Category: Level 1

Is the Forex Broker a Legit Company?

Who are you trading with?

Is the forex broker a legitimate company? Can you trust it?

Unlike Batman in the story from the previous lesson, you’re not going to know who you are trading with. And even if you did, that doesn’t mean you should blindly trust them.

Do not trust Spider-Man. He stole my money. Feel free to skip his upcoming movie.

Even though it started as fun and games where Batman and Spider-Man were supposed to be making friendly bets on trying to guess where GPB/USD was headed, it didn’t end up so friendly. Batman ended up getting duped by a fellow superhero, who was supposedly a “good guy”.

If you’re not familiar with the story above, this means you haven’t read our earlier lesson on How Forex Brokers (Kinda) Work starring Batman and Spider-Man. It’s highly recommended that you read this lesson first.

Forex Brokers

In order to trade forex, you will need a trading account with a provider of online foreign exchange (FX) trading or CFD trading services, more commonly known as retail “forex brokers” or “CFD providers”. 

When you open a trading account with this company, you will need to deposit money to the account so you can trade.

Are you sure you can trust this broker?

Shady Forex Broker

Unfortunately, not all brokers are honest and trustworthy.

A big issue with the retail forex trading industry is a lack of transparency and unclear regulatory structures with insufficient oversight.

Due to its decentralized and global nature, the forex market is less regulated than other financial markets making it more prone to fraud.

And with the rise of internet-based trading platforms since the early 2000s, forex trading has become even more accessible and popular among retail traders across the world.

This explosion of noob traders (“fresh meat”) creates more opportunities for dubious behavior by shady brokers like fraudulent schemes, order manipulation, refusal to pay out for wins, or preventing account holders from withdrawing their funds.

In the past, many forex brokers were unregulated, which means that these brokers were NOT operating under the supervision of a governing body whose role is supposed to protect traders from being fleeced. So if you are scammed, there’s no hope for any legal recourse.

Forex Broker Stealing Your Money

Your money is gone.

Fast forward to today and while the retail forex industry has slowly become more regulated, shady brokers still exist who should not be in business.

This is why the most important first step is verifying the legitimacy of the forex broker you choose.

When you’re looking to trade forex, it’s important to identify brokers who are reputable and avoid the ones that are not.

You don’t want to end up being part of the unfortunate group of individual traders who fall prey to a forex scam.

Forex Scam Victim Club

In order to identify reputable brokers from shady ones, you need to do your homework before depositing a large amount of money with a broker.

The forex broker you choose is going to be your first critical decision as a new trader.

Why?

Because you’re going to handing over money to this company!

Deposit Money to Forex Broker

So the first thing you need to make absolutely sure, especially BEFORE you make your first trade, is once you transfer funds to the broker…if you’ll also be able to withdraw those funds.

You might make the assumption that once your money is in your trading account that you’ll be able to trade with it and then withdraw it whenever you want to cash out your profits.

But don’t just assume this is true! VERIFY!

Never assume, always check.

You can be the most awesome trader in the world, but if your broker disappears with your money, then it doesn’t matter.

Most Awesome Broke Trader

You’d just end up being the most awesome broke trader in the world. 🤣

If you want to stay awesome, but avoid being broke, then here are some important questions to consider before choosing a broker.

Is it a real company?

Is the forex broker a real company?

Don’t be fooled by a nicely designed website.

Legal Incorporated Forex Broker

Make sure there’s an actual legally incorporated company behind that website.

Here are things to look for to verify that they are a real company:

  • What is its formal business name?
  • Where is it incorporated and registered to do business?
  • How long has it been in business?
  • Can you find anything on Google about the company?
  • Have there been any recent press releases or articles about the company?

Where is it located?

Does the company have a physical office address?

Don’t be fooled by a listed address on their website. Make sure there’s a real office behind that address.

A simple way to check if the office is an actual office is to use Google Maps.

Enter the address in Google Maps and see what appears.

Google Map Forex Broker's Office Address

And to get a better view of the office, you can also use Google Earth.

Enter the address in Google Earth and see what appears.

Google Earth Forex Broker's Office

Zoom in until you can see the building they’re in. Is it an actual office building? Or does it look suspicious?

