If you are looking for a new Forex broker or want to test if your broker is giving you an acceptable deal then here is a checklist of some things for you to consider if making your decision.
1. Not all Forex Brokers are bad!
It would be very unfair to have the opinion that all Forex brokers are bad. What you should have in mind is that the most Forex brokers do not place their client’s trades in the real market and charge spreads instead of commissions. This means that the most Forex brokers are in a direct conflict of interest with their clients: the more their clients lose the more money the brokers make. Actually their business model is based upon the failure of their clients’ trading.
It is a sad fact that most Forex traders lose but this is mainly because of their poor trading methods and means at least that Forex brokers do not have to act tricky to make a profit.
Indeed more profit is always good news so there are a few tricks that some brokers have to cheat clients.
Here are some things you should be careful about:
2. High Spreads/Commissions
Spreads have come down a lot in the last years. Of course the more money you can fund to your account the better spreads you will probably have available to you. This is because a lot of brokers offer better spreads which usually require higher minimum deposits. In any case you really should look around and test some brokers. The days of having to pay a 4 pip spread for GBP/USD are over.
In the last time more brokers have been introducing commission-based models where you pay a set cash amount per trade. When you face this carefully calculate how much you usually risk on a trade per pip and then from that derive the “spread” you will be paying. Sometimes these spreads plus commission deals are created to make the offer looking better than it really is and you can only detect it when you make personalized calculations.
3. Overnight Financing
Except you are a day trader and close all your positions before 10pm or Midnight London time every day you will either be paying or receiving a small amount - usually less than 1 pip - on every open trade you have at this time. This is based upon interest rate differentials between the currencies which making up that particular pair but is structured by practically every broker as a net loser for the client. Some brokers are far worse than others and many do not advertise these rates – you only see it on your statement the next day if the payment has been made. If you contact most brokers they will usually be prepared to quote you their current overnight financing rates. Get a few quotes and compare them on the same currency pairs and you might be surprised by the results. If you like to hold trades for the long-term do a few calculations on how much you are likely to pay on this overnight financing. You might find that it significantly eats into or even erases your profits.
4. Running of Stops/Spikes
It is not widely understood that brokers control their own price feeds. There is no central exchange and most brokers are not making the real trades and they can quote you any price they want! Of course they have to keep the prices fairly honest as otherwise you could use other brokers’ price feeds to correctly predict movements and they would lose money as a result. So you do not really have to worry that your broker is just going to make the price up.
What you might have to worry about is that a broker can see where their clients have their stop loss orders and if the general market price comes very close to triggering these stops the broker might be very tempted to just quickly nudge their price over that level and pocket the profits. This can be done even more easily during news announcements or sudden shocks which have the effect of spiking the general market price up or down. An ruthless broker can always send the price a little higher or lower at such times.
To be fair mistakes are sometimes made and brokers will often repay stopped-out trades after excessive spikes if enough of their clients complain. Nevertheless it is something for you should watch out for.
5. Outages
There are times when the market is in one clear direction. If you want to place a trade and you can not get a connection to your broker or the trade is repeatedly rejected for some unknown technical reason then watch out. This is a sign of a broker which is using unfair methods to prevent their clients placing winning trades. If it happens often it is a fishy sign.