.

Trading with $50,000 and at 3 - 1 leverage will seem grossly unattractive to the retail trader. Should we consider what a group of traders that are 95% likely to blow up are attracted to?

No need for an answer to that rhetorical question. At BluFX the parameters such as leverage are set at the level that achieves the following:

  • It allows the trader to withstand a series of relatively small and manageable trading losses, since collectively they do not have a material effect on the trader’s capital (as the professional trader knows that a series of losses can never be allowed to compromise his/her monthly trading performance)
  • It enables the trader to place his stop loss at a technically/strategically appropriate level that does not compromise his/her objective technical analysis of the market. In other words, the size of the trading position is made to “fit” the stop.
  • It allows BluFX to promote good traders and not lucky traders to the position of professional fund manager with no account restrictions or subscription fees.

 Calculating Margin Requirements with BluFX Accounts 

Margin requirements are never as simple as assuming that 1.5 standard lots can be traded with a 50k account just because 1 lot is $100,000 and the leverage available is 3x

Margin available and margin required are 2 different things because the total size position a trader can put on will depend on the currency pair and its ‘cost’ to trade. The ‘cost’ of a pair will depend on its volatility, the exchange rate of the currency and the risk the pair present to the broker. The risk to the broker is primarily customers losing more money than they have in their accounts. BluFX and its traders trade through STP (passes on the trades to the big banks)  broker and are therefore subject to the same risk and margin parameters as professional customers.

Or put simply, trading for BluFX at their broker requires a professional approach to calculating risk and lot size. Or put in another way, the retail brokers that offer fixed spreads, guaranteed fills and simplified and binary 'profit per pip' outcomes are not passing the trades to the real FX market. They are merely using the prices as a basis to allow you to place highly leveraged bets against themselves. You lose they gain, your trades are never exposed to the real FX market of liquidity providers, slippage, risk and variable spreads.

So how do FCA brokers that serve professional traders and require a minimum deposit of $50,000 work?

If a customer has 100k and the currency pair has an exchange rate of 1 and a margin requirement of 100K, then he will only be able to trade 1 lot which is $100,000. But only if the broker allows customers to commit 100% of the funds they have available – the available margin. If we discount the exchange rate factor, most brokers have a required margin amount of a percentage less than 100% of available margin, and this percentage can vary according to the pair and the prevailing conditions. If a broker has 80% threshold it means they will stop a trader when he still has 20% in his account to provide them with a buffer if the worst comes to the worst according to their risk expectation for that pair.

So they protect themselves with a buffer against the possibility of the customer losing over 100% of his margin and then having to chase the customer for more money. So they set their risk software to block trading unless available margin is above 100% of required margin, for example 120% or 110% or 130% according to their own risk models.

This  added available percentage over the required margin dictates the trigger to block the trade/order. This vital information can be found by right clicking the pair in the 'market watch' window and selecting 'specification' and looking at the 'margin percentage' variable. (Please note that the following examples are indicative and therefore will likely not reflect actual prevailing situation when you read this)

For example to trade 1 lot of USDCHF you would need to have available 3 times the margin requirement for 100,000 units.

-CHFCapture.png

To trade 1 lot of EURUSD you would need to have available 1.2 times the margin requirement for 100,000 units.

EURCapture.png

 This percentage varies for different brokers and different pairs but it is never  (exchange rate discounted) 100%. Therefore someone with a 50k balance should never be able to put on 150k position with 3x leverage in a pair with exchange rate of 1. They will be able to do this if the exchange rate between the pair is not 1.

 This is key to understanding why some orders are rejected and why we should never ever assume that a ‘standard lot’ of $100,000 or $80,000 is standard for margin for different pairs where the exchange rate is either below or above 1.

 Questions relating to margin etc are a topic that is complex and needs careful study and understanding for customers who want to be exact in their position sizing and money management strategies.  

 

Calculating Margin Requirements – A simple calculator  

Margin level (%) is calculated as follows: Equity / Margin X 100. 

Margin level gives us the available margin. Depending on the pair and the amount in the account a calculation then has to be made that considers; 

 Required Margin = Trade Size / Leverage * account currency exchange rate (if different from the base currency of the pair traded) 

 

 Allowed Pairs and Position Size Guide 

 BluFX Lite $25,000:  BluFX Islamic and Pro $50,000

The following are typical maximum open positions allowed on each subscription package. These limits will vary depending on your actual account balance , current exchange rates and the actual or perceived volatility used by the broker when setting margin requirements.

