How To Avoid Forex Broker Traps – A Question and Answer Session
Forex brokers seem to be a dime-a-dozen these days. Furthermore, it seems like everyone is calling foul about his or her broker. Indeed a lot of brokers are less than honest. Here’s what you should look out for.
Q. Where can I find an honest broker offering a 1 or 2 pip spread?
A. That depends. For a mini-account or a micro-account, you can’t. The smallest spread I’ve ever seen (that was legitimate) was 1.5 pips offered by Interactive Brokers. However, they required that you have an account size of $25,000.00.
The only other broker that I know of that comes close is Oanda. They offer spreads that get very low during times of high liquidity for very small accounts. However, during other times of the day, the spread on the EUR/USD can get as high as 6 pips.
If a broker is willing to give you a fixed 2 pip spread and let you trade an account that is only $200 in size, that is a problem. I can almost guarantee you there is some shading of the price going on. In other words, you aren’t getting the real price. You’ve getting a price that will be more favorable to the broker. That means you’ll have more losing trades. The old phrase, buyer beware, has much meaning in the forex broker world.
Q. Why shouldn’t I use 400:1 leverage?
A. The higher the leverage you use, the harder it’s going to be for you to make money. The more leverage you use the more value each pip has. Since the pips are worth more, you have to risk fewer pips per trade to avoid risking your account’s wellbeing.
Here’s the problem. When you risk fewer pips, you’ll get stop too close to the market’s current price. Then any market “hiccup” will take you out with a loss. If you had lower leverage, you would have had more room for the trade, and it may have very likely become a winner.
Many new forex traders are trying to trade with these really tight stops (10 to 15 pips). That’s way too close. Decrease your leverage and give your trades some room to breathe. You’ll probably find that you have more winning trades.
Q. When I’m shopping for a new broker, what should I look for one their website?
A. Actually, you shouldn’t be looking for something. You should be looking for the absence of something. What exactly? Hype.
Anywhere on the website (especially on the homepage), do they talk about how easy it is trade forex? Do they make it sound like making money is easy? These are problems. Immediate cross that broker off your short list.
You should also look for something else. Do they make a big deal of the fact that you can open an account for next to nothing and trade at very high leverage? Those kinds of brokers are like sharks. They try to take your money. Avoid them.
In summary, avoid brokers that heavily advertise high leverage, trade with lower leverage, and lastly, avoid any kind spread that seems too good to be true. It is.
Nathan Pennington is author of the (sold-out) forex trading book “The Rubber Band Method”: How to Trade Against the Trend for Consistant Profits. His current website is http://www.moneymakingforex.com/ which shows forex traders how to become winning traders. Reviews and ratings of interactive brokers, a forex trading broker rated and reviewed by forex traders.
