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| Is Your Forex Broker Ripping You Off? |
By:
Brian Dalton |
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Forex (Foreign Currency Exchange) traders spend a great deal of time wringing their hands and discussing their various concerns about the retail brokers they use to execute their money. The prevailing assumption is that when you try to make money trading you are testing your talent against 'the market' and that's the only enemy you must be concerned about. Unfortunately, the company that any person uses can have as much to do with how successful he can be as any other factor.
Many traders stay away from so-called Bucketshops; retail brokers who quote inaccurate prices, apparently play fast and loose with them to help themselves, and actually trade to the detriment of their own clients. Few agencies will confess to doing this, mainly due to the incontrovertible fact that it provides them a strong reason to make their clients lose. The term 'Market Makers' is also frequently used to describe certain brokers that actually assume the other side of their clients' positions. Because they produce their own version of prices and fill the clients' trades right from the company's own trade inventory, they are undeniably making the market. A realistic look at the environment of currency, though, lets us see that this type of practice is truly vital to making it possible for small retail trades to be made, and although it As unsettling as such truths may may be, small capital trading wouldn't be doable in the absence of such practices, and very few agencies use them to defraud their clients.
The reason this is true is because there is no actual 'Forex market', in the way that there is for ordinary varieties of trading. Stocks for companies, as an example, are traded on a stock exchange such as the New York Stock Exchange or the OTC Exchange in America. These exchanges are regulating agencies who qualify every corporation to be listed, define the specifics of the acceptable trading contracts, monitor brokers, and ultimately clear each trade financially. They have a specific location, trade known hours and are given the power to shut down marketing of all stocks or the dealings of any broker whom they feel is acting unlawfully or in such a way that impedes fair and legal trade.
However, the Foreign Exchange market is just the totaled trade activity of institutions who want to convert cash from one particular currency to another. The real Forex market is made up of major global conglomerates and worldwide banking institutions that move currency about in order to facilitate global trade. If a Japanese company sells goods to America, it will surely be paid in the form of $US, but it have to pay its internal costs as Japanese Yen, therefore it needs to be able to convert massive amounts of currency on a regular basis. This is the actual Forex market; companies and financial institutions who move trillions of dollars worth of currency to and fro daily. Retail traders like us could never participate in that market -- we simply don't have enough cash.
For this reason a Forex broker needs to be free to buy and sell currency straight across with their customers. They are able to handle small trades of the kind we can do, and they can package them together. They, in turn, execute much bigger trades with their 'Liquidity Provider' which is a bank that is willing to transact with brokers in order to make some profit from we retail traders. The large banks are willing to trade with an agent who represents many retail traders even though they would never consider trading with each and every individual. This just wouldn't be possible for them.
As a result, a trader relies on his broker to offer their own currency prices rather than receiving a unified value from a formal exchange. A broker has to work with prices provided to it by its liquidity provider(s) which might not be the same as those published by the other banks. These differences are apparent in the variation between broker quotes. It should not be viewed as an attempt to cheat the clients (although there likely will be those who do) but simply a necessary part of creating the market for you to participate in. A reputable retail brokerage will not endeavor to gain from its customers by misquoting prices, but it has to take the other half of its clients' trades so that they can honor them.
Therefore, to sum up, we see that retail brokers find it necessary to take the opposite side of all but the most sizable of their customers' trades, but they are not supposed to use this to actively trade to their detriment. In these circumstances a Forex trader needs to be responsible for her own interests. Each trader must consciously pick their broker and ought to actively watch the trade and price activities to ensure that they are being treated ethically. In fairness, in any case, every speculator should accept that the brokerage has to trade opposite to them and they shouldn't conclude a nefarious design. It may seem strange and also somewhat burdensome, but it's a fundamental and crucial part of the small capital Forex business model.
About the author:
Brian Dalton has been studying and trading Forex for years. He has made it a personal goal to help fellow traders by sharing his insights and understanding to de-mystify the Forex market experience.You can read his blog at Money Pipeline. He writes and sell Forex indicators and trading systems at www.tantalusonline.com. |
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