Embarrassing questions to ask a forex broker
Take time to understand the ins and outs of a forex broker's policy on spreads before you consider trusting them with your hard-earned money.
Ask these few hard questions and listen to the answers carefully to determine whether the broker you shortlisted is right for you.
Fire at will!
How often are the spreads advertised on the website updated?
You can really check a broker's spread only if it is published in real time.
Some brokers publish "minimum", "standard" or "average" spreads, while omitting to specify how often and for how long these spreads are available. It's very well possible that you will never get these spreads when you'll trade on a daily basis.
If your broker advertises a "minimum" spread of 0,8 on EUR/USD, you need to make sure what "minimum" really means. Are there any special conditions? Is it possible to get a history of spreads to check whether the actual spreads are the ones advertised?
Check the advertised spreads for all the currency pairs a broker offers, not only the major pairs. If you wish to trade minor or exotic currency pairs, you shouldn't be forced to pay more through wider spreads to subsidise the narrow spreads on highly traded pairs.
Are there any special conditions or limitations?
Spreads should not vary according to the size of your trade or any other factor.
Brokers often advertise narrow spreads that in reality only apply to a restricted group of VIPs. These custom spreads are reserved for traders with specific characteristics, based on account size, trading volume, geography or lot size.
For instance, many brokers impose a minimum deposit for opening an account, or require a minimum trade size before you can benefit from their narrowest spreads.
Are there any additional fees on top of spreads?
Read the small print so you know what you are really paying.
Some brokers offer narrow spreads but make money through other means.
For instance, they may charge extra just for the privilege of accessing their "premium" or "professional" trading platforms.
Or they may charge a fee that can be avoided only if you keep a certain amount on your trading account, or if you reach a minimum trading volume.
They may also widen spreads in order to pay introducing brokers or other middlemen.
Enquire about how your future broker earns his money.
Do all clients get the same spread?
Reduced fees granted by some brokers to their best clients may very well be financed by ... your spread.
All forex brokers will tell you they have the narrowest spreads in the business. It's possible. But all traders don't get equal treatment. It is common practice fot brokers to adjust their commissions according to the client's habits, account size and trade volume. The largest clients, as well as financial institutions (e.g. banks), often get special treatment. But guess what? You are the one financing all that, through higher trading costs and wider spreads.
If possible, try to find a broker who doesn't discriminate among clients.
Is anyone else than the broker earning money on my trading activity?
Some brokers widen spreads with the sole aim of paying introducing brokers and affiliates.
Forex brokers often accept to pay introducing brokers ("IB") or affiliates a cut of your spread.
If a broker assures you no one gets paid on your spread, don't rejoice too fast. Instead, ask him if the IB's revenue is directly dependent on your trading activity.
If the company pays its IBs and affiliates a percentage of the profits they make on your trades, then it is likely you are being treated differently. In this case, you deserve to know how exactly you are being treated differently.
There is nothing inherently wrong with paying third parties a cut of your spread, but you should be made aware of it. Up to you to decide whether the IB provides enough added value for you to pay him with your wider spreads.
You should also ask if you would get better spreads if you cut out your IB.
Do I have unlimited access to a live trial platform?
A live trial platform is absolutely necessary if you wish to fully understand a broker's trading system.
Open a demo account and watch
A demo trading platform can come in handy to analyse how prices and spreads vary under different market conditions.
It can also show you the broker's quality of execution, provided the demo platform behaves exactly like the live one.
Be sure to ask the broker in what ways the demo and the live platforms differ from one another, in terms of execution and spreads.
In order to test out new trading strategies in time, you should have unlimited access to a demo platform. Does your demo have an expiry date?
Before you sign up for a demo account, enquire about the broker's sales policy. Some brokers see the opening of a demo account as an chance to bombard you with promotional emails and salesy phone calls.
How is interest calculated?
Enquire about interest rates, including the one you earn on your cash.
In the forex industry, interest in usually calculated using rollover swaps with a 2-day execution. In practical terms, that means you pay (or earn) interest according to the amount of your open trades at 5 p.m. Eastern Standard Time (New York).
Experienced day traders usually synchronise their trades with the rollover swap, but think about how that could affect your freedom to keep open trades.
Ideally, you should pay (or earn) interest according to the length of time you held open trades, not according to time of day.
Moreover, do you know what carry rates you pay (or earn)? What are the interest rates? Are they competitive?
Ask to know about the interest rates for all currencies. Also ask whether or not your cash deposit earns you interest.
What are the benefits of fixed spreads?
Fixed spreads act like an insurance policy. Make sure you get your money's worth.
On the foreign exchange market, exchange rates and spreads vary all continuously. If you choose fixed spreads, they are probably larger than in a variable spread system.
Is it worth it? That depends on your trading needs. With fixed spreads, you pay some kind of insurance fee. A fixed spread allows you to trade at lower costs in volatile market conditions, when spreads tend to widen dramatically (e.g. rate changes, monetary policy announcements, publication of important economic data, etc.).
But if you effectively manage to profit from market events, will your broker really provide "insurance", or will he find exemptions? Make sure you read all the fine print very carefully. Are there any restrictive clauses on trading during market events? If so, you are paying insurance for nothing. Are special conditions and restrictions spelled out clearly? Ask when the latest restriction added, just so you can get a feel for how often they change the rules.
The quality of execution of your orders also is critical for your trading success. What is the broker's policy concerning requotes? Make sure the broker has sufficient liquidity and quality of execution for you to really get the spreads you expect.
Do I have free and unhindered access to information?
If a broker remains vague on pricing, what else is he hiding from you?
Many banks and forex brokers are don't like to share information. Some would even say they even conceal information you need to make optimal trading decisions.
This often starts with a broker's reluctance to allow quick and easy access to his spreads and pricing.
If you find it hard to find information on a broker's website, or if he is reluctant to give it to you, beware!Read the next article : Different types of forex brokers