Penny Wise & Pound Foolish: Choosing the wrong FX broker

By Justin D. Hertzberg, CEO, ForestParkFX

Around this time of year (and just about this time in every preceding year) tens of thousands of traders from around the world plot their course for the new year to come. Some do it in their minds; some more disciplined traders will actually keep a journal or a blotter and memorialize their thoughts and plans for conquering the FX world in 2016.

Often these thoughts will involve getting the right charting package or using this indicator or that EA or subscribing to this market analyst or trade copier program. There will be proclamations of strict risk/reward parameters and commitments to trade only certain pairs or times of day or chart patterns. There will be goals of going from demo to live, or making $X in profits or finally making trading a career instead of a hobby.

These New Year’s resolutions are being made right now.

And yet, on January 4, 2016 thousands of these bright-eyed and hopeful traders will begin the year on the wrong foot and unlikely to ever live up to their lofty resolutions. And why? Because in all their preparation and planning for the New Year, they were penny-wise and pound-foolish in selecting a broker for all the wrong reasons.

Often, the biggest misstep is making a selection on based upon saving a tenth of a pip here or there with tiny XYZ broker instead of working with a globally regulated, reputable and well capitalized broker with a history of service and stability. Other times it is because ABC broker will enable the trader to link an account to successful money managers – without really providing any meaningful disclosure as to who these managers are, where they are located, how long they have been trading, how much capital they manage, how they are compensated and a host of other pressing questions that need to be answered before one can make an informed decision.

Sometimes it is a decision to NOT go with an excellent broker because someone somewhere posted a negative review on some largely unmoderated forum where anyone and everyone can bash this broker with impunity and with no regard for the accuracy of the posting.

…..and what happens?

If you are lucky, nothing.

“You are fortunate enough to have opened an account with a brokerage run by decent and fair human beings. But for the THOUSANDS of traders who are penny-wise and pound-foolish, money will go into their brokerage account and never come out – perhaps because the broker manipulates spreads, slippage, latency or other factors.”

“Perhaps because the broker will simply not process their withdrawals (scary to think about, yet happens all the time); perhaps because they entrusted their account to some nameless, faceless manager who blew it up inside of two weeks. The reasons why you lost your money are many…and often have NOTHING to do with whether you are a decent trader” – Justin D. Hertzberg, CEO, ForestParkFX

As an introducing broker to FX traders from around the world, I speak with thousands of traders each year and do my best to counsel them on how to identify and choose a broker that best suits their trading, and always with an eye towards protecting their capital and ensuring a fair and honest trading experience with a professional broker.

As a general rule of thumb, I always advocate for traders to work with brokers supervised by regulators with a bite stronger than their bark. This typically includes brokers regulated by the NFA (US), FCA (UK) and ASIC (AU). It doesn’t mean that all such regulated brokers are good, And it doesn’t mean that brokers regulated by other jurisdictions are not good. But it should give you pause. Why are we all of a sudden seeing so many startup brokers in Cyprus, New Zealand, South Africa, the Caribbean and other jurisdictions?

Because it is EASIER for the broker to obtain registration as an FX broker in those jurisdictions.

Easier for them means less regulatory controls, restrictions, policies and procedures – all of which are designed to protect YOU as the trader.

There is obviously not the consideration. Others include looking at a broker’s capitalization, pricing model, execution model, liquidity sources, banking operations, service, support, platforms, technology and actual, firsthand experience with the principals and operations of a broker.

On the road to being a successful trader you will have to make many investment decisions. First and foremost of which should be placing your money and your trust in a broker that warrants it. For the tens of thousands of traders looking to start 2016 on the right foot, I encourage you to make the right brokerage selection in advance of your first trade. Don’t be penny-wise and pound-foolish with your hard-earned money.

Photograph: Downtown Manhattan, copyright Andrew Saks-McLeod