Why It's Hard to Earn Money With a Forex Broker
The forex market presents a huge opportunity to make gains. However many forex traders lose instead of gaining for several reasons. One of the reasons traders lose their money is the wrong choice of brokers. The broker you trade with to a great extent determines your success or failure. Some forex traders trade against their clients. They do this in two different ways.
How your forex broker may be trading against you
The first group of brokers technically trade against their clients. They do so by taking the opposite side of your trades. However, in general, they’re taking a risk-neutral attitude to trade and are seeking to instantly counterbalance the trade. Therefore, they aren’t intentionally trading against you but only technically.
The second group of brokers decides on the positions of their clients to offset. Therefore, they intentionally take a directional position against your trades and in this way they directly trade against you. For example, assuming this group of brokers want to take a long Euro position in the market, they will fail to offset the short Euro trades you or other traders have made. Instead, they intentionally take the opposite side of these trades.
Both the first and second groups of brokers can end up with a high risk which in turn affects their traders if the bigger banks and brokerage companies they offset orders with stop taking positions. This type of risk is known as liquidity risks. When this happens, both the broker and its clients get hit. A very clear example of this is when the Swiss National Bank detached the Swiss Franc from the Euro and this resulted in a large market move within minutes.
You can avoid this problem by finding out from your broker what dealing desk policy they’re using. This is essential because many of them don’t feel comfortable accepting that they’re the counterparty to your trades. Also, sometimes, some of their staff are not properly educated about their mode of operation and what exactly their business model is. So, ensure you trade with a reputed broker.
Finding a reputable FX broker
The forex market doesn’t enjoy much supervision like the other financial markets. This is why it's possible to find some disreputable brokerage firms in the market. You need to ensure your safety and the safety of your finances by working with a reputed Forex broker. For US traders- you may find a special list of Forex brokers, that accept citizens of the USA. For Europe - you can check brokers under CySec Regulation.
The broker must have overall integrity that will ensure your funds are safe and also for the possibility of becoming a successful trader with this broker.
Check the broker's registration with a regulatory body
The first place to start is to choose a broker that is registered with the regulatory body of the jurisdiction where you’re trading. Also, it’s good to know that regulatory bodies are not created equal. For your safety ensure that such a brokerage firm is recognized by a reputable and preferably first-tier regulatory body. If you’re trading from the UK, for instance, look for brokers that are registered with FCA and if you’re in the US, look for brokers registered with CFTC.
Check the account offers of the broker
You should equally research the broker’s account offerings and this must include leverage amounts, commissions and spreads, initial deposits, account funding processes, and withdrawal procedures. You should be able to get this information from the customer service of the company you’re intending to work with.
Margin and leverage account
Besides trading with a disreputable broker, another reason why traders lose their money with brokers is over leveraging. While trading with leverage can boost your profit, it can equally result in losses if trades go against you. When trading with leverage, you’re technically borrowing that sum from your forex broker. When you’re trading with a margin account, you get an account boost and a potential to make some profit. On the other hand, such trading can easily make you lose all the money you have in your account in a twinkle of an eye.
If you’re lucky, you may be working with a broker that will place you on a margin call to cap your loss with the money you have in your account. Other brokers will not only make you pay with the money you have in your account but much more than that if the trade closes at a position that is far beyond the money you have in your trading account. They make you pay for the entire negative balance. You don’t want all your savings and properties confiscated.
Trade with a reputable broker and remember to follow the rule of thumb-only trade with the amount you can risk.