Forex Broker's Office Building Looks Suspicious

If it looks like the building above, are you sure you really want to hand over your money with this broker? 🤔

If no building is present and instead, you’re seeing a warehouse on a tiny tropical island or even worse, an empty plot of land, you probably want to pass on this company.

Who runs the company?

Do you know who runs the company? Or is it a “ghost corporation” with no active employees?

Who are the principals of the company?

principal is generally someone who holds a significant ownership stake in a company or has a formal title and ability to control the company’s activities.

For example, principals could be the founder (or co-founders), President, CEO, COO, CFO, other C-level officers, or any person or entity that owns 10% or more of the company.

Beware of “ownership-opaque” companies, where their true owners and/or company officers aren’t disclosed.

This lack of transparency might be due to the fact that it’s actually a criminal enterprise whose members wish to remain anonymous.

Anonymous Forex Broker Owners

If you’re trusting a company with your funds, you should know the people who are in control of the company.

If something goes wrong, you’ll know who to hold accountable.

Can you contact the company?

Does the company provide multiple ways to contact them?

You want to make sure your broker is there when you need to ask a question or have a problem.

  • Does it have a phone number?
  • Does it have an email address?
  • Does it have a live online chat?
  • What are its customer support hours?

It’s not enough to see all three listed on their website. Just because it looks like there are multiple ways for you to get in touch with the broker doesn’t mean it’s true.  Verify that they all actually work and it’s not just for show.

📞 Call the phone number. Does somebody pick up quickly?

📧 Send an email. How long does it take to receive a reply? (Automated replies don’t count.)

💬 Start an online chat. Does it work? Or are you simply asked to send a message by filling out a form?

🤖 If the online chat does work, are you talking to a chatbot or an actual human?

⌚ What are their customer support hours? Is their support staff available 24 hours a day, 5 days a week?

You can also test how good their customer support is by opening a demo account. Once you’re logged in to their demo trading platform, send them a question using their support feature.

Since you’re a potential new customer who may open a live account, they should be responsive. If not, it should make you wonder how their support will be once you’re already a customer.

Forex Broker Customer Service

A reputable broker should have a dedicated support team that can answer your questions. In a live trading situation, phone access or live online chat is a must since an email reply may take days.

At the end of the day, you want to make sure that the broker will be there for YOU when you need them.

Is your money safe?

Do not rush into opening a live account or “real money” account without knowing how your funds are handled.

You need to ask the following questions:

  • What bank do you use to store customer funds?
  • Are customer funds held separately from the company’s bank account?

Bank

The forex broker should be using a reputable bank. Ask who they use. Would you trust your funds with an unknown bank?

Before you deposit any funds with a forex broker, make sure it uses segregated accounts.

A segregated account is a dedicated bank account where all its customers’ money is kept completely separate from the company funds.

This means that your money is kept entirely separate from the broker’s money.

The main reason for segregated accounts is to prevent the broker from using YOUR funds outside of your trading account.

If a forex broker does not segregate accounts, it will be able to use customers’ funds for operational expenses. And maybe an exotic sports car (or two) for the CEO?  🤔

Segregated Funds

Or it might just use all deposited funds to buy a boatload of bitcoin and disappear.

In the past, shady brokers have used their customers’ money for their own purposes, putting this money at unnecessary risk.

You do not want your broker to use your money for the wrong purposes. A segregated account protects your money against dishonest and fraudulent behavior from brokers.

Should a broker become bankrupt, it also ensures that customer funds are easily identified. In the event that the forex broker’s become insolvent, your money would not be affected.

Depending on the country, regulations state that segregated accounts can’t be used to pay creditors, and customer funds must be returned to the customers.

Imagine a broker’s money and its customers’ money all mixed together. If this was the case, companies to who your broker owes money could come after your money!

Having segregated accounts ensures that customer funds will be easily identified and returned in case of bankruptcy.

Segregated accounts between customer funds and a broker’s funds provide safety. If a broker does not use segregated funds, do not deposit your money with them.

Summary

In order to trade forex, you need to use the services of a retail forex broker. And since you’ll be depositing your hard-earned money, you need to DYOR and make sure the company is legit.

