In this episode of Truth About FX, Walter sheds light on the things that traders should keep their eyes on when dealing with brokers. He shares some notes and resources about offshore brokers — including the dodgy ones — and some key insights about leverage and red flags.
Download (Duration: 07:16 / 8.31 MB)
In This Episode:
00:52 – pitfalls and hurt
01:39 – red flags
03:22 – best antidote
04:18 – blowing smoke
06:01 – microsecond gap
Announcer: Sometimes, forex trading is a wild and wooly place to be. That’s why Hugh is here, to post your questions to Walter, the naked forex guy. Hugh’s got questions and Walter’s got the answers. Here at the Truth About FX Podcast.
Hugh: Hi, Walter. Somebody wrote in, I guess his name is Steve, and he says, “You guys are excellent. I just heard of my answer to the question that I had several months ago.” He just realized the answer on his own.
He was impressed with us and himself. He says, “It proves I’m on the right track and also that your teaching is sinking in”. Alright, thanks, Steve. We really appreciate that.
He also has a question though. He asks, he spent a lot of times on the pitfalls and hurt too as a trader. What are the most common broker red flags that we should be avoiding and before you state the obvious, I’m forced to go to an offshore broker. He says he lives in a nanny-state where, “We’re not considered adult enough to make our own decisions.” What do you think about that?
Walter: Okay. In the shownotes, Steve, we can link up — thanks for your comments, by the way. That’s great. I’m glad to hear that. I would go to the shownotes for this episode, Steve, and click on the link
You should never listen to Hugh or myself when it comes to that. I’m just saying that there are brokers out there that will do that for you and it’s linked up in the show notes. You can have a look there.
Now, as far as red flags, there’s a couple of things that I would pay attention to. One, first of all, is the broker regulated by some governing body? Not all governing body is the same so the one in the… It changed name.
It used to be called the FCA I think in the UK and I think it’s the FSA or vice versa or something like that. That one’s good. The Australian ones are great. So, if Steve has 20 grand to trade, you really shouldn’t be putting 20 grand with your broker anyway unless you’ve got some sort of crazy system where you need a lot of leverage.
You really probably get by putting 9 or 10 grand in there so that if the broker does go bust, at least you have the rest of your trading capital.
If you’ll go in a drawdown and you need more money, you can wire back in and that sort of thing but I would never give the broker all of my trading capital. I think that’s a crazy thing to do and check with the regulator.
Now, here are the dodgy places: Malta, believe it or not Switzerland, Turkey and stuff like that. A lot of these places, those regulating bodies are not going to be as vigilant as the ones in the US, UK or Australia or New Zealand.
You need to be careful there. I would go through the list that’s linked up in the shownotes and see if you can find one that is in an area that’s not Malta, not Switzerland, not like Belize or something like that. That’s what I would do.
The other thing is — so red flags, the question was red flags — if they’re not processing your withdrawals, that’s a big red flag. If they’re giving you bad ticks and stopping you out, whereas, if you’ll look at the other brokers and they don’t have any tick anywhere near that and they won’t refund you and reset the trade for you, that’s a red flag.
If they start slipping you, if you’re trading the lower time frames, you’re going to get slipped once they see you’re making money, that’s normal. I think the best antidote for that is to trade on the higher time frames but it’s up to you.
The big ones are going to be bad ticks that spike out your trades which also includes, obviously, gaps. Gaps are the weakling that take out your trades, and then the withdrawal. They drag their feet with the withdrawals. That’s also a big one.
If they are in a country that it’s probably not and you can look up at the regulators and see how vigilant they are but that’s what I would do. I would look at that. The other thing to note is if they’re offering you really high leverage then they are a market maker.
Even 600 to 1, they’re market maker which means of course that they’re trading against you, which is fine. You just need to realize that that is what’s going on. You need to be aware of that and say, “Okay, yeah. They are market makers.”
They won’t claim to be ECN or whatever. If they claim to be ECN and they’re offering you 600 to 1 leverage or whatever, they’re totally… That’s the blowing smoke like it’s not true so you really probably are looking for a broker that has a 100 to 1.
That’s probably what you’re going to end up settling on which of course is better than the one that you can get in the US. But, if you’re worried about that, if you don’t want to deal with the market maker and you want to deal with the ECN and then that’s probably what you’re going to end up looking for. It’s a broker that has about a 100 to 1 leverage.
Hugh: What do you think about researching like capitalization? How much money do they have in a bank and stuff like that?
Walter: That did not help FXCM. There are examples, some recent ones actually, where if the owner of the company commits fraud and just takes the money, that doesn’t prevent that either.
There was a broker with the guy who took the money and went to Czech Republic or something. Those sorts of things, you’re still not immune to it. What do we learn from the FXCM Tobacco which people probably may or may not know what happened on, was it January 2015, Hugh? Is that correct? Francogeddon?
Walter: Yeah. Francogeddon was January 2015. I think it’s around the 15th of January, there was a huge move in the Swiss-Franc because the Swiss National Bank surprisingly announced that they are no longer going to try and water down their currency.
It got really, really strong really quickly and the USD/CHF fell like a brick. Now, it took some time to get back up but it did retrace the whole amount. What happened was FXCM basically went bust and then they’ve got bailed up by the loan sharks, essentially.
Whereas, Oanda and other brokers that are market makers, they were fine. They made money that day. What happened was they got caught as an ECN. They got caught in the gap between people taking trades and they’re going in into the market to try and balance those trades out.
They got caught in that little microsecond gap and they lost their shirt. You need to be aware of that too. If there are very violent, very quick moves in the market, you might be better off with the market maker.
That is something to think about and I don’t think you really technically — I mean I know some people are going to argue this against me — but I don’t think you technically really need to have an ECN.
Unless, if you’re scalping and then “Yeah, sure. I get it,” you’ve got to do that. But, if you’re trading like H4, D1, W1 charts, I don’t think you necessarily need to have an ECN. I know and other goes against the grain, a lot of people say, “Yeah, you need an ECN blah, blah” but I don’t believe that.
I think that you’re going to be okay with the market maker if you are trading the higher time frame charts and it just means you stops further away. If it gaps over the weekend, you’re less likely to be hit and all that sort of stuff.
That’s what I would say, Steve, and thanks again for your comment. That’s a great question.
Hugh: Yeah, great question. Thanks, Steve. Thanks, Walter.