Do a search on Google for Forex Brokers and you will get over 12 Million results!! Whilst choice is normally a good thing, when it comes to investing your own hard earned money, you want to be certain that your Broker meets (and hopefully exceeds) your expectations. Don’t be afraid to ask your Broker questions. After all you need to feel comfortable about where you will be trading and if you don’t get the answers you want, or expect, you should consider finding another Broker.
So Size Really Does Matter?
Because the Forex market is an over-the-counter market (i.e. no centralized exchange), not every Broker gets access to the same competitive prices or can provide superior quality of execution. It should come as no surprise that those Brokers with the largest trade volume and a strong balance sheet have access to better prices and execution. So the bigger the broker, the better they are able to pass on the benefits of size, better prices, and better quality of execution to you.
Where to my trades go?
Forex Brokers predominantly offer the following 2 execution models:
1.“Dealing Desk” which means that your Broker provides the pricing and executes your orders. In this model your Broker “wins” when you “lose” and vice versa. Invariably there are often times when a “conflict of interest” arises. Think about it…. A Broker that is “the other side” to all your trades could potentially “manipulate” rates to provide you with a price that is more favorable to the Broker than you. This model should not incur any commission as the broker makes money on the spread they are providing. In the industry this is known as a “B-Book” Broker.
2. “Agency” (aka Non-Dealing Desk) usually means that multiple sources (typically referred to as Liquidity Providers) stream competing prices to your Broker, which is then aggregated into Best Bid/Best Offer, and your trades are executed directly with the Liquidity Providers (LP’s) themselves. This model has no conflict of interest to the trader as your Broker is purely acting as a “Middle Man”. Invariably such a model will have tighter spreads and may have a commission charge per trade. In the industry this is known as an “A-Book” Broker. There is another execution model that is becoming more prevalent – that of a Hybrid or “C-Book” Broker. Simply put; the Broker utilizes both an Agency and Dealing Desk execution models. Certain trades will go directly to market and certain trades stay with the Broker. It sounds like “Cherry Picking” but such a model can often result in superior pricing and a higher certainty of execution. May Brokers with this model will “internalize” trades. Simply put; they will internally match buyers and sellers which means trades are executed faster without the reliance of an LP who may “decline/reject” trades during the course of a typical trading day.
In the very early days of online trading spreads were only quoted to four decimal places, i.e. GBPUSD 1.4303 – 1.4305, so a pip would equal .0001 or one basis point. That all changed with the arrival of Fractional Pricing. This adds an additional decimal place to the price making the spread more competitive and accurate. i.e. GBP/USD 1.43034 – 1.43045. So more competitive and accurate pricing is better for you – now ask the question “what is the average spread”? Remember there are times when a lack of market participation can result in the widening of spreads (typically Asian Session) and high volatility events such as NFP. Any reputable broker should be able to give you average spreads throughout a typical trading day – so ask!
Swaps (aka rollover) is the interest earned, or paid, on FX positions held overnight. The “charge” varies depending on the difference in interest rates between a currency pair (between Base and Term currencies i.e. EUR/USD is calculated using the EUR and USD interest rates) and fluctuates day to day with the movement of prices. A Negative Swap occurs when you sell a currency that pays higher interest rate, so you pay interest. A Positive Swap is when you buy a currency that pays higher interest rate, so you can earn interest. Negative Swaps are routine, but not all Brokers offer positive Swaps. Again, check with your broker what their Swap charges are. And be aware that many brokers will charge more for held positions towards the end of the week as a result of the weekend rollover. This varies from Broker to Broker so check as, whilst a relatively small charge, this can add up if you are trading larger volumes. One of the more popular strategy is known as the “Carry Trade”. Such a strategy is dependent on the benefits from Positive Swaps (money you get paid) and high leverage available in margin trading. For example, if you buy USD/JPY, you could earn a positive roll. You are essentially borrowing the Japanese yen at a low interest rate cost to buy the US dollar with a high interest rate earning. Remember that leverage can dramatically amplify your losses, so beware of this technique, as it carries a high level of risk. It should be noted that many Brokers are aware of such “Carry Trades” and, as such, will place restrictions/limitations on held open positions. Again, check with your Broker what, if any, limitations are in place before placing any form of Carry Trade.
Hedging allows you to have BUY and SELL positions in the same currency pair at the same time. Hedged positions do not necessarily limit risk as traders can find themselves losing on both sides of the trade (remember spreads can, and will, dramatically change during the day. While this strategy tends to work temporarily in range markets, it does not work well in trending markets. In order to mitigate your risk, it is often beneficial to placing stop-loss orders on your positions. Special Note: The National Futures Association (NFA), a self-regulatory organization in the USA, adopted a new Compliance Rule in 2009 that prohibits customers of Forex Dealer Members to open a “hedged” position in the same account. This rule often does not apply to Forex Dealers outside of the US – so once again check what your broker offers.
The FX Markets are open 24 hours a day 5.5 days a week throughout the year. So, more importantly, is your Broker open/available? Can you call, email, online chat with your broker when the markets are open? When you ask questions, do they answer them clearly, honestly and in a timely manner? If your Forex Broker can’t answer the following “often asked” questions below, you may want to look for one who can!
- How long have you been a Forex Broker?
- Who are you regulated by?
- Do you have good relationships with reputable banks?
- Who is quoting the rates, my broker, a bank, or multiple banks?
- Are the spreads fixed or variable?
- How tight are the spreads?
- How many trading platforms do you offer?
- Are my funds safe?
- Is my money protected?
- Do you have variable margin levels?
- Is there a commission charge? If yes how much?
- Where is my money deposited?
- Do you have segregated accounts?
- Are there any restrictions on using EA’s?
- Are there any trading restrictions?
- Can I place orders inside the Spread?
- Can I earn interest on positive swaps?
- Can I earn positive swaps at all margin levels?
- How many instruments do you offer?
- Are swap rates displayed prominently? Where?
- Does the trading platform (s) allow me to hedge?
- Can I lose more money than I put into my account?
- What are the Stop Out levels?
- What is the quality and availability of customer service?
The above list of questions is not definitive. Hopefully you will have additional questions specific to your needs. Remember a Broker is providing you with a service. If you don’t like the service, then leave!! According to Google you have a lot of choice.
#tradesafely #doublehit #fxzoo