How Forex Brokers Work

Like any other business in the history of business, your broker’s raison d’etre, is to make as big a profit as possible. There are about as many ways to go about this as there are brokers. For those who are in it for the long haul, however, it is generally best to adopt a set of practices which are deemed fair by their clients: certain boundaries are set, and operating beyond them can cost a brokerage its reputation, and along with it its clients. Straying outside these boundaries, therefore, is not considered as being in line with the long term goals of the business. How strictly these boundaries are enforced, especially when there is little chance of clients ever even becoming aware of any transgression, again varies from business to business. For the sake of simplicity, in this article we assume that everyone in the business is squeaky clean, as if every client could peek into the broker’s back office at any time and dissect every trade. This is obviously not the case, and many brokers do take advantage of this opaqueness, but the details of that are best left for another discussion.

So without further ado, let’s get into the details of how forex brokers function. Somewhat removed from the top-tier interbank market, retail forex brokers are there to provide a service that would otherwise not be available, that is, giving an investor with a $10,000 bankroll the chance to speculate in the up-until-recently very exclusive forex market. There are generally considered to be 2 types of brokers providing access at the retail level: Electronic Communications Networks (ECNs) and Market Makers. ECNs are generally somewhat more exclusive, requiring larger deposits to get started, but are seen as providing more direct access to the interbank market. As we will see, there are certainly advantages to this, but some disadvantages as well. Market makers, on the other hand are more often than not, the counter party to their clients’ trades, creating somewhat of a conflict of interest, whereas ECNs profit from commission fees charged directly to the clients, regardless of the result of any trade, they are seen as being completely impartial – an ECN has no incentive for a client to lose money. In fact, one could argue that an ECN stands to profit more if a client is successful, meaning that s/he will stay around longer and they will be able to collect more commission fees from them. A market maker, on the other hand, being the counterparty to a client’s trade, makes money if the client loses money, providing an incentive for some shady practices, particularly in an unregulated market. The extent to which this happens varies among individual brokers. There are also some benefits to trading with a market maker (see our ECNs vs. Market Makers article) Some brokers also provide a service that doesn’t quite fit into either category – they route different orders differently, depending on complex algorithms, or on a dealing desk, that analyze each order and attempt to fill it in the way that will be most beneficial to the broker’s bottom line. They can offset some client orders against one another, effectively creating an in-house market, they can choose to be the counterparty to a client’s trade (trade “against” the client), or they can offset their position with a hedge through a higher-tier counterparty. Note that the market maker is mainly concerned with managing its net exposure, and NOT with any single individual’s trades. They are NOT gunning for your stop losses specifically, but may be gunning for clusters of stops.

If you have already read the first article in the series, Structure of the Forex Market, you will recall that market mechanics are responsible for the variation in bid/ask spreads, and also for slippage. So it seems the two biggest novice traders’ pet peeves are not so much a function of who their broker is, but rather their lack of understanding of the way the forex market operates. A broker that offers a fixed spread tends not to fill orders during periods of low liquidity because this would expose them to undue risk, and as much as their job is to cater to their clients, remember they are in business primarily to make money for themselves. Some brokers also offer guaranteed order fills, such as “guaranteed stop losses”. Again, if there is no counter party to take the trade, they have to expose themselves to risk in order to fulfill this guarantee, so don’t be surprised if you see such a broker quoting different/delayed prices around important trend lines or support/resistance levels. Be especially aware of brokers who offer both guaranteed fills AND fixed spreads. When a broker offers something that seems too good to be true, you would be wise to question how exactly their business model is able to support such a risky practice. As a general rule, a broker will help you only when your interests are aligned with theirs. On the other hand, brokers provide a very valuable service, without which you wouldn’t have the opportunity to profit from the forex market, so please think about how it all comes together before blaming yo

Providing Better Proof For Forex Automated Products

hen you are thinking about buying a Forex robot or expert advisor, is there anything in particular that should draw your attention? Well, you must gain sufficient confidence that the product will be capable of producing consistent profits over the long haul. What is the best way to achieve this goal?

You can do so by carefully studying the proof items supplied by the sellers. Unfortunately, this information tends to be deeply immersed within all the drawling sales literature that normally accompanies these devices. Consequently, the data supplied is usually substandard at best and even heavily manipulated at worse.

If you realize that most automated devices have failed to produce any reliable income streams in the past, then you should hardly be surprised at this state of affairs. Is there a superior method of producing proof of performance that can be readily verified by potential buyers including novices?

The Forex robot industry would certainly upgrade its reputation if better methods were adopted. There is one method in which you could place your faith and trust, but it does have a couple of stipulations. The first one is that you must be a serious user of Forex automated solutions and not just someone seeking an immediate solution to all their financial woes. This is because Forex trading and its automation are complex tasks and you may still need to work at achieving the optimum answers.

You cannot expect to just switch on a Forex expert advisor, sit back and watch the money pour in. This is because there could be awkward system bugs and the like that have to be ironed out which may not be possible in the initial versions of the product. Basically, you will need to develop a good rapport with the supplier of these devices in order to resolve these issues.

Another stipulation is that the product must work or be very close to doing so. This means that a positive expectancy value can be produced from its test results that can be readily verified by third parties including you. Sellers have not done this in the past because they had no faith in their products.

The preferred method of producing proof would be to display it using live testing. Any potential customer would then be able to witness trading events develop before their own eyes and in real-time. In addition, you would not have to rely on data that was produced historically and outside the range of your own experiences.

Developers could produce snapshots and test results on a regular basis using a blog site. Potential buyers would then have the ability to completely confirm the performance parameters of all automated solutions of interest independently.

Good Forex Education Can Provide a Shortcut To Success

it a good idea to consider serious Forex training at the start of your trading career? A recent survey showed that most novices do not consider this action as important. This study highlighted the fact that only about 5% of traders plan to use demo trading for a period of two years or more before going live.

The other 95% was distributed between those who planned to live trade immediately up to those who intended to demo trade between one to two years. You should pay particular attention to the close correlation between the first statistic quoted and the 5% of traders who actually succeed at Forex.

Forex is a complex subject that can be extremely volatile. You will require significant amounts of skill to trade it profitably over any extended period of time. You will also require substantial powers of concentration so that you can make continuous high quality decisions on a regular basis. This is because you have to conduct each of your transactions with great care because of the amounts of your money that are consistently at risk.

In addition, Forex operates long trading hours and is active from 5:00 pm EST Sunday to 4:00 pm EST Friday. Consequently, you will enjoy many opportunities to realize profits, but must devise a way so that you can trade in a consistent and planned manner.

You cannot let yourself cave in to instinct trading or rushes of adrenaline because you have too much at stake. With so much at risk, you may well consider that your best option would be to seek professional training. If you can locate a first-class choice of education, then this action could save you time as well as heartache and grief over the long haul. Always keep in mind that Forex is a ruthless adversary and only the best survive for any length of time.

If you are just starting, then you have a lot to learn. For instance, you need to grasp all the intricacies of subjects such as technical and fundamental analysis, trading strategies, Forex jargon, money and risk management, etc. You also need to find methods that can enhance your mindset and improve your trading psychology.

If you can select a good teacher, then you should be able to develop a profound understanding for this type of trading. This will help you base your trading decisions on a foundation of quality knowledge and market conditions pertaining to any trading situation that you are studying.

If you can develop your skills to such a level, then you will be able to plan your new open positions based on a superior feel for Forex. In contrast, you could endure months of thrashing about aimlessly if you attempt to try to educate yourself alone.