Let’s review the questions that you should consider:

  • Is it a real company?
  • Where is it located?
  • Who runs the company?
  • Can you contact the company?
  • Is your money handled safely?

There is one last question that you should consider that’s crucial.

Is the forex broker licensed and regulated? 

This topic is so important that it deserves its own lesson…

Why Trade Forex: Forex vs. Futures

It’s not just the stock market. The forex market also boasts of a bunch of advantages over the futures market, similar to its advantages overstocks.

But wait, there’s more… So much more!

Liquidity

“Mr. Futures, our short shorts look cool!”

In the forex market, $6.6 trillion is traded daily, making it the largest and most liquid market in the world.

This market can absorb trading volume and transaction sizes that dwarf the capacity of any other market.

The futures market trades a puny $30 billion per day. Thirty billion? Peanuts!

The futures markets can’t compete with its relatively limited liquidity.

The forex market is always liquid, meaning positions can be liquidated and stop orders executed with little or no slippage, with exception to extremely volatile market conditions.

24-Hour Market

At 5:00 pm EST Sunday, trading begins as markets open in Sydney.

At 7:00 pm EST the Tokyo market opens, followed by London at 3:00 am EST.

And finally, New York opens at 8:00 am EST and closes at 4:00 p.m. EST.

 

Before New York trading closes, the Sydney market is back open – it’s a 24-hour seamless market! 

As a trader, this allows you to react to favorable or unfavorable news by trading immediately.

If important data comes in from the United Kingdom or Japan while the U.S. futures market is closed, the next day’s opening could be a wild ride.

Overnight markets in futures contracts do exist, and while liquidity is improving, they are still thinly traded relative to the spot forex market.

Minimal or no commissions

With Electronic Communications Brokers becoming more popular and prevalent over the past couple of years, there is the chance that a broker may require you to pay commissions.

 

But really, the commission fees are peanuts compared to what you pay in the futures market. 

The competition among spot forex brokers is so fierce that you will most likely get the best quotes and very low transaction costs.

Price Certainty

When trading forex, you get rapid execution and price certainty under normal market conditions. In contrast, the futures and equities markets do not offer price certainty or instant trade execution.

 

Even with the advent of electronic trading and limited guarantees of execution speed, the prices for fills for futures and equities on market orders are far from certain. 

The prices quoted by brokers often represent the LAST trade, not necessarily the price for which the contract will be filled.

Guaranteed Limited Risk

Traders must have position limits for the purpose of risk management. This number is set relative to the money in a trader’s account.

 

Risk is minimized in the spot forex market because the online capabilities of the trading platform will automatically generate a margin call if the required margin amount exceeds the available trading capital in your account. 

During normal market conditions, all open positions will be closed immediately (during fast market conditions, your position could be closed beyond your stop loss level).

In the futures market, your position may be liquidated at a loss bigger than what you had in your account, and you will be liable for any resulting deficit in the account. That sucks.

ADVANTAGES FOREX FUTURES
24-Hour Trading YES No
Minimal or no Commission YES No
Up to 500:1 Leverage YES No
Price Certainty YES No
Guaranteed Limited Risk YES No

Judging by the Forex vs. Futures Scorecard, Mr. Forex looks UNBEATABLE! Now meet the winners who trade the forex market.

Why Trade Forex: Forex vs. Stocks

There are approximately 2,800+ stocks listed on the New York Stock exchange. Another 3,300+ are listed on the NASDAQ.

Which one will you trade? Got the time to stay on top of so many companies?

 

With forex, there are dozens of currencies traded, but the majority of market players trade the seven major pairs.

 

Aren’t seven major pairs much easier to keep an eye on than thousands of stocks?

Look at Mr. Forex. He’s so confident and sexy. Mr. Stocks has no chance!

That’s just one of the many advantages of the forex market over the stock markets. Here are a few more:

24-Hour Market

The stock market is limited to an exchange’s opening hours. For example, in the U.S., most stock exchanges open at 9:30 am EST and close at 4:00 pm EST.

The forex market is a seamless 24-hour market. Most brokers are open from Sunday at 5:00 pm EST until Friday at 5:00 pm EST, with customer service usually available 24/7.