Simply put, the higher the standard deviation of the pair the more money the broker will want from your backer to allow you to trade with a liquidity provider. The reason for this is that, if prevailing conditions could bring about sudden moves such as the Swiss Franc revaluation in January 2015 then they want more buffer from the trader. As you trade with a liquidity provider, if  something suddenly happens causing huge swings the liquidity providers would simply widen the spread or not make prices. This would then mean huge losses for someone, and as the brokers found out in January 2015 it would be them if the trader (or his firm) simply cannot pay the huge loss from funds on deposit.

Therefore the following table is indicative of the limits during normal conditions as calculated from indicators such as ADR.

In theory if the broker uses ADR (average daily range indicator) then the plan is that as the money required to open the same position increases, so does the size of the moves and hence the bigger the daily range and the possible profits on each move. Thats the theory, however volatility can change faster than the brokers ability to change the parameters and so the professional trader must take responsibility for adjusting position size as volatility increases.

 

Product Table

Only the pairs listed below may be traded. 

 

Currency pair Typical position per account balance Typical dollars per pip
$25,000 $50,000 $25,000 $50,000
EURUSD 0.46 0.93 4.6 9.2
EURGBP 0.46 0.93 5.68 11.36
EURJPY 0.46 0.93 4.27 8.54
EURCAD 0.46 0.93 3.27 6.54
EURCHF 0.46 0.93 4.71 9.42
USDJPY 0.50 1.00 4.27 8.54
USDCAD 0.50 1.00 3.27 6.54
USDCHF 0.50 1.00 4.71 9.42
CHFJPY 0.49 0.98 4.27 8.54
CADCHF 0.70 1.41 4.27 8.54
CADJPY 0.70 1.41 4.27 8.54
GBPUSD 0.41 0.81 4.6 9.2
GBPJPY 0.41 0.81 4.27 8.54
GBPCAD 0.41 0.81 3.27 6.54
GBPCHF 0.41 0.81 4.71 9.42
XAUUSD 0.12 0.24 2.2 4.4
EURAUD 0.46 0.93 2.93 5.86
EURNZD 0.46 0.93 2.76 5.52
GBPAUD 0.41 0.81 2.93 5.86
GBPNZD 0.41 0.81 2.76 5.52
AUDUSD 0.78 1.57 4.6 9.2
AUDNZD 0.79 1.57 2.76 5.52
AUDCAD 0.79 1.57 3.27 6.54
AUDCHF 0.79 1.57 4.71 9.42
AUDJPY 0.79 1.57 4.27 8.54
NZDUSD 0.83 1.66 4.6 9.2
NZDJPY 0.83 1.66 4.27 8.54
NZDCHF 0.83 1.66 4.27 8.54
NZDCAD 0.83 1.66 4.17 8.34

Notes on Margins and Product table

  • The values shown are indicative and subject to regular small variations.
  • Pip values will change according to the exchange rate of the second paired currency vs USD as BluFX accounts are held in USD.
  • Margin requirements will periodically change inline with significant changes in market volatility and currency exchange rates.
  • Current margin requirements reflect ADR in normal conditions and are approximately 60% lower than the previous Covid -19  inspired high earlier in 2020

 Spread Dynamics 

MT4 spreads are based on aggregated leading institution price feeds. BluFX pooled volume results in tighter spreads than our broker offers to retail, this can be seen in the MT4 chart and execution window.

 Spreads on currency pairs available will vary and are generally tightest during liquid times and widest at times of high volatility or uncertainty. This variability begins with the institutions that provide liquidity and trade matching for BluFX traders. 

 MT4 works on 5 decimal places - EURUSD quote of 1.19813/1.19826, meaning a spread of 1.3 pips.

 Please be aware of the nature of variable spreads and do not complain about brokers if you trade when the market is very volatile and the spread widens. We do not want to hear it.

Standard Lot Sizes and Maximum Order Cap

1 lot volume = 100,000 of the first named currency 

 So trading 1 lot of EURUSD  is to trade €100,000 of USD.  

Some brokers cap individual limit orders for risk purposes. At BluFX the individual order size is capped at 0.5 lots. This is not a position limit. Multiple orders of the maximum 0.5 lot order can be placed simultaneously and are limited by margin. If margin available allows a position of 1.8 lots, then the position must be entered with 3 x 0.5 orders and 1 x 0.3 order.

Promoted traders (Stage 2 +) have no order cap restrictions.

