Thursday, July 24, 2014

Things to know, the Brokers won't tell you

Transaction Costs: Brokers make their money by charging you a routing fee or by padding the spread, plain and simple. They may claim they have commission-free trading, but they pad their spreads excessively or their “low or no commissions” may not really be that low. Make sure you are honestly doing your homework here. Compare transaction costs, then compare them some more.

Try finding or negotiating for lower commissions on volume you trade per month or on initial deposit, balance of equity in your account; A good enough broker should not play tricks with your hard earned money and, or your efforts to earn from your investments.

Execution: Some brokers are deal desks that make money in the spread. Others route your orders to a single bank preventing best execution. Yet others claim to let customers trade with each other, but don’t allow you to post your Limits for others to see. How does one know what’s real?
A good enough broker provides liquidity by routing orders directly to an Electronic Communication Network [ECN] or other suitable network comprising of multiple banks, hedge funds and, or market makers -- the trading in FOREX indeed is decentralized; execution should not be controlled by the brokers and, or anyone else.

Trading Tools: Some brokers lock you into one trading platform with only a few order types. Some don’t allow you to connect with the services and tools you want or need to be a better trader. For example you can open multiple positions using a most popular, though a totally tush Metatrader 4, terminal, but you can't merge these positions. You can't hedge positions in many a popular platforms including the latest Metatrader 5.

A good enough broker doesn't handcuff your trading by limiting your trading tools or enforcing a certain proprietary system, but allows third party developers by offering an Application Programming Interface [API] and, or even a Software Development Kit [SDK] based on open standards and, or common protocols.

Security: Can you point to Cyprus on a map? Do you know who is regulating traders in that third world country promising unbelievable leverage? Before you place your hard earned money with a broker, you should make sure it’s going to, well-regulated market, not a country where trading is still a bit of a Wild West show.

Good enough brokers operate from reputed countries and are regulated by government appointed authorities or industry standard associations, organizations known for stringent rules and regulations, which most other countries use as their guide. We take additional measures, such as Redundant and Automated Manually Observed Risk Management systems, to ensure you can trade with trust and security.

Price Improvements: Other brokers may tout their price improvements as a reason to give them a try. But look closer and you may see that their “price improvement” is just the market fluctuating naturally. That is not a price improvement.

A price improvement at a good enough broker means that the market was 10 when you wanted to buy and you got filled at 9. That is a true price improvement.

Fill Speed: Some FOREX brokers make some pretty outrageous claims about fill speed—beware of what they say! If they talk about fill speed in seconds, run away.

Good enough brokers route your orders directly to liquidity providers, except for the orders settled internally or locally, or other customers in milliseconds, not seconds. Their cancel speed (sometimes more important than fill speed) is even faster than their order processing speed, something every trader can appreciate.

Spreads: Don’t be fooled by claims from brokers implying spreads can be smaller than the minimum price difference (sometimes down to zero!). They are falsehoods. Make sure you are reading the fine print.

Better watch their claims regularly for a few months or more; can't wait -- ask for a tick data for the past year and analyze it carefully ;)

Trust: Trust in your broker is crucial. Whether it is transparent trading, non-deal desk execution, or ethical conduct, your broker should have your back. Sadly, this isn’t always the case. Research the NFA and CFTC or other relevant records. Some brokers have racked up millions in fines... and are still operating.

The best brokers are focused on you, the trader, and not the market price. They must work tirelessly to provide you a true trading environment, system and, or platform to give you the cost effective and transparent way to trade FOREX.

Nothing is perfect, not even the God in this world! However, the records at regulator's registers must show little or no complaints about good enough brokers or should show quick and satisfactory replies as well as solutions. Same is applicable for their publicly open bug tracking system.

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