Saturday, November 21, 2009

Some Tips to Choosing a Forex Broker

When you first start trading on the forex market finding a broker may not be a major concern; not all brokers the same anyway? Lets face it if you can find a trading strategy that you feel comfortable with and become consistently profitable then that is winning the battle, right? Unfortunately it was not easy and it is a shame that there are too many so-called brokers out there who want to cheat you off.

Where Did It Come From Mentality?
Forex retail industry has grown up on the fact that FX is worth $ 2 Trillion in volume every day (in reality only a small proportion of this comes from private speculators, mostly produced by large banks and multinational corporations). This is quite interesting especially when we are reminded of how these numbers actually dwarf the stock market, and we've all heard how much you can make from the stock. Now add the statistics to the mix is between 90 and 95% (probably closer to 99%) of all retail speculators lose money and you have to climb the corporate associations themselves to get their hands on cash. Forex is billed as a way to become mega rich, leaving a job and live the life you always wanted but if it was that easy everyone would do it!

How to Position Yourself Retail Broker?
To answer this question we need to briefly explain some of the market dynamics. Forex market completely decentralized. This means that, unlike the centralized exchange like the NYSE and the LSE, there is no central location where each transaction can be tracked and recorded as well not have specialist currency market makers are responsible for providing quotes for the entire market. Conversely, entities that act as market makers for the currency market is the largest bank in the world. These banks to make transactions with each other on a regular basis, then the term "interbank market". In order for you to deal directly with large banks, you need to establish credit relationships with those who take large sums of money and consequently most people are not able to do this. So, this is where the retail broker in; they connect you with major banks. Because they represent many clients they have enough equity to build a credit relationship and dealing with these banks, should be on your behalf.

This position is Open to Exploitation
Retail Forex Broker is an intermediary between you and the interbank market so that every time you place an order to buy EURUSD for example, your broker to change their currency positions held by large banks partner to reflect this. Right so your broker to set fees for these services usually come in the form of the spread (difference between bid and ask). The spread they offer you is a little larger than the spread they are offered in the interbank market so that your broker can make a small profit on every trade you make. It all sounds all well and good so far, agree?

Now let me ask: suppose you work in Las Vegas as runner placing sports bets on the books for several clients. Now you've done this for a while and you acknowledge that some of you smart clients pick a winner and a few select either the loser. If you can make a little extra on your costs to run by doing the opposite of clients that consistently losing bets would you do that? Now suppose that 99% of your clients lose money over a long period of time so you have to do is to bet against them all and you'll make a fortune! Sometimes around who really big sporting event you're so busy you can not put your clients' bets and bet you that your numbers fast enough you will make sure you get a good opportunity and then sort out your client when you are done, then they have little or sometimes even worse than your chances. This mindset is a greedy, profitable and you will not have many friends but at least you'll make a good retail forex broker!

Sorry to use a gambling analogy in here (the trade should not be confused with gambling) but did not explain the problem properly. All you have to do to apply to the situation we switched a few words: Las Vegas is the interbank market, a broker retail runner, sports books into big banks, betting trading clients, the cost of running the spread, major sporting events and big news items the difference between You get the chance and opportunity to get your client is the slip that you give.

Is not this a bit cynical?
Yes analogy used is a bit cynical, but it is not the case that every broker out there who are guilty of 'bucket shops' tactics (rest assured that any broker will deny it but it) but too general. Even the bank's traders can slip in volatile times, but the extent to which it occurs at the retail level can not be accepted. Also you can not use the volatility as a defense when you start a dog profitable traders with the constant re-quoting, accusations of illegal scalping (no such thing even exists!) And forced the closure of accounts. And what about the broker went bankrupt without returning your money? Is it surprising that this article questioned the honesty of some retail brokerages?

What About Regulation?
Retail market is still quite young and therefore are loosely regulated. However, there are two organizations that the police sector, and they began to move and protect consumers in a more regular basis. These organizations are the National Futures Association (NFA) and Commodity Futures Trading Commission (CFTC). The CFTC from two of the most heavily involved in the regulation of fraud, manipulation and trade practices in the harsh retail forex sector. sites are the source of information about consumer protection and legal disputes that are running against the brokers and other entities.

Let's Talk About Positive
That's not all bad out there; a particular company offers very attractive and honest services. Let us conclude some of the attributes you should consider looking at brokers:

1. NFA and CFTC registered

2. No dealing desk, ECN style brokers

3. Spread variables that reflect the level of volatility in the interbank

4. Companies that commission responsible than the average spread (the thinking here is that the more you trade the more they make so it is in their interests to see you make a profitable trade and commerce continue to be happy with them - are less likely to be on the other side of your trade)

5. Friendly and efficient customer service

6. Bid to ensure your capital in bonds to secure (to protect customers funds in the event of bankruptcy of a broker)

7. Limit entries (your broker allows you to enter the market with a given 'chase factor' a few pips. If your order is not fulfilled within the acceptable 'chase factor' your order is either partially filled or not filled at all - prevents silly slip at the volatility high)

8. A good reputation in the industry (check the site for users independent review)

9. No BS marketing that focuses on the multi-millions you'll make a few months after opening an account (prey on these companies are not experienced traders and gamblers who do not have the opportunity to benefit)

10. Realistic and modest margin / leverage (the company that offers a 100:1 leverage on your push for greater trade and loss account to them quickly - you may want to look out for brokers who offer a choice of margin requirements)

Of course not all of these attributes can be classified as a 'golden rule'. If there is something that is considered attractive is open to exploitation. For example, ECN brokers became very popular and this has caused some advertising services company that ECN when they do not really have the technology to provide one.

Are You Due Diligence
I know it can seem boring, but studied the broker you choose must be well spent. At least you have to spend time browsing the website broker. You may want to make a list of things that you like the sound and the things that you do not (remember, if something sounds too good to be true it probably is). Contact their customer support and put these issues their representatives and see if you are offered a satisfactory answer (also a big test of their customer service dept. And the general professionalism). I also highly recommend checking the website and browse the CFTC forums, discussion boards, blogs and user review website for information. My final suggestion here is that you share the good and bad experiences in the trade community. Although you may have heard about this effort you will save his fellow traders / time, money and maybe a few gray hairs. Good luck and happy hunting!

By: David Thorpe

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