| Choosing The Right Forex Broker | | | | is switch out a few words: Las Vegas is the |
| | | | interbank market, runner becomes retail |
| Introduction When you first start trading | | | | broker, sports book becomes large bank, bets |
| the forex market finding a broker is unlikely | | | | become client trades, running fee becomes |
| to be a major concern; aren't all brokers the | | | | spread, big sports events are big news items |
| same anyway? Lets face it if you can find a | | | | and the difference between the odds you get |
| trading strategy that you are comfortable | | | | and the odds your client gets is the slippage |
| with and become consistently profitable then | | | | you hand out. |
| that is the battle won, right? Unfortunately | | | | |
| it isn't that easy and the shame of it is | | | | Isn't This Slightly Cynical? Yes the analogy |
| that there are too many so-called brokers out | | | | used is slightly cynical; it is not the case |
| there who want to rip you off. | | | | that every broker out there is guilty of |
| | | | these 'bucket shop' tactics (rest assured |
| Where Does This Mentality Come From? The | | | | that every brokerage will deny it however) |
| retail forex industry has been brought up on | | | | but it is far too common. Even bank traders |
| the fact that FX is worth $2 Trillion in | | | | can experience slippage at volatile times but |
| volume every single day (in reality only a | | | | the degree to which it occurs at the retail |
| fraction of this comes from private | | | | level is unacceptable. Furthermore you cannot |
| speculators, the vast majority is generated | | | | use volatility as a defence when you begin to |
| by large banks and multinational | | | | hound profitable traders with constant |
| corporations). This is quite a lure | | | | re-quotes, accusations of illegal scalping |
| especially when we are reminded at how this | | | | (no such thing even exists!) and forced |
| figure completely dwarfs the stock market, | | | | account closure. And what about a brokerage |
| and we've all heard how much you can make | | | | going bankrupt without returning your funds? |
| from stocks. Now add the statistic into the | | | | Is it any wonder that this article is |
| mix that between 90 and 95% (probably closer | | | | questioning the honesty of some retail |
| to 99%) of all retail speculators lose money | | | | brokerages? |
| and you have a bevy of firms climbing all | | | | |
| over themselves to get their hands on this | | | | What About Regulation? The retail market is |
| cash. Forex is billed as the way to become | | | | still fairly young and therefore loosely |
| mega rich, leave your job and live the life | | | | regulated. However, there are two |
| you've always wanted but if it was that easy | | | | organisations that police the sector and they |
| everyone would be doing it! | | | | are beginning to step in and protect the |
| | | | consumer on a more regular basis. These |
| How do Retail Brokers Position Themselves? | | | | organisations are the National Futures |
| To answer this question we need to briefly | | | | Association (NFA) and the Commodity Futures |
| explain some market dynamics. The forex | | | | Trading Commission (CFTC). Of the two the |
| market is completely decentralised. This | | | | CFTC is most heavily involved in the |
| means that, unlike centralised exchanges such | | | | regulation of fraud, manipulation and abusive |
| as the NYSE and LSE, there is no central | | | | trade practices in the retail forex sector. |
| location where each transaction can be traced | | | | The CFTC.gov website is an excellent source |
| and recorded nor do currencies have | | | | of information on customer protection and |
| specialist market makers responsible for | | | | on-going legal disputes against brokers and |
| providing quotes for the entire market. | | | | other entities. |
| Instead, the entities that act as market | | | | |
| makers for the currency market are the | | | | Lets Talk About the Positives It's not all |
| World's largest banks. These banks carry out | | | | bad out there; certain firms do offer very |
| transactions between each other on a regular | | | | attractive and honest services. Let us |
| basis, hence the term 'interbank market'. In | | | | summarise some of the attributes you should |
| order for you to deal directly with these | | | | consider looking for in a broker: |
| large banks you need to establish credit | | | | |
| relationships with them which takes a vast | | | | 1. NFA and CFTC registered |
| amount of money and consequently most people | | | | |
| cannot afford to do this. So this is where | | | | 2. No dealing desk, ECN style brokers |
| the retail brokers come in; they connect you | | | | |
| with the large banks. Because they are | | | | 3. Variable spreads that reflect the |
| representing many clients they have enough | | | | volatility at interbank level |
| equity to establish credit relationships and | | | | |
| deal with these banks, supposedly on your | | | | 4. Firms that charge commission rather than a |
| behalf. | | | | flat spread (the thinking here is the more |
| | | | you trade the more they make so it is in |
| This Position is Open to Exploitation Retail | | | | their interest to see you make profitable |
| Forex Brokers are the middleman between you | | | | trades and continue to trade happily with |
| and the interbank market so every time you | | | | them - less likely to be on the other side of |
| place an order to buy EURUSD for example, | | | | your trades) |
| your broker alters their currency holding | | | | |
| positions with their large bank partners to | | | | 5. Friendly and efficient customer service |
| reflect this. Rightly so your broker charges | | | | |
| a fee for this service which usually comes in | | | | 6. The offer to insure your capital in a |
| the form of spread (the difference between | | | | secure bond (will protect client funds in the |
| the bid and the ask). The spread they offer | | | | event of a broker's bankruptcy) |
| you is slightly larger than the spread they | | | | |
| are offered in the interbank market so your | | | | 7. Limit entries (your broker allows you to |
| broker can make a small profit on every trade | | | | enter the market with a specified 'chase |
| you make. Everything sounds all well and good | | | | factor' of a few pips. If your order is not |
| so far, agreed? | | | | filled within the acceptable 'chase factor' |
| | | | your order is either partially filled or not |
| Now let me ask you a question: suppose you | | | | filled at all - prevents ridiculous slippage |
| work in Las Vegas as a runner placing bets at | | | | at times of high volatility) |
| sports books for several clients. Now you've | | | | |
| been doing this for a while and you recognise | | | | 8. A good reputation within the industry |
| that some of your clients are good at picking | | | | (check independent sites for user reviews) |
| winners and some are good at picking losers. | | | | |
| If you could make a little extra on top of | | | | 9. No BS marketing that focuses on the multi |
| your fee for running by doing the opposite of | | | | millions you will make within months of |
| the clients who consistently lose bets would | | | | opening your account (these firms prey on |
| you do it? Now suppose that 99% of your | | | | inexperienced traders and gamblers who have |
| clients lose money over a long enough period | | | | no chance of being profitable) |
| of time so all you have to do is bet against | | | | |
| them all and you will make a fortune! | | | | 10. Realistic and modest margin/ leverage |
| Sometimes around the really big sporting | | | | (firms that offer leverage over 100:1 are |
| events you get so busy you can't place your | | | | encouraging you to trade big and lose you |
| clients' bets and your bets quickly enough so | | | | account to them quickly - you may wish to |
| you figure you'll make sure you get in with | | | | look out for a broker who offers you a choice |
| good odds and then sort out your clients once | | | | of margin requirements) |
| you are done, meaning they get slightly or | | | | |
| sometimes much worse odds than you. This | | | | Of course not all of these attributes can be |
| mindset is greedy and unfortunate and you | | | | classed as 'golden rules'. If something is |
| won't have many friends but at least you | | | | perceived as attractive then it is open to |
| would make a good retail forex broker! | | | | exploitation. For example, ECN brokers are |
| | | | becoming very popular and this has lead to |
| Sorry to use a gambling analogy here (trading | | | | several firms advertising an ECN service when |
| should never be confused with gambling) but | | | | they don't really have the technology to |
| it does explain the problem quite nicely. All | | | | provide one. |
| you have to do to apply it to our situation | | | | |