When you invest in Forex, you can never take too many precautions. We invite you to read our advice, coming out of direct experience and verification/proof/knowledge of how much this sector can bring large winnings and substantial losses in a few minutes.
The important thing is to be patient, to want to learn and maybe be lucky enough to fall in with some serious professional.
Thanks to our long-term experience in the sector of private investment on trading platforms, we have reached a series of rules in the world of Forex. You can find below some tips on the best approach to follow when you want to invest in the Forex market.
Education is the fundamental way of preventing losses. Statistics speak for themselves; a very high percentage of traders fail because they lack understanding in the rules and basic concepts that absolutely must be respected when investing.
The choice of the intermediary
The first trade that a private party or company carries out in order to begin investing is the choice and opening of the account with a broker. Through our experience, we have found ways of evaluating investments carried out on many platforms, both national and foreign, regulated and un-regulated ones, reaching some conclusions on how to choose the best intermediary.
The first evaluation to be made is certainly to make sure that the broker is regulated, in this document we will not suffer through the details of regulations, but below you can find a list of supervisory bodies for financial markets concerning the countries that the brokers themselves belong to: the CONSOB in Italy, the FCA in England, the ASIC in Australia or CySEC in Cyprus.
Beyond being regulated, it is important to make sure that funds are deposited on separate accounts, that is to say that they are deposited on a current account of an Independent Bank for the broker’s assets.
This will prevent, in case of problems, potential creditors taking advantage of assets.
Dealing Desk Broker or Not
Another evaluation concerns the procedure by which the broker operates.
We can largely divide them into two categories:
- Dealing Desk (DD) broker
- No Dealing Desk (NDD) broker.
The first ones, the DDs, are normally called Marker Makers (MM) and the second ones, NDD, are also named STP (Straight Through Processing) or ECN (Electronic Communications Network) brokers.
Without dwelling on the more technical parts regarding the differences between an intermediary STP or ECN, we maintain that the latter (ECN) are those that should be taken into consideration for trading activities.
DD brokers or Market Makers, when we insert a market order by using a criterion of “less transparent” management, in the sense that generally they take the opposite position to our order and gradually work to counterbalance their risk on interbank market (Banks, investment funds, hedge funds, etc.), generally earn on the spread by putting themselves between us and the interbank market.
Unlike with ECN brokers (NDD) our order is directly aimed at the interbank market and the earnings of the broker derive from a commission relating to the operation.
Spread and leverage as discriminating factors
The choice of a broker can also be linked to the more commercial aspect, that is to say the offer in terms of the spread and levies that are proposed.
Following what has just been concluded above, if we choose an ECN broker, the spread question is almost inexistent, as in an ECN execution, the broker generally earns through commission and therefore the spread will always be near to zero, which is why, in these cases, the difference is made by brokers that consent to higher leverage!
Unlike what is rumoured, a broker, whether they be be regulated, an ECN, or offers high levies, we maintain that it is the perfect compromise for all the small and medium investors since with high levies we can allow ourselves to deposit small funds on the platform by allowing operations of a certain level in relation to the concept of money management that is to be calculated on the total of funds that we have thought of investing.
Within the concept of levies, there is a great deal of confusion.
This is because the same term is used to handle two different but related aspects; on one hand leverage is understood as a presentation of the risk relating to our capital, on the other it means the financial levies that the broker offers.
The presentation of risk deals with, briefly, the quantity of capital with which we enter into the market.
In this way it is correct to say that we must use a lower levy because the earnings can be high, but the losses can also be very high.
For this reason the concept of money management (money management as a finance manual, is the management mode of risk that expects a maximum presentation of 2% of capital relating to the operations carried out).
However, the concept of leverage offered by the broker is intended as an advantage that we must make the most of for our investments.
We know that products offered in financial leverage may need a reserve margin in order to be able to accomplish a market operation.
Leverage is the factor that determines the margin of reserve, so the higher the leverage offer then the lower the required margin.
To explain the concept from the practical side, we can use a concrete example: two parties have decided to invest $10,000 in Forex, the first with a broker offering a levy of 1:500, the other with a broker offering a levy of 1:100.
Keeping in mind money management, they decide to entre the market by buying one lot of Eurodollars ($10 without levies in order to be able to carry out this operation, liquidity would have been needed for an equivalent of $100,000).
- Broker levy: 1:500
- Margin: $100,000 : 500 = $200
- Broker levy: 1:100
- Margin: $100,000 : 100 = $1,000
Based on the example, it is clear that with a broker that offers a higher levy we will be able to carry out the same operation by depositing less money on the broker’s platform.
Be aware of the assets committed.
From experience, considering the risks that these markets involve, we should not deposit all assets on the trading account that we thought about investing in.
This concept should be held in high consideration since, on these markets, it is not rare to witness very high price movements that do not guarantee control of risk.
The most striking example involves the Euro-Swiss Franc pairing, which in January 2015, due to decisions by the National Bank of Switzerland decided to bring the Euf/Chf exchange rate from a value of 1.20 to below the parity of Eur/Chf 1.00 with a price loss of more than 2,000 pips in minutes. In this case, our highest loss, if we had had a buying position on the exchange, would have depended only on the capital spent.
In conclusion, it seems to us that the choice of the broker must fall on regulated entities, which operate in ECN ways and that offer substantial levies such as 1:500 or higher, these are the most convenient terms that allow us to operate in an advantageous way without considerably exposing our capital.
If you want to invest in Forex and need an expert guide or if, in the worst case scenario, you are still involved in a scam linked to Forex, or simply suspect that your broker is acting in an unclear way, do not hesitate to contact our expert lawyers.
Boccadutri International Law Firm will clarify any doubt you may have and will suggest to you the best way to safeguard your investments.
You can contact our lawyers by filling out this form.