DEMYSTEFYING THE FOREX BROKER: A TRADER’S WORST NIGHTMARE
Tell you the truth, a broker isn’t really the Devil depicted by the retail community. Yeah, Yeah!!There are shyster brokers out there that’s why you need to do your due diligence in finding an honest broker that has proper regulation, a compensation scheme in case of bankruptcy and a segregated customers’ account.
Let’s cut to the chase. Retail forex is synonymous to the Casino as almost every broker except the true ECN’S have internal order-matching system that pair a seller of a certain currency pair against a buyer of the same currency pair. The order system pays a winner from the loser and when disequilibrium occurs, hedging is implemented as agreed in the Liquidity provider’s ‘Terms of Contract’.
But there are Pros to this perceived shyster attitude of brokers as no broker wants to bring her customers to utter ruin.
A high leveraged system coupled with a commission-free environment are some of the plethora of goodies offered to the retail trading community.
So, how can you tell a genuine Forex Broker? There are key requirements that a Broker should have in place, these are some but not limited to the following;
Segregation of Customer’s Account.
Compensation scheme in the case of Bankruptcy.
Different countries have regulatory bodies which act as watch-Dog to protect traders from the many myriad plaguing the huge retail community especially the Rookies. In Switzerland, you have to be a licensed Bank in order to carry out Brokerage activities in the currency market. As of the time of this writing, there are few licensed Forex Brokers in Swiss. Bodies like CFTC/NFA of the U.S., FSA of the UK, Finmma of Switzerland, ASIC of Australia, ensure Brokers operates within regulatory laws in order to protect customers and maintain integrity in the business.
Avoid brokers with too high a spread, as this will eat into your account on your
losing streak periods.
Most brokers don’t really pass your trades to the inter-bank, except for the true ECN as they employ a high probability setup and they know eventually, that 99% of retail traders lose money before they even get into the arena. They match buyers/sellers as this is cheaper for them to do and collect the spread, which is legal when you read completely, the Brokers‘ lengthy ‘Terms of Agreement’. If you are one of those unusually-skilled traders i talked about in one of my articles, and you keep hitting winning streaks, they forward your trades to the Inter-bank and hedge against uncertainties as agreed with their liquidity providers.
Brokers with no financial disciplinary records who have been in the business for quite some time and who process large volume of trades through their proprietary platform, running into hundreds of millions and billions of dollars daily, coupled with the requirements highlighted above should be duly considered when selecting a Broker.