Forex Broker Truth: Basics
Every few weeks a new Forex broker joins the market offering online currency trading.
Some brokers do business in a straight forward, honest way, while others try to “invent” additional rules to maximize company gains.
Think this way, a broker doesn’t come into the market with the self purpose to help you earn profits in Forex. Forex brokers, first of all, come to make money for themselves.
I won’t dive into the details on how brokers make money using common industry standards. I’m going to talk about the OTHER rules, invented by Forex brokers. These “other” rules are also fair, nothing illegal, with the exception that “other rules” make Forex brokers slightly more richer.
Illegal brokerage practice remains illegal and is prosecuted by the law worldwide. Again, we are talking about legal methods of making extra profits (often than not, at clients’ cost), those methods that not every trader is able to spot out without the experience.
These other rules are about:
- spread policies;
- position time limits;
- platform time zones;
- negative interest rollovers;
- affiliates commissions;
- and other..
This topic will consist of several separate publications, where we’ll talk about each of these rules in details.
My friends, let’s clarify the last important thing, before we move on:
I’m not trying to make you suspicious about brokers and their practice. I simply want you to be smart and aware of practices that exist out there whether we wish for it or not.
I’m not trying to teach you to hate brokers or stop respecting them; after all, it is you in the end, who will decide about signing a contract with them and accepting their rules. Some brokers choose not to overload clients with tons of details about trading; it is your duty to ask a broker about the rules and terms before you sign a contract and begin trading.
Trading platform time zones:
If you tried trading with at least two Forex brokers, you may have already noticed that every Forex broker has own time zone settings for thier trading platform?
Having data displayed in the right time zone is crucial for many aspects of Forex trading.
Daily and weekly charts can easily have different values and price ranges if a new daily candle on one trading platform appears at 00:00 GMT, on another platform 2 hours later at 00:00 GMT+2, and on the third platform 5 hours earlier at 00:00 GMT-5 (EST)
If you are using automatic pivot points, they will be calculated according to your time zone and daily candles. As a result — your support/resistance levels will be different form what other traders may have.
If you are trading daily breakouts, your breakout entry points will differ from other traders’ orders.
And finally, every single indicator can behave differently. Enough, I think.
There are many nuances of that; an exception could be maid only for intra-day trading: starting from 1 hour time frame and lower you won’t care much about time zones (except for pivot points levels, and may be few other studies).
Have you ever been into a situation where, once you’ve changed a broker, your old strategy seemed to start performing worse or even failed completely?
When discussing trading systems on forums, some traders report amazing results while other traders while being 100% disciplined in trading can’t achieve any similar performance… I wonder why… ^^
Time zone settings on majority of Forex trading platforms cannot be changed.
Some brokers use this factor to their advantage.
Instead of picking for their trading severs the most common time zone(s), where the largest Forex markets operate: London (GMT) or New York (EST), brokers choose other time zones, like GMT+2, +3 etc.
I can’t explain why they do it. Except, probably, for those brokers who decide that platform time zone should be the same as the location of the company. But I’ve seen unexplainable cases, when broker company is, say, in New York, and they set time zone for their platform (randomly?) at GMT+6… Why would you do that? Probably to make sure no strategy works well under this conditions…
I can sound overly cautious and concerned with those time zones, but it doesn’t eliminate the fact that the platform’s time zone plays a significant role in one’s trading success way to often to be completely ignored!
Spreads:
This should be easy. Only an inexperienced trader takes the first recommended broker. Others do lots of comparisons before settling with a choice. One of the comparison criteria is brokers’ spreads for different currency pairs. If, for example, I know that my strategy requires trading USD/JPY and GBP/JPY, I’ll go and check all available spread options with different brokers and will be looking to pick the lowest spreads for the currencies of my choice.
Same selective tactics apply when shopping for leverage, margin, lot sizes etc.
Novice traders often don’t have preferred pairs as they also don’t have finished and polished trading strategies, therefore they are fine with a broker who offers more or less low spreads on common pairs, like EUR/USD, for example.
