Currency Trading blog - one post needs to be the first one… Variable Currency Trading Spreads are a GOOD Thing…
Dec 04

Currency trading markets not regulated

There’s no such thing as a single currency trading market that offers you a market wide standard contract you engage when opening a position.  The Forex currency trading markets are not regulated like the futures- and option markets are.

Each Forex broker effectively is an independent market maker. Each of them offers their services according to their own conditions which you should study very closely.

Comparing Forex Brokers is a daunting task

Checking out Forex broker ads, one could easily gain the impression that low spreads and commission free trades are the most important selection criteria for choosing an FX trading order fulfillment partner. Although these criteria bear some weight, others are important as well:

  • low spreads - 1-2 pips spreads for the most liquid currency pairs is the norm. Heavy traders may get better deals. Some European Forex brokers still believe that their offer of a 5-pips spread is a super deal. Wake up European Forex brokers! Note that some brokers have floating spreads within currency pairs. The actual spread is determined by current market liquidity, volatility and who knows what. This is not necceseraly a bad thing:  instead of following news releases, I monitor the evolving spreads to know when to keep out of the market.  It’s an indicator in its own right.
  • commision free trades - a funny marketing ploy really, as I’ve not been able to find Forex brokers that indeed charge commisions for a full lot. These houses make money off the spread between opening and closing a position. Forget about commision free trades, as for normal Forex trading, this is non-existent.
  • Leverage offered - another marketing ploy, but this one is too dangerous to be funny!  Using the entire leverage offered by some brokers is the fastest way to clear your account. Really, it is! Do the math yourself: what is your effective portfolio leverage, if you use a risk profile of only say, 2%? This risk profile, combined with the stop distance of your trading system defines how many positions may opened at any one time. So what’s your leverage then? It goes to show that using leverages up to 1:500 (!) is sheer folly, inconsistent with any type of sensible trading.
  • guaranteed stop execution - bottom line: you’re not going to get it at least not when you need it the most, despite promises to the contrary! It’s like a politician promising that there will be no tax increases.  The small print always includes a sentence somewhere that says that in very volatile markets, guaranteed stop execution may not always be possible. So what do you reckon is the value of this so called ‘guaranteed stop execution’, really?
  • How safe is your money going to be? - The demise of one of the largest Forex brokers in 2005 and the sub-prime induced turmoil in the financial markets in 2008 makes this a rather contemporary issue. Now, you could indeed check the quality of the bank that is behind all of this, but what do the agreements with your broker say? If they go down the drain, how can you block them having access to your account?
  • Broker is hedging your open positions? - This makes sense from the broker’s risk reduction point of view, after all he’s lending you the money you need for leveraged Forex trading. But do remember: in this situation your broker is actually betting against you and he has access to your purse as well. How do you know whether your broker is merely hedging his risk? Since his hedging makes him a market participant, how do you tell that your broker isn’t also trying to eek out a little profit for himself? So far, I’ve not been able to determine whether this may be happening or not, but there’s no denying that a real conflict of interest exists here…

Confused as I am?

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