With the ability to trade during the U.S., Asian, and European market hours, you can customize your own trading schedule.

Minimal or No Commissions

As a lot of online stock brokers now offer zero commissions, so this is now less of a factor.

Most forex brokers charge no commission or additional transaction fees to trade currencies online or over the phone.

 

Combined with the tight, consistent, and fully transparent spread, forex trading costs are lower than those of any other market.

 

Most brokers are compensated for their services through the bid/ask spread.

Higher Trading Volume and Liquidity

The forex market sees an average daily turnover of $6.6 trillion.

The stock market sees a fraction of this.

Short-Selling without an Uptick

Unlike the equity market, there is no restriction on short selling in the currency market. Trading opportunities exist in the currency market regardless of whether a trader is long OR short, or whichever way the market is moving.

Since currency trading always involves buying one currency and selling another, there is no directional bias to the market. So you always have equal access to trade in a rising or falling market.

Minimal Market Manipulation

How many times have you heard that “Fund A” was selling “X” or buying “Z”? The stock market is very susceptible to large fund buying and selling.

 

With currency trading, the massive size of the forex market makes the likelihood of any one fund or bank controlling a particular currency very small.

 

The FX market is sufficiently liquid that significant manipulation by any single entity is all but impossible during active trading hours for the major currencies.

Banks, hedge funds, governments, retail currency conversion houses, and large net worth individuals are just some of the participants in the spot currency markets where the liquidity is unprecedented.

Analysts and brokerage firms are less likely to influence the market

Have you watched TV lately? Heard about a certain Internet stock and an analyst of a prestigious brokerage firm accused of keeping its recommendations, such as “buy,” when the stock was rapidly declining?

 

It is the nature of these relationships. No matter what the government does to step in and discourage this type of activity, we have not heard the last of it.

 

IPOs are big business for both the companies going public and the brokerage houses.

Relationships are mutually beneficial and analysts work for the brokerage houses that need the companies as clients. That catch-22 will never disappear.

Foreign exchange, as the prime market, generates billions in revenue for the world’s banks and is a necessity of the global markets. Analysts in foreign exchange have very little effect on exchange rates; they just analyze the forex market.

ADVANTAGES FOREX STOCKS
24-Hour Trading YES No
Minimal or no Commission YES Maybe
Liquidity HUGE Meh
Short-Selling without an Uptick YES No
No Market Manipulation Depends No

In the battle between forex vs. stocks, it looks like the scorecard between Mr. Forex and Mr. Stocks shows a strong victory by Mr. Forex! Will it go for 2-0 with Mr. Futures?

Why Trade Forex: Forex vs. Stocks

There are approximately 2,800+ stocks listed on the New York Stock exchange. Another 3,300+ are listed on the NASDAQ.

Which one will you trade? Got the time to stay on top of so many companies?

 

With forex, there are dozens of currencies traded, but the majority of market players trade the seven major pairs.

 

Aren’t seven major pairs much easier to keep an eye on than thousands of stocks?

Forex vs. StocksLook at Mr. Forex. He’s so confident and sexy. Mr. Stocks has no chance!

That’s just one of the many advantages of the forex market over the stock markets. Here are a few more:

24-Hour Market

The stock market is limited to an exchange’s opening hours. For example, in the U.S., most stock exchanges open at 9:30 am EST and close at 4:00 pm EST.

The forex market is a seamless 24-hour market. Most brokers are open from Sunday at 5:00 pm EST until Friday at 5:00 pm EST, with customer service usually available 24/7.

With the ability to trade during the U.S., Asian, and European market hours, you can customize your own trading schedule.

Minimal or No Commissions

As a lot of online stock brokers now offer zero commissions, so this is now less of a factor.

Most forex brokers charge no commission or additional transaction fees to trade currencies online or over the phone.

 

Combined with the tight, consistent, and fully transparent spread, forex trading costs are lower than those of any other market.

 

Most brokers are compensated for their services through the bid/ask spread.

Higher Trading Volume and Liquidity

The forex market sees an average daily turnover of $6.6 trillion.

The stock market sees a fraction of this.