For a Forex broker it is easy to lure in such traders. Some brokers would offer competitive low spreads for common currency pairs, like EUR/USD, GBP/USD, which traders tend to compare most, but for other pairs set higher than average spreads. Novice traders buy it, and brokers stay happy. Later traders realize they want to trade other pairs as well…
Another way for Forex brokers to attract a client is to advertise about lower spreads. A broker would say that their spreads are “as low as 0.7 pips”.
There comes another wave of “they think they are smart” traders, who are glad to take such a bargain. What traders don’t realise while comparing the spreads it that those spreads are variable. Unless you are trading with true ECN broker, variable spreads could be quite costly. The problem with variable spreads that traders always complain about is: you seem to never get a spread you’ve been lured by in the advertisement. Variable spreads will vary depending on the market volatility and liquidity. Higher volatility — higher spread, lower volatility — lower spread. At the same time: higher liquidity — lower spreads, lowers liquidity — higher spreads. Could be difficult for a beginner trader to get a grasp on it at first, I know.
Opposite to variable spreads are fixed spreads: fixed spreads are easier to trade with, they don’t vary no matter what. (*Fixed may increase during news announcements. If that’s the case, a broker will warn about it).
Additionally, variable spreads go wild during news time. Biggest suckers (sorry…) come to trade with variable spreads during news releases. Ever seen a spread 40 pips wide? Yes, that’s what you may pay one day for opening a position during news time if you trade with variable spreads. (*At times fixed spreads may surprise in the same way. Be warned.)
If you go with a broker whose spreads are variable, you’re signing a contract to take “whatever is offered to you” at the moment of opening a position… This “whatever” can be very different from what’s been advertised. On the top of that you’re signing in for an additional headache of looking at spreads EVERY TIME you open a new position.
Although the spread cost itself seem to be quite a small fee comparing to the profits one plans to make, spreads add up very quickly, so quickly that for many intra-day traders it may become a determinant of profitable or unprofitable trading performance. Try to calculate how much you’ll pay in the spread cost each month.
But don’t run so happily now towards fixed spreads… Fixed spreads, you won’t believe it… can also widen. This warning is written on every broker website where you have fixed spreads. Every serious shakeout in the market: news, economic shifts other global events will immediately cause fixed spreads to expand, unless a broker promises to never widen a spread. It is your duty to check the spread before you enter with it.
ECN brokers provide the lowest variable spreads, which is the best deal, yet there is a commission cost to be paid on top. STP brokers can also offer variable spreads, but you have to monitor the spreads closer than ever. Market makers can offer variable spreads — here you have to be very cautions and look at spreads before you jump in each trade. Fixed spreads are common among Market makers and STP brokers, who get quotes from larger market makers: fixed spreads are usually wider than variable, but in the long run may actually be equal in the cost as they remain stable most of the time.
Fees:
As an educated beginner or an experienced trader, you know a thing or two about interests and rollovers in Forex.
For holding a trading position open past 17:00 pm, brokers calculate a rollover on it. You won’t see this in your account history, but what actually happens is: during a rollover a position is closed and re-opened again. Because different countries have different interest rates for their currencies, an interest differential between currency pairs occurs. This differential can be either positive or negative, which defines the outcome: interest is either earned or charged to your account.
The list of pairs that collect positive interest when bought or sold and pairs that collect negative interest is well known to experienced traders.
Among the currencies that collect positive swaps/rollover are normally:
AUD/USD when Long (bought)
USD/JPY, EUR/JPY, GBP/JPY and other/JPY pairs when Long
USD/CHF, GBP/CHF and other/CHF pairs when Long
You should be always able to check the swap rates table with your Forex broker. If you don’t know what swaps are awaiting for you after 5pm each day, please don’t tell me you’re a serious trader.
All you need to do is to buy a currency with a high interest rate against the currency with a low interest rate.
Popular currencies with high interest rate are: USD (not the case with recent economic situation), GBP, AUD and NZD.
Popular currencies with low interest rate are: CHF and JPY.
