Posts Tagged ‘Currency’

Forex Brokers – How to Find One and How Much to Pay

Phil Jarvie asked:


The Forex trading market is different to say the stock market. One of its unique feature is the many tactics brokers use to entice traders to trade more. They may promise no exchange or regulatory fees, no data fees and amazingly -no commissions. To the new forex trader this sounds too good to pass up. Make no mistake – the brokers are there to make money from YOU. It’s just a question of how they entice you to them with disguised offers.

Trading without transaction costs is clearly an advantage. However, it sometimes is not the bargain it seems nor the best deal available. Actually sometimes it can even really suck.

I’ll now show you how to evaluate forex broker’s fees and commission structures to find the one that will work best for you. And don’t worry – by going with a broker you have set nothing in concrete and can change at any time.

Commission Structures:

There are three forms of commission used by brokers of Forex trading. They are;

fixed spread, variable spread and commission based on a percentage of the spread.

What do they mean by “spread”? The spread is the difference between;

the price the market maker is prepared to pay you for buying the currency ( the bid price), versus the price at which he is prepared to sell you the currency (the ask price).

Suppose you see the following quote on your screen:

“EURUSD – 1.4831 – 1.4834.”

This represents a spread of three pips, the difference between the bid price of 1.4831 and the ask price of 1.4834. You are dealing with a broker (market maker) who is offering a fixed spread of 3 pips instead of a variable spread. With him, the difference will always be three pips, regardless of market volatility.

In the case of the broker who offers a variable spread, you can expect to see a spread that will (at times) be as low as 1.5 pips and at other times as high as 5 pips – all depending on the currency pair being traded and the level of market volatility at the time.

So which is the best choice? It does seem that the fixed spread may be the right choice considering you would know what your costs will be. However, there are a few other issues you need to consider.

Some brokers may also charge a very small commission of say 2/10’s of one pip. He then passes the orders he receives from you and others on to a large market maker with whom he or she has a good relationship. This way you can receive a very tight spread that normally only larger traders could get access to.

Don’t worry about all of this for now. Trade profitably for some time first. When you have moved up the learning curve further than you have so far, then revisit brokerage fees. With some track record behind you, then reconsider what are the acceptable fees you are prepared to pay.

What is the bottom line?

Each type of calculation still means you pay a commission on your trading. there’s no free lunch. All brokers will find a way to make money from you some how.

For now you need find a broker you (rationally) can work with for a fair price. With that account, get some track record. Get your trading profitable. These are the most urgent things – and where your Forex Robot is needed.

Also, understand that not all brokers are equal. That there are other factors to take into account when deciding the most advantageous trading account to go for.

Different Service Levels from Different Brokers:

Not all brokers are able to make a market equally.

Big players have credit-worthiness advantages. The forex market is an over-the-counter market. There is no exchange in the middle to guarantee performance. This means that banks – the primary market makers – have relationships with other banks and price aggregators (the retail online brokers).

The relationships are based on the capitalization and creditworthiness of each organization. Strong players get the best rates and can dictate rates to the weaker ones.

Because it is tied to credit agreements between each player, when it comes to an online brokers, the broker’s cost-effectiveness will depend on his or her relationship with banks. And how much volume the broker does with them.

Usually, the higher-volume forex players are quoted tighter spreads.

If the broker has;

* a strong relationship with a line of banks and
* can aggregate, say, twelve banks’ price quotes, then the brokerage firm will be able to pass the average “bid and ask” ( spread) savings on to its retail customers.

Even after slightly widening the spread to account for their profit, the dealer will be able to pass on a more competitive spread to you. Competitors that are not well capitalized cannot.

You should look for a broker that can offer “guaranteed liquidity” at attractive spreads. Liquidity means that you can close out your positions immediately. You want “at-the-money” executions every time you trade. Paying a “fixed pip spread” for this is good value.

“Slippage” occurs when your trade is executed away from the price you were offered. It adds a cost that you do not want. So a low commission with slippage is a false economy. The true cost of the transaction would be ” slippage plus pip spread”.

In the case of a commission broker, whether you should pay a small commission depends on what else the broker is offering.

Suppose a broker charges 2/10’s of a pip (about $2.50 – $3 per 100,000 unit trade) in exchange for access to a superior proprietary software platform. In that case it may be worth paying the small commission for this additional service.

Choosing a Forex Broker: You must always consider the total package when deciding on a broker. Some brokers may offer excellent spreads but their platforms suck or don’t talk to your forex robot. The one constant is that you will definitely need your robots, and so you must have a data feed that will talk to them.