Short-Selling without an Uptick

Unlike the equity market, there is no restriction on short selling in the currency market. Trading opportunities exist in the currency market regardless of whether a trader is long OR short, or whichever way the market is moving.

Since currency trading always involves buying one currency and selling another, there is no directional bias to the market. So you always have equal access to trade in a rising or falling market.

Minimal Market Manipulation

How many times have you heard that “Fund A” was selling “X” or buying “Z”? The stock market is very susceptible to large fund buying and selling.

 

With currency trading, the massive size of the forex market makes the likelihood of any one fund or bank controlling a particular currency very small.

 

The FX market is sufficiently liquid that significant manipulation by any single entity is all but impossible during active trading hours for the major currencies.

Banks, hedge funds, governments, retail currency conversion houses, and large net worth individuals are just some of the participants in the spot currency markets where the liquidity is unprecedented.

Analysts and brokerage firms are less likely to influence the market

Have you watched TV lately? Heard about a certain Internet stock and an analyst of a prestigious brokerage firm accused of keeping its recommendations, such as “buy,” when the stock was rapidly declining?

 

It is the nature of these relationships. No matter what the government does to step in and discourage this type of activity, we have not heard the last of it.

 

IPOs are big business for both the companies going public and the brokerage houses.

Relationships are mutually beneficial and analysts work for the brokerage houses that need the companies as clients. That catch-22 will never disappear.

Foreign exchange, as the prime market, generates billions in revenue for the world’s banks and is a necessity of the global markets. Analysts in foreign exchange have very little effect on exchange rates; they just analyze the forex market.

ADVANTAGES FOREX STOCKS
24-Hour Trading YES No
Minimal or no Commission YES Maybe
Liquidity HUGE Meh
Short-Selling without an Uptick YES No
No Market Manipulation Depends No

In the battle between forex vs. stocks, it looks like the scorecard between Mr. Forex and Mr. Stocks shows a strong victory by Mr. Forex! Will it go for 2-0 with Mr. Futures?

Why Trade Forex: Advantages Of Forex Trading

There are many benefits and advantages of trading forex.

Here are just a few reasons why so many people are choosing this market:

No commissions

No clearing fees, no exchange fees, no government fees, no brokerage fees. Most retail forex brokers are compensated for their services through something called the “spread“.

No fixed lot size

In the futures markets, lot or contract sizes are determined by the exchanges. For example, a standard-sized contract for silver futures is 5,000 ounces.

 

In forex, you can trade smaller lot sizes, or position size. This allows traders to open trades as small as 1,000 units.

 

Low transaction costs

The retail transaction cost (the bid/ask spread) is typically less than 0.1% under normal market conditions.

For larger transactions, the spread could be as low as 0.07%. Of course, this depends on your leverage, and all that will be explained later.

A 24-hour market

There is no waiting for the opening bell. From the Monday morning opening in Australia to the Friday afternoon close in New York, the forex market never sleeps.

 

This is awesome for those who want to trade on a part-time basis because you can choose when you want to trade: morning, noon, night, during breakfast, or in your sleep.

 

No one can corner the market

The FX market is sufficiently liquid that significant manipulation by any single entity is all but impossible during active trading hours for the major currencies.

The foreign exchange market is so huge and has so many participants that no single entity (not even a central bank or the mighty Chuck Norris himself) can control the market price for an extended period of time.

Leverage

In forex trading, a small deposit can control a much larger total contract value. Leverage gives the trader the ability to make nice profits, and at the same time keep risk capital to a minimum.

 

For example, a forex broker may offer 50-to-1 leverage, which means that a $50 dollar margin deposit would enable a trader to buy or sell $2,500 worth of currencies. Similarly, with $500 dollars, one could trade with $25,000 dollars and so on.

 

While this is all gravy, let’s remember that leverage is a double-edged sword. Without proper risk management, this high degree of leverage can lead to large losses as well as gains.

Deep Liquidity

Because the forex market is so enormous, it is also extremely liquid. This is an advantage because it means that under normal market conditions, with a click of a mouse, you can instantaneously buy and sell at will.

You are never “stuck” in a trade. You can even set your online trading platform to automatically close your position once your desired profit level (a limit order) has been reached, and/or close a trade if a trade is going against you (a stop loss order).

