What’s the best way to know your broker?
In this episode of Truth About FX, Walter digs into the most common red flags forex traders should avoid. He gives some useful hints on where to look for the “best” brokers — and the reason why they stay at certain places — and how do you know which broker to trust? Walter puts out a simply way to test this.
Download (Duration: 07:33 / 8.6 MB)
In This Episode:
00:49 – be real
01:34 – burned to ashes
03:00 – test them
04:51 – “A” account
06:05 – drag their feet
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. We’ve spent a lot of time on the pitfalls inherent in each of us traders and this is a question coming from a reader by the way. What are the most common broker red flags we should be avoiding?
Walter: This is a good question. Overall, the most common complaints about brokers are unfounded — which I know is kind of controversial. If you think about it… First of all, let’s just be real. There are dodgy brokers, no doubt, and that’s just a fact to life and it’s often like futures traders. You hear people like futures traders point to forex and say, “Oh, it’s a bunch of baloney. Forex is a big scam because the brokers are all dodgy.”
That’s not true. I mean, if you think about it if you’re running a business and you start stealing money from people — which is basically what dodgy brokers do — then you’re going to get a bad reputation.
I know for a fact like here in Australia, there’s one broker that doesn’t even market anymore. They’re actually kind of like have an introducing broker that does all their marketing for them because they basically burned their reputation into ashes.
It does happen and I’ve had accounts with dodgy brokers. Here’s what I would say: there’s a couple of things that you can look at. One, you can look at where they’re based and where they regulate. Now, that’s not going to tell you everything but it’ll tell you something.
You’re going to need to ask why would someone be based in St. Vincent and the Grenadines. It could be for tax purposes, it could be because they wanted to take on US clients and they don’t want to be based in the US to get slapped.
It could be lots of reasons why so that’s one thing. Obviously, if you go to a broker who is regulated in the United Kingdom, in the United States, Australia and even places like Singapore and New Zealand or Canada, those are great places to look for brokers.
That’s one thing to look at where their head offices and where they’re regulated. The other thing is because you can actually have a broker who is in the United Kingdom but their main office is in Malta so they’re not actually subject to the same regulations that a broker would be if their head office is in London. Be careful there.
Here’s the thing, if you are concerned about your broker and you’ve looked at where they’re regulated and everything and you’ve feel pretty good about it, the best thing that you could do is test them.
This is how I do it and feel free to do it however you want. First thing you do, you open up an account with your broker and fund it and then immediately withdraw it. This is a trick I learned from one of our fellow traders, one of the Masterminds we did. This is a great idea.
The reason why is because you want to see how the process works. You want to see if they’ll start asking you questions. I used to have a broker. Everytime I sent through withdrawal, they would say things like why do you need this and that doesn’t really matter. It’s my money. It doesn’t matter so I would start writing small things like, “Oh, I want to buy my wife some flowers.” “We’re going on a holiday.” I always like the funny things, like I want to buy a pair of shoes. You know what I mean? It’s ridiculous if they ask that question on the withdrawal process.
You’ll see how long it takes, how fast it is. If they badge you things like that, that’s good to know then, you can fund it again. Now, here’s what you’ll do. After you trade it for about a month, you’re going to find out if they’re going to start slipping you — and most brokers will start slipping you a bit. But, ideally, if you’re trading the higher time frames, it’s not going to hurt you that much.
Now, what you want to do is you can open up another account with the same broker and ideally, if you can in someone else’s name — like maybe your wife or your friend — and then what you do is you do the same trades.
You do the same trades that you’re doing on the accounts that’s two months old as you do with the new account and you can compare and see if those trades are slipped like in terms of their targets and their entries and all that.
Ideally, you can use a software that would copy it and will copy the same trades from one account to the other or whatever but you can just do it manually too. The point here is you want to see the difference between what a new account looks like versus your account that’s been flagged as an A account and they start doing whatever they do.
That’s the main test that I like to do because you will see the difference between the two accounts. Ideally, there’s a perfect match but sometimes there isn’t so the biggest things to look for here are if they drag their feet when you ask for withdrawal — which you will find out immediately if you do what I recommend. The second thing is how do they basically mess with you once they’ve identified you as an A trader or profitable trader.
Those are really the two big things. I know people have talked about it in the past, even I’ve talked about it in the past, about the size of the broker.
It doesn’t really matter how much they have in deposits. It doesn’t really matter if it’s segregated. All of that stuff, they can have lots of money in deposits. They can be segregated and they can still go bust.
If you’ve got $200,000 that’s your trading capital, I would never ever, ever give one broker $200,000. I would probably break it up into 3 or 4 maybe even 5 if you can swing it. You give 5 brokers $20, 000. Do something like that.
The leverage you’ll get is going to be plenty in most cases, even if you only have a 100:1 and that way, if one of them goes bust, you don’t get into trouble. Basically, that’s what I would do.
You want to see if they’re going to drag their feet when they do withdrawal. It doesn’t really matter if they have a lot of deposits. It doesn’t really matter if it’s segregated. Things can still happen.
They can get caught specially if they’re an ECN. They can get caught in fast market moves as what we’ve seen with FXCM. They can also just have someone dodgy running the company and they steal all the money. There’s nothing you can do about that.
The best thing that you can do is not give your broker all your trading money. In either case, just go find someone else. There’s plenty of brokers out there, that’s the good news. The good news is you can find another broker out there. That’s what I would do and I know it’s a common thing to blame the broker.
Remember, take responsibility of your own trade. Sometimes we blame the boogeyman when really it’s us. So, if you’re having a losing because you’re not sticking to your strategy, that’s you. That’s not the broker. That’s what I would recommend. It’s not as big of a problem as most people think and hopefully that works.
Hugh: Cool! That’s easy to understand. Thanks, Walter.
Walter: Thank you.