So consider the following:

* How well capitalized is the firm?
* How long has it been in business?
* Who manages the firm and how much experience does this person have?
* Which and how many banks does the firm have relationships with?
* How much volume does it transact each month?
* What are its liquidity guarantees in terms of order size?
* What is its margin policy?
* What is its rollover policy in case you want to hold your positions overnight?
* Does the firm pass through the positive carry, if there is one?
* Does the firm add a spread to the rollover interest rates?
* What kind of platform does it offer?
* Does it have multiple order types, such as “order cancels order” or “order sends order”?
* Does it guarantee to execute your stop losses at the order price?
* Does the firm have a dealing desk?
* What do you do if your internet connection is lost and you have an open position?
* Does the firm provide all the back-end office functions, such as P&L, in real time?

Conclusion:

If it looks too good to be true, it probably is. You may getting a great deal on the spread and you may be sacrificing other benefits by doing so. But one thing is certain: as a trader you always pay the spread and your broker always earns the spread.

To get the best deals, choose a reputable broker(s) who is/are well capitalized and have strong relationships with the large foreign exchange banks.

Examine the spreads on the most popular currencies. Very often, they will be as little as 1.5 pips. If this is the case, a variable spread may work out to be cheaper than a fixed spread. Some brokers even offer you the choice of either a fixed spread or a variable one.

In the end, the cheapest way to trade is to make a profit. If your profit is large, then you don’t mind sharing a little of it with a very reputable market maker who can provide the liquidity you need to trade well.

So you think you can start FOREX Trading before gaining experience with a DEMO Account?

Stop Hunting Forex Brokers Myth

Danielle Franklin asked:

The market turns against you and the desperate need to blame someone but yourself arise. Has your broker forcefully removed you from the game by moving the market price to the level of your stop-loss? Or is it just a myth created by the paranoid traders? Is there stop hunting, and if so, how to avoid it?

What is stop-loss hunting? Basically, stop-loss hunting is all about causing the market price to reach your stop-loss order and push you out of the market with a loss.

In other words, the big financial institutions have to intentionally buy/sell a large amount of currency which changes the market price accordingly and hits the trader’s stop-loss levels and kicks the trader out. Meanwhile, the financial institutions gain from the losses, by taking the other side of the trades and profit from the short-term move.

The story about hunting stops is familiar to every trader. However, most traders who have been “stop hunted” simply had a bad trading day, got a paranoid idea that the broker is “spying” on them and force out the positions placed.

Technically speaking, it is true that your forex broker know where your stop-loss are placed via the trading platform. Once you place a stop-loss order, the broker will be aware of it. However, it is rather unprofitable for forex broker to try to take out your orders.

Why? Well, although it is true that every forex broker offer different spreads, a broker probably wouldn’t risk moving the prices just to force your orders out. Besides, your losses are not profitable for the broker. A reputable forex broker want you in the game, because a profitable trader can afford larger lot sizes and therefore make more commissions for the broker of the spread.

Forex forum posts and blogs may give you an impression that stop-hunting is a common practice among brokers. However, in most cases, the upset traders simply blame (maybe even unconsciously) stop hunting for their losses because it is the convenient way to find someone responsible for their losses. No one likes to realize their own mistakes, right?

Yes, it is true that a stop hunting forex broker may profit in the short term, however in the long run it is destructible. A forex broker with bad reputation will quickly lose the existing and potential trades. Besides, it can also cause a potential legal problem. Overall, it is highly unworthy for forex broker to stop hunt in the first place.

In case you are still convinced that your forex broker is guilty of stop-hunting, here are some tips of dealing with the situation:

1. Change the broker! The easiest way to get away from stop-hunting issue is to withdraw your money and move on to another broker. If you cannot rely on your own broker to deal with your orders, then how can you possibly continue trading with it?

2. To make sure that your broker is really involved in stop-hunting, it might be a good idea to open another trading account with another broker and compare their lows and highs.

3. Confront your forex broker about your suspicions by writing an email and attaching some evidence to it (for example, the screenshots of other broker’s highs and lows).

4. Use mental stops instead of placing an stop order on the platform. This advice is only or advanced traders. You have to know the risks involved with “mental” stops! Make up your mind (let’s say, stop whenever a certain price is reached) and follow your plan. This is basically the full proof! Your forex broker won’t know where the stop is and therefore wouldn’t try to hunt it.

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