We all have our secrets. Our little white lies. Our dirty laundry. The things we hide from our nearest and dearest.
But what about my very reliable Forex broker. What are their little secrets?
Actually, with Forex brokers, the truth is generally a little more prosaic. Because of regulations (and we assume you are working with a regulated broker. If you aren’t, please see Forex 101), there really are no secrets, and you can’t do anything illegal because you will be fined a bucketload of money. But, there are few little things that a Forex business would probably prefer you didn’t look into or ask.
Let’s take a small trip to the dirty washing basket of a Forex business and see what we can find.
1. Regulation is Your Friend
This is first because it’s HUGE. In life there are bad people. Crazy ex’s, identity thieves and supervillains. If life was like Forex brokerages, those bad people would be unregulated. Get it? Companies that get set up to steal your money or commit identity fraud don’t just have dirty laundry, they are committing stark crime. Avoid an unregulated company – simply put, they are BAD.
2. We Don’t Charge any Fees or Commissions, Only Fixed Spread
Great! Where do I sign up?
When this statement comes from your bank, it sounds like a blessing. And when it come from a Forex company it sounds equally great. But beware! There are a few ways in which this can be misleading.
Even fixed spreads can change
There are two types of spreads, the market spread and broker spread. The market has built in spread, which will usually vary with volatility. Note: Before you get angry, this is out of the control of your broker, this is what they have to pay to the market for the position and are just passing on the costs. The fixed rate quoted is usually ON TOP OF the market rate. That’s fine when it is zero in a nice quiet market, but wait until the market is volatile, and watch your “fixed” costs skyrocket!
The rate may not be very good
This is where a market maker will make their profit, so this is where you are paying for the service. Often the fixed spread rates quoted will be for a micro lot, which means that it will be 10 times as much for a mini lot. It’s not misleading, but it is very hard to catch if you are a newbie. Thankfully you can use non dealing desk models who often provide really tight spreads (if any at all). But they will charge commissions and fees.
Before you get any ideas to avoid fixed spread models, you should know that the alternative models can also be costly. Talk to your broker, read the fine print and calculate the costs. You can often negotiate special reductions.
Hooray! Free money to trade with”¦. Hold the horses, once again there is no such thing as free money.
The broker is offering this to get your business and make a profit, which means that they are offering it in such a way as to ensure that it is going to turn a profit, or at the very least not cost them a cent. There are a few ways in which the company will ensure that they don’t lose money on the transaction, so it’s imperative that you check out the trading conditions for bonuses before you accept this money.
Remind yourself that you are being given the money for them to make a profit and that money and leverage are pretty much the same thing in this situation. It will help you determine if the bonus is really worth anything at all.
4. Read the fine print – Trading terms and conditions are very important
Along the trading journey there will be things that you learn. We touched on them earlier in relation to market spreads, but that was just the tip of the iceberg. Spread widening, overnight fees, margin use and margin calls, automated stop losses, signal vendor software issues, slippage, market trading gaps, platform availability times, technical issues, the list goes on. Read the terms and conditions. Then discuss any concerns with an experienced trader. This will help you find out how to deal with or avoid the pitfalls. Be aware that all brokers will have conditions in place that you may not like. It is up to you as to whether those are a deal breaker or not.
The truth is that the brokers are not trying to trick you. In most cases they are doing what any business would do, protecting themselves from unacceptable risk and passing on legitimate user costs to the users. By educating yourself about the things discussed above, you will be in the best position possible to use the power of the Forex market to make spectacular investment returns.
And then buy me a yacht with your petty cash!