The common pitfalls of Forex traders
Before we jump into the desirable qualities of brokers or the right way of selecting a broker, I would like to spend a moment and illustrate why you should care about this subject. We can all learn from the mistakes of others.
Mistake 1. Select a broker too quickly. We typically hear someone brag about a fantastic return they made trading currencies. That urge to do the same makes it so tempting to skip the broker selection stage, to get on with real trading. Without knowing anything about your skill or IQ, we can almost guarantee that if you skip the broker selection process your initial deposit - whether it was $50 or $50,000 - it will be lost in 45 days. The new trader is probably not ready for trading, has little risk management training, and worst of all, does not understand how Forex brokers make money. Do yourself a favor: take it easy and be methodical to do things correctly. The Forex market is not going away tomorrow.
Mistake 2. Assume too much, ask too little. The average trader who opens a live account will not take the time to ask the broker things like: do you have a dealing desk?, how many banks give you Forex prices?, what is your policy for scalping?, etc. So, let's say that you heard that trading the news can make you a lot of money. You think you are clever because you select a broker that has fixed spreads, so when the news announcement comes the spreads will not change. The problem you did not contemplate, however, is that your chosen broker may not allow you to trade during news announcement. Do yourself a favor: Don't assume, ask all the questions that are important to you upfront before you fund the account.
Mistake 3. Over-react when a trading problem happens. Trading problems or surprises are part of a normal experience trading Forex. The problem may be how a stop loss was executed, or how long it takes to open/close orders, or the charts freezing at the wrong moment, etc. Being hit by a surprise like that can be costly and will typically cause a shock to the new trader. This shock along with a lack of knowledge how things work will almost always lead the new trader to say that he has been scammed. He will immediately seek out a forum or website where to vent his frustration and will start his search for a new broker. Do yourself another favor: Educate yourself about the things that can and do go wrong. Very often, you can control and prevent these types of problems by careful broker selection and by the type of trading you engage in.
Mistake 4. Deposit money where you shouldn't. We live in uncertain times when the largest of banks have suffered a crisis of confidence. Brokers are like mini-banks. If enough traders try to pull their money from a broker at the same time, the broker will be forced to freeze client funds. That happened in 2005 with Refco, the largest Forex broker at the time. In hindsight, there were some lessons to help us today. Refco's FX division was regulated off-shore. The regulation of brokers in the US and UK is very strict and it would be extremely hard for a US regulated broker to pull a scam like Refco. Be smart: Try to do business with US/UK regulated brokers unless you have good reasons to keep your funds in other jurisdictions.
Mistake 5. Repeat the same mistakes over and over. You would be surprise how many traders never really learn the right lessons from problems that happen. Too often the solution for a trading problem is to "get a new broker". But changing a broker will not necessarily cause you understand what went wrong and how it can be avoided. Not all brokers are crooks, just like not all traders are losers. Our recommendation: Read the Forex Datasource report "Essential things to know about broker operations", this reading will add more clarity about the complexities of order execution once you put on a trade request.
The attributes that any Forex Broker should possess
> Trading technology that is attractive and stable
> More capital than the minimum required
> Qualified personnel
> Responsive management
A professional Forex broker takes seriously its role as a sophisticated provider of trading services. Sadly, there are plenty of Forex brokers with $500,000 in initial capital that think that with a nice website, a leased backoffice software and five employees, they have all that is necessary to start receiving money from Forex traders. The basic architecture of a Forex broker - see graph below - is something that is complex and typically costs millions of US dollars. It is comprised of hardware, software, support personnel and experienced managers.
Mistake 1. Select a broker too quickly. We typically hear someone brag about a fantastic return they made trading currencies. That urge to do the same makes it so tempting to skip the broker selection stage, to get on with real trading. Without knowing anything about your skill or IQ, we can almost guarantee that if you skip the broker selection process your initial deposit - whether it was $50 or $50,000 - it will be lost in 45 days. The new trader is probably not ready for trading, has little risk management training, and worst of all, does not understand how Forex brokers make money. Do yourself a favor: take it easy and be methodical to do things correctly. The Forex market is not going away tomorrow.
Mistake 2. Assume too much, ask too little. The average trader who opens a live account will not take the time to ask the broker things like: do you have a dealing desk?, how many banks give you Forex prices?, what is your policy for scalping?, etc. So, let's say that you heard that trading the news can make you a lot of money. You think you are clever because you select a broker that has fixed spreads, so when the news announcement comes the spreads will not change. The problem you did not contemplate, however, is that your chosen broker may not allow you to trade during news announcement. Do yourself a favor: Don't assume, ask all the questions that are important to you upfront before you fund the account.
Mistake 3. Over-react when a trading problem happens. Trading problems or surprises are part of a normal experience trading Forex. The problem may be how a stop loss was executed, or how long it takes to open/close orders, or the charts freezing at the wrong moment, etc. Being hit by a surprise like that can be costly and will typically cause a shock to the new trader. This shock along with a lack of knowledge how things work will almost always lead the new trader to say that he has been scammed. He will immediately seek out a forum or website where to vent his frustration and will start his search for a new broker. Do yourself another favor: Educate yourself about the things that can and do go wrong. Very often, you can control and prevent these types of problems by careful broker selection and by the type of trading you engage in.
Mistake 4. Deposit money where you shouldn't. We live in uncertain times when the largest of banks have suffered a crisis of confidence. Brokers are like mini-banks. If enough traders try to pull their money from a broker at the same time, the broker will be forced to freeze client funds. That happened in 2005 with Refco, the largest Forex broker at the time. In hindsight, there were some lessons to help us today. Refco's FX division was regulated off-shore. The regulation of brokers in the US and UK is very strict and it would be extremely hard for a US regulated broker to pull a scam like Refco. Be smart: Try to do business with US/UK regulated brokers unless you have good reasons to keep your funds in other jurisdictions.
Mistake 5. Repeat the same mistakes over and over. You would be surprise how many traders never really learn the right lessons from problems that happen. Too often the solution for a trading problem is to "get a new broker". But changing a broker will not necessarily cause you understand what went wrong and how it can be avoided. Not all brokers are crooks, just like not all traders are losers. Our recommendation: Read the Forex Datasource report "Essential things to know about broker operations", this reading will add more clarity about the complexities of order execution once you put on a trade request.
The attributes that any Forex Broker should possess
> Trading technology that is attractive and stable
> More capital than the minimum required
> Qualified personnel
> Responsive management
A professional Forex broker takes seriously its role as a sophisticated provider of trading services. Sadly, there are plenty of Forex brokers with $500,000 in initial capital that think that with a nice website, a leased backoffice software and five employees, they have all that is necessary to start receiving money from Forex traders. The basic architecture of a Forex broker - see graph below - is something that is complex and typically costs millions of US dollars. It is comprised of hardware, software, support personnel and experienced managers.
