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