In our last lesson we finished up our series profiling the main currencies of the world, with a look at the major fundamental factors which affect the New Zealand Dollar. In today's lesson we are going to start a new module, on what I consider one of the most misunderstood and confusing aspects of getting started in trading the foreign exchange market, choosing a forex broker.
A many of you who have looked around the internet and/or talked to other forex traders probably know, there are a wide array of differing opinions on which broker is the best to trade with, and message boards are full of horror stories about trading with pretty much every forex broker out there. There are several reasons why I believe this to be the case, which we will examine in this video. After we have identified where the source of the confusion lies, we will do a series of videos to help traders develop a fact based checklist, so they can go about determining which broker is right for them through a process which separates fact from fiction.
In my opinion, the main reason why there are so many horror stories about the forex market, stems from the lack of regulation that existed (and to some extend still exists today) in the retail forex market, when compared to the equities and futures markets. As I examined in my video on the Role of the Retail Forex Broker in module 1 of this course, before the internet, the over the counter forex market was pretty much cut off to individuals. While the internet opened up the market to the individual trader, the regulations which are designed to protect traders from scams and shady dealing practices, were slow to follow in many countries, and to some extent still has not caught up today.
It is from this point that the forex market gets its reputation as the wild west of financial markets, as many firms took advantage of individuals who came into the market, and used their lack of knowledge to basically rob them blind through shoddy execution and exorbitant fees. There is no question that some of the things that gave the forex market its bad name still exist today, but luckily for us as traders, there are several firms out there who offer a quality product and service to forex traders, without all the scams that have gone on in the past.
So if there are several firms out there who offer a quality product and service, then how come this is not obvious when reviewing all the message boards and review sites out there where people give their opinions on forex brokers? There are three reasons for this in my opinion:
1. Because the forex market is over the counter, there is a lack of standardization across many of the aspects of trading, that are standardized in centralized markets like futures and stocks.
2. As retail forex trading is a relatively new market, there is not a lot of experience behind comments made in forums and on review sites. When you combine this point with the point above you get many people who angerly post on a message board or forum review site after getting slipped on a trade around a news even for example, instead of understanding that this is the way that the market works.
3. The best firms in my experience, are also much bigger than the large majority of firms out there, so the fact that they have 10 times or more clients, makes it look like the larger firms get a larger percentage of complaints than other firms. Many times this is in fact not the case, because as I see it, a firm that is ten times as big but has only twice the complaints offers a much better service than the firm recieving half the complaints.
Thats our lesson for today. In our next lesson I will begin showing you how to develop a fact based checklist that you can work through, which I hope will help simplify the process of selecting the broker that is right for you.
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Risk Disclosure: Trading forex on margin carries a high level of risk, and may not be suitable for all investors. The high degree of leverage can work against you as well as for you. Before deciding to invest in foreign exchange you should carefully consider your investment objectives, level of experience, and risk appetite. The possibility exists that you could sustain a loss of some or all of your initial investment and therefore you should not invest money that you cannot afford to lose. You should be aware of all the risks associated with foreign exchange trading, and seek advice from an independent financial advisor if you have any doubts.