 

Spread Costs & Calculations

Spread cost = (Spread X Position Size)/10,000* 

We can look at the market watch window to see the spread, for example EURUSD spread = 1.3 Position size = 1 lot (100,000 units) 

 Spread Cost for 1 lot = (1.3  x 100,000) / 10.000 = $13.00 

* 10,000 Factor = this is because the spread is measured on the 4th Decimal Point. This value always remains constant. 

 The spread cost is always calculated in the second name currency of the currency pair quoted. In the example above, the spread cost is quoted in USD. As the spread or position size varies, the spread cost will vary. 

 

Swap Rate and Fee Calculations  

The swap fee is charged for carrying a position overnight. A forex swap is the difference in interest rates between the two currencies of the traded pair. The calculation will depend on whether the position is long or short. 

 We can find the swap rate for long and short positions by right clicking the pair in market Watch window and selecting ‘Specifications’ 

 The calculation is then as follows; 

 Swap = (Pip Value * Swap Rate * Number of Nights) / 10 

 For example to carry 1 lot of EUR/USD (long)  

  • 1 lot = 100,000 
  • Pip Value = $10 
  • Swap Rate = 0.64 
  • Number of Nights = 1 

Swap fee = (10 * 0.64 * 1) / 10 = $0.64 

 

 Risk and Trader Guidelines 

 All traders are required to read, understand and follow the few guidelines. The risk is managed by algos with human supervision. Risk is basically insurance against loss. That insurance costs a certain premium and is generally applied by the system based on assumptions and then actual behavioural data about every single trader,currency and trade.  Each trader is required to manually manage and close positions and to remove limit orders to avoid breaking the guidelines. Individual breaches of the guidelines create non factored in and therefore expensive 'surprises' for the risk system and are deemed to be unauthorized activities. Therefore accounts with a pattern of this behaviour will invalidate targets for growth and withdrawal and will be closed without warning by the system.

The trading hours are set based on data that implies that most big unexpected losses come outside the set hours where 70% of total volume is traded on the FX market.

Traders are asked to be professional about following these rules and to manage limit orders accordingly.

Stop orders are frequently 'hunted' just as the Asia session starts, therefore for those holding positions overnight, it is an idea to manage stops with this in mind.

Unauthorised trading penalties and charges 

Unauthorised trades drive up our costs disproportionately. This puts pressure on the feasibility of the subscription model. However due to the machine learning nature of our risk system and the fact that our promoted traders do not have the same restrictions we allow our traders to make their own decisions about every trade. Therefore those unable to follow or understand the few simple rules are not likely to become useful fund managers. The likelihood of becoming a fund manager is directly correlated to the ability to trade within pre set parameters.

We therefore deal with these flagged accounts in a few ways depending on the behaviour pattern and whether intent to break the rules is evident.

However every unauthorised trader will at a minimum receive a charge equivalent to a subscription payment. For traders breaking the rules to be able to make a profit then we will either hold back the majority of the payout or we will simply cancel the account and make no payout at all.

 

 Summary 

It's worth familiarising oneself with the following parameters for each pair to be traded and to adequately study and understand the formula;

  • Contract Size 
  • Margin Percentage 
  • Account Currency Exchange Rate 
  • Leverage 
  • Account Balance 
  • Swap Rate 

 Frequently asked questions have the following answers;

  • BluFX offer 1: 3 Leverage.
  • Max Order Size = 0.5 and Multiple Orders may be placed.
  • To place a POSITION of 1 standard lot, 2 ORDERS of 0.5 must be placed 
  • Max Position Size depends on account size and which pair.
  • Use the above Margin Calculator to work out how many lots you can trade.
  • CHF pairs require up to 3 times the margin of EUR pairs.
  • Traders must manage and close positions with care to avoid 'unauthorized trader' status. 
  • CHF, USD, GBP, EUR, JPY, CAD, AUD, NZD, XAUUSD may be traded in any combination as pairs. 
  • Non of the following currencies may be traded: XAG, SEK, CHN, HKD, MXN, NOK, DILS, ZAR, TRY.
  • Stop Loss, Take Profit and Limit orders may be used. EAs may not be used

     Do you want to be a Pro? 

    BluFX Project parameters are set by the risk system to achieve the objectives - developing fund managers valued by our investors - that have acquired the skills required to trade professionally - the only qualification therefore is progress through the stages.  If you can progress, then you will have developed from high leverage hit or miss to professional returner of profit on capital with a low risk of ruin.

Good luck!

Tags: Trading with BluFX, Margin

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