Have you ever wondered why the ads of '400-1 leverage' are shown all over the broker sites? Or have you jumped at them and looked to sign up for a Free Demo Account? Well the problem that most novice traders don’t see is that these brokers are selling you the supposed ‘benefit’ when in turn; the only ‘benefit’ is theirs. Let’s explain this. Dealing Desk forex brokers make their own markets - they make the bid-offer price to their clients. They work on the probability assumption that as most highly leveraged speculators lose then its good business to take the opposite position to them.
This is done automatically, so when a client buys Dollars against the Yen, the broker sells short the Dollar. When the client covers the position (either for a profit or loss) the broker is taken out also. If the client wins the broker loses and vice-versa. If the brokers stand to gain when a client loses, what is the best way to make sure that the clients lose big time? Easy, let them trade huge positions on a limited amount of capital so that the odds even for the best and most talented traders are pretty much – ZERO. This is how the leverage game is played.
Understanding how leverage works is also cruicial in deciding which broker to choose for your trading. The question here is does your forex broker immediately offset positions with their clearing house or do they actively take positions on the other side of their clients' trades? The purpose you should focus on here is to find a forex broker that is looking after your own interests not theirs.
Which Broker to Choose?
Find a broker where you can trade with low leverage, definitely lower than 300:1 or the ridiculous ratios like 500:1. Our recommended broker discourages high risk trading and prohibits the use of leverage in excess of 50:1.
Those brokers offering high leverage have a business model established primarily for transferring wealth from your account into theirs and are not looking after YOUR interest. Remember also that there is a big difference between the minimum margin required and leverage. If you don't understand these concepts you are at risk.
Nothing a broker offers in terms of technology, charts, news, training, narrow spreads, interest on unused margin or any of the many tricks the marketing wizards play will save you from the peril of too highly geared trading.
Do Some Investigation
It is imperative that you make sure that you are comfortable with the risks associated with your forex broker. You have to make sure you get satisfactory answers to some basic questions:
•Is your forex broker subject to a globally recognized regulator?
•Does the regulator specifically oversee the retail OTC forex
market?
•Does your broker have a registration / license number with the
regulator?
•Does your broker have a disciplinary record with the regulator?
Lastly enquire whether the forex broker is a small independent entrepreneurial firm or is it part of a larger financial group? If the firm is part of a large financial group it is possible that many of the risks associated with a smaller firm do not come into play. It is also possible for your broker in such case to indeed offset all trades with "mothership", thereby limiting the risks of "running stops", which may sometimes be to your disadvantage.
Dealing Desk brokers advertise "zero commission" trading on their websites to promote a supposed benefit when in fact this is not how they make money. They make money through the spreads they charge clients and which (if you have had some experience in the past with them) you would know that they tend to jump unexpectedly in certain times. With a non-dealing desk broker, the fees (commission) they charge are fully transparent and stated upfront. That cost is decidedly less than what you pay trading against a broker who controls pricing, can spike your trades and offer quotes whatever may suit them.
This is done automatically, so when a client buys Dollars against the Yen, the broker sells short the Dollar. When the client covers the position (either for a profit or loss) the broker is taken out also. If the client wins the broker loses and vice-versa. If the brokers stand to gain when a client loses, what is the best way to make sure that the clients lose big time? Easy, let them trade huge positions on a limited amount of capital so that the odds even for the best and most talented traders are pretty much – ZERO. This is how the leverage game is played.
Understanding how leverage works is also cruicial in deciding which broker to choose for your trading. The question here is does your forex broker immediately offset positions with their clearing house or do they actively take positions on the other side of their clients' trades? The purpose you should focus on here is to find a forex broker that is looking after your own interests not theirs.
Which Broker to Choose?
Find a broker where you can trade with low leverage, definitely lower than 300:1 or the ridiculous ratios like 500:1. Our recommended broker discourages high risk trading and prohibits the use of leverage in excess of 50:1.
Those brokers offering high leverage have a business model established primarily for transferring wealth from your account into theirs and are not looking after YOUR interest. Remember also that there is a big difference between the minimum margin required and leverage. If you don't understand these concepts you are at risk.
Nothing a broker offers in terms of technology, charts, news, training, narrow spreads, interest on unused margin or any of the many tricks the marketing wizards play will save you from the peril of too highly geared trading.
Do Some Investigation
It is imperative that you make sure that you are comfortable with the risks associated with your forex broker. You have to make sure you get satisfactory answers to some basic questions:
•Is your forex broker subject to a globally recognized regulator?
•Does the regulator specifically oversee the retail OTC forex
market?
•Does your broker have a registration / license number with the
regulator?
•Does your broker have a disciplinary record with the regulator?
Lastly enquire whether the forex broker is a small independent entrepreneurial firm or is it part of a larger financial group? If the firm is part of a large financial group it is possible that many of the risks associated with a smaller firm do not come into play. It is also possible for your broker in such case to indeed offset all trades with "mothership", thereby limiting the risks of "running stops", which may sometimes be to your disadvantage.
Dealing Desk brokers advertise "zero commission" trading on their websites to promote a supposed benefit when in fact this is not how they make money. They make money through the spreads they charge clients and which (if you have had some experience in the past with them) you would know that they tend to jump unexpectedly in certain times. With a non-dealing desk broker, the fees (commission) they charge are fully transparent and stated upfront. That cost is decidedly less than what you pay trading against a broker who controls pricing, can spike your trades and offer quotes whatever may suit them.
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