Low Barriers to Entry

You would think that getting started as a currency trader would cost a ton of money. The fact is, when compared to trading stocks, options, or futures, it doesn’t. Online forex brokers offer “mini” and “micro” trading accounts, some with a minimum account deposit of $50.

We are NOT saying you should open an account with the bare minimum, but it does make forex trading much more accessible to the average individual who doesn’t have a lot of start-up trading capital.

Free Stuff Everywhere!

Most online forex brokers offer “demo” accounts to practice trading and build your skills, along with real-time forex news and charting services.

And guess what?! They’re all free!

Demo accounts are very valuable resources for those who are “financially hampered” and would like to hone their trading skills with “play money” before opening a live trading account and risking real money.

Now that you know the advantages of the forex market, see how it compares with the stock market!

Know Your Forex History!

At the end of World War II, the whole world was experiencing so much chaos that the major Western governments felt the need to create a system to stabilize the global economy.

Known as the “Bretton Woods System,” the agreement set the exchange rate of the US dollar against gold. Which allowed all other currencies to be pegged against the US dollar.

This stabilized exchange rates for a while, but as the major economies of the world started to change and grow at different speeds, the rules of the system soon became obsolete and limiting.

Bretton Woods

Soon enough, come 1971, the Bretton Woods Agreement was abolished and replaced by a different currency valuation system.

 

With the United States in the pilot’s seat, the currency market evolved to a free-floating one, where exchange rates were determined by supply and demand.

 

At first, it was difficult to determine fair exchange rates, but advances in technology and communication eventually made things easier.

Once the 1990s came along, thanks to computer nerds and the booming growth of the internet (cheers to you Mr. Al Gore), banks began creating their own trading platforms.

These platforms were designed to stream live quotes to their clients so that they could instantly execute trades themselves.

 

Meanwhile, some smart business-minded marketing machines introduced internet-based trading platforms for individual traders.

 

Known as “retail forex brokers”, these entities made it easy for individuals to trade by allowing smaller trade sizes.

Unlike in the interbank market where the standard trade size is one million units, retail brokers allowed individuals to trade as little as 1000 units!

Retail Forex Brokers

In the past, only the big speculators and highly capitalized investment funds could trade currencies, but thanks to retail forex brokers and the Internet, this isn’t the case anymore.

With hardly any barriers to entry, anybody could just contact a broker, open up an account, deposit some money, and trade forex from the comfort of their own home.

Brokers basically come in two forms:

  1. Market makers, as their name suggests, “make” or set their own bid and ask prices themselves and
  2. Electronic Communications Networks (ECN), who use the best bid and ask prices available to them from different institutions on the interbank market.

Market Makers

Let’s say you wanted to go to France to eat some snails. In order for you to transact in the country, you need to get your hands on some euros first by going to a bank or the local foreign currency exchange office. For them to take the opposite side of your transaction, you have to agree to exchange your home currency for euros at the price they set.

Like in all business transactions, there is a catch. In this case, it comes in the form of the bid/ask spread.

 

For instance, if the bank’s buying price (bid) for EUR/USD is 1.2000, and their selling price (ask) is 1.2002, then the bid/ask spread is 0.0002.

 

Although seemingly small, when you’re talking about millions of these forex transactions every day, it does add up to create a hefty profit for the market makers!

You could say that market makers are the fundamental building blocks of the foreign exchange market.

Retail market makers basically provide liquidity by “repackaging” large contract sizes from wholesalers into bite-size pieces. Without them, it will be very hard for the average Joe to trade forex.

Electronic Communications Network

Electronic Communication Network is the name given for trading platforms that automatically match customer’s buy and sell orders at stated prices.

 

These stated prices are gathered from different market makers, banks, and even other traders who use the ECN.

 

Whenever a certain sell or buy order is made, it is matched up to the best bid/ask price out there.

Due to the ability of traders to set their own prices, ECN brokers typically charge a VERY small commission for the trades you take.

The combination of tight spreads and small commission usually make transaction costs cheaper on ECN brokers.

Of course, it’s not enough to know the big guys in the biz. As Big Pippin once said, “Trading requires timing.” Do you know WHEN you should trade?