Some pairs may change their positive interest earning features in the long run as country governments cut or raise interest rates, but overall the base list remains the same.
I’ve seen and you’ll see Forex brokers, who don’t care about those interest rate rules.
What would be better than making all Forex rollover interest negative? Right?
“…Alright, let’s leave one or two pairs with a positive rollover for curious traders, but make everything else negative” — a simple trick used by a broker. As a result — traders are discouraged to hold positions past 17:00pm, the rollover time. Holding positions open for many days becomes expensive. What to do then? Avoid rollover and trade more frequently, may be..? Well, good choice ;), that’s what brokers aim for in the first place..!
Every trader may easily find what currency pairs should have a positive interest.
If you buy a currency pair where the base currency has a higherinterest rate than the quote currency, then you’ll earn positive interest; if it is the other way around, you’ll pay interest. For example, if you buy GBPJPY and the interbank interest rates in UK are higher than in Japan, then a rollover should be positive by the end of the day and your broker should pay you the interest. But, say, if the interest rates in Japan were higher than in UK, then you’ll pay a rollover fee to your broker when you’re Long on GBP/JPY.
The only thing left to do is to learn what interest rates for currencies are now.
Let’s take an example:
If the interest rate for EUR now is 3.25%, and for USD the rate is 1.0%, this means that when you Buy EUR/USD you are going to earn interest (positive rollover), if you are to Sell EUR/USD you’ll pay interest (negative rollover).
Example:
If to calculate the interest for holding a Buy position on EUR/USD:
when buying EUR you earn 3.25%
when selling USD you pay 1.0%
Net total is 3.25% — 1.0% = 2.25% interest earned.
Simple, right?
Now, you can check the latest interest rates, define currency pairs that collect positive interest and compare results against your Forex broker rollover fees…
By now, my friend, you already know that there are spreads to pay for entering a trade and there are rollovers to pay (sometimes to earn, thanks God… oh, well…) for holding a trade.
What you probably never thought of, or never experienced due to the lack of experience, hm, is that this Rollover thing is way much more nastier and costly than you can imagine. Where and How?
The truth is, the system of currency trading is built such way that we, retail traders, are slaves of constant fees as long as we trade: we pay the spread to enter a trade, and then if we hold it for a day, we pay a rollover on top (more of less we can treat it as another spread), and later the next day if we hold on to a trade, we pay another rollover (”spread”) and so on. The grim reality of all this costly trading is that long term investors (usually the smartest guys with a long term outlook at the currency trends) are actually put in the most disadvantageous position, where their fat brokers keep on charging them rollovers day after day as the trades kept open.
Want an example? Let’s laugh (or cry) together about my trades: I have a trade running for over 1.5 months now on AUDUSD. The trade sits in profit since opening, but it is a long term goal, and it’s not yet the time to close it. Everyday I pay a rollover on it (I mean, come on, I’ve paid the spread already, but it’s another everyday “spread” I’m paying to my broker… what a rip off! Really…) Yeah, let me boast about my profits so far: it’s $1960 in floating income and already -$532 in rollover charges, which leaves we about $1350 to cheer about.
Well, another trade is a bit better, check it out for yourself:
… And this will be with everyone who dares to hold a long term trade with a negative swap/rollover. Forex brokers are simply feeding on us everywhere they can! On the other hand, that’s the rules we accepted from brokers, right? So it is silly to whine now. I should repeat, that’s the rules we accepted!
I accepted it as well :(
Can you make a conclusion from this, I hope you can. If you ever to hold a long term trade, consider opening only those where you’ll get a positive swap — it is better that way, trust me ;) Or, there is another way around — seek for a broker with no-swap accounts. The number of such brokers is growing, basically due to increasing popularity of trading in the Muslim world, where the Sharia laws prohibit swaps (extra rewards). So, Forex brokers now have this new no-swap technology working, and you can join in regardless your religion (depends on a broker, of course).
Well, that’s the lesson for today. Hope you’ve took something out for yourself. Stay tuned!
Cheers
