Shh! The 4 Things Your Broker doesn’t want you to know

By Adinah Brown

We all have our little white lies. Those little secrets that we keep to ourselves. So, did you really did take out the rubbish last night? Sure, just as you told your son that you just don’t know what happened to the chocolate bar, which he has spent the past 2 hours looking for this morning, which you ate last night. Our motives are not always wrong, sometimes we just want to make this world a slightly, shall we say, more beautiful, if not easier world to live in.

Well, the bad news is that your forex broker is no exception, your broker also has their secrets that they simply choose not to reveal, even if your broker is legit and properly regulated. The good news though, is that we’re here to tell you what they may be hiding. Giving you the opportunity to take them to task.

1. Are you Regulated?

This one is huge, because the first thing you want to know about a broker before you start trading with them is if they are, and if they’re answer is anything else than a direct yes, than walk. Better still, find out who they are regulated by, as the transparency and credibility of regulation authorities greatly vary. Generally speaking, those jurisdictions with the most reputable regulation authorities include the UK, Europe, Australia and Japan.

2. STP or MM?

Get our Weekly Commitment of Traders Report: - See where the biggest traders (Hedge Funds and Commercial Hedgers) are positioned in the futures markets on a weekly basis.

Get Our Free Metatrader 4 Indicators - Put Our Free MetaTrader 4 Custom Indicators on your charts when you join our Weekly Newsletter

That by the way stands for Straight Through Processor and Market Maker and the one you want is the STP. The Market Maker is essentially bidding against you, in the sense that if you place a trade, the MM, otherwise known as the A book is placing an equal and opposite trade. The STP, on the other hand is more transparent. Also known as the B-book, they effectively transfer your trade direct to the liquidity provider. Effectively performing the tasks that you would presume of a broker, who unlike the market maker, is invested in your interest to win.

3. No fees. We only charge a Fixed Spread

Sounds good, tell me where to sign? Before you get too excited, let’s read the fine print on this one.

A. Fixed spreads are variable to change and that’s because there are two types of spreads the market spread and the broker spread. The market has a built in spread which will vary according to volatility. The broker takes no cut in this charge and the varying rate is completely out of their control. They make this payment to the market and are simply forwarding this cost on to you. Therefore to make their profit the broker also puts on their fee on top of this, which is also variable. In a quiet market, this may be minimal, but if the market is experiencing a state of extreme volatility, you’re in for skyrocketing costs!

B. Generally speaking the market maker will take their profit from the spreads. The fix spreads quoted will be for a micro lot, which is ten times as much than a mini lot. That’s not in any way misleading, but it certainly is something that you should know. In contrast a broker with an STP model will provide really tight spreads, or if not that, than a charge in commission or fees. This is ideal for those who want to know how much their fees will be from the outset.

4. High Leverage and Free Bonuses

Whoo Hoo! This all sounds like free money to trade with. But hold it right there, didn’t your mother ever tell you that there is no such thing as a free lunch? Well unfortunately, she was right.

Leverage is a powerful tool that has the means to dramatically increase your profits, but the converse means that it can also dramatically increase your losses. So, trading at a 1:400 leverage ratio means that for every $1 you trade, you could earn $400, but it also means that you could lose $400. Now consider the multiplications of that when the average trade is $200 or $300. That’s quite a sizeable loss. Therefore, it’s imperative you know how much leverage you are trading with and make sure that it’s an amount that you can afford to risk.

Bonuses don’t work that differently, basically its additional capital that works to further compound your leverage. So, let’s say you are trading $1, and the broker says they’ll give you a bonus of $1 and that the leverage is at 1:200. This means you then have the potential to win and lose to the degree of 2×200. Bonuses are offered by brokers to attract new clients, but they only do so because it’s a scheme that they know works in their favor. Many respected regulators have outright prohibited the provision of bonuses, so if your broker does offer bonuses, it’s a good indication that they are not regulated. This is then your cue to stay well away.

About the Author:

Adinah Brown is a professional writer who has worked in a wide range of industry settings, including corporate industry, government and non-government organizations. Within many of these positions, Adinah has provided skilled marketing and advertising services and is currently the Content Manager at Leverate.