How to check if a broker is serious or not
Choosing a forex broker is an important of your trading success. Most brokers have pretty websites and sexy marketing materials. Unfortunately, so do a few bad brokers.
Here are a few essential things to look out for in order to spot the serious forex brokers.
Every broker has a bank account, where it has its own money as well as its clients' deposits. Make sure the accounts are segregated, i.e. that the broker's bank account is separate from its clients' accounts.
If not, a broker's money and its clients' money are deposited together on one sole bank account. In this case, if the broker ever goes bankrupt, you can't be sure you'll get your money back.
A broker's bank can produce a document that stipulates that accounts are segregated. Ask the broker to send you a copy.
In times of high volatility, when prices vary wildly, a forex broker may not be able to execute your order at the requested price because counterparts are scarce.
In this situation, you risk having your trade executed at a different price from the one you had indicated. This is called "slippage". Slippage is particularly harmful when you have set up stop loss orders. These orders are at risk of being executed even if the price level has not been reached.
Some brokers take advantage of slippage to "go get stops". They shift prices so stop orders get executed.
In case you post a complaint with the broker, it's very difficult to determine whether it's just slippage or if the broker purposefully took advantage of the situation. To avoid this problem, you may refrain from using stop orders in times of high volatility, or move your stop orders further towards historical market levels.
Widening of spreads
Many forex brokers are market makers that earn a living by taking a cut on the spread (i.e. the difference between the ask price and the bid price) of each currency pair, on every one of your trades.
Brokers often offer their clients not to pay any commission on their trades. Some brokers can then be tempted to widen spreads in order to make more money for themselves.
For example, the EUR/USD currency pair has a spread of 3 pips under normal market conditions. Let's assume EUR/USD quotes 1,4470 - 1,4473. When you purchase EUR/USD at $1,4473 you immediately "lose" 3 pips. If you wished to resell EUR/USD instantly, your broker would offer you only $1,4470, earning himself 3 pips in the process.
As a result, the wider the spread, the harder it is for you to make a profit. Make sur your broker does not unjustifiedly widen spreads to his own benefit.
In the highly competitive brokerage industry, some forex brokers go as far as to give you a cash bonus when you open an account. 1000 dollars for a 10 000 dollar deposit, for example.
Make sure you check the conditions attached to this bonus, as it would a bit naive to believe that it is a given thing. Sometimes you'll be required to reach a certain trading volume in order to withdraw that bonus from your account.
You must make sure you research brokers thoroughly before opening a trading account.
Demo accounts allow you to get a preview of how a broker works, but it's also good to test a broker under real conditions. Open an account with a small deposit, make a few trades and withdraw your money.
If all these operations go smoothly, then you can consider trading forex with this broker.
Read the next article : Embarrasing questions to ask a forex broker