Forex Brokers – How the $1 Billion EUR/CHF Flash Crash Happened
How Forex Brokers Went Bankrupt Overnight
The EUR/CHF crash of 2015 was one of the unforgettable events in the history of foreign exchange trading. The crash caused unprecedented slippage in Euro and Swiss Franc currency pairs, bankrupting many FX brokers and leaving a huge number of traders with negative balances. Trillion of dollars were wiped out from the financial markets within minutes of the crash. The following Infographic briefly describes the causes, events, market reaction and aftermaths pertaining to the CHF crash.
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Need Help choosing a Broker? Start Here!
Success in forex depends on a number of factors and not solely on the skill of a trader. A huge chunk of the success factor in forex has to do with the broker that the trader selects to handle his forex trading business.
When you consider that brokers hold the trading capital for the trader, provide the trading platform used for market participation, as well as provide clearing and settlement services as well as determine trade conditions under which the trader operates, then it can be seen that choosing a good forex broker easily constitutes more than a fair percentage of the success factor in the forex market.
Top Forex Brokers 2016:
|Broker||Info||Bonus||US Traders||Open Account|
|Spread: from 3 pips
Leverage: Up to 1:400
Minimum Deposit: $500
Demo Account: No
|No Bonus Available||Visit Broker Read Review|
|Spread: 0.7 pips
Minimum Deposit: 250
Demo Account: No
|30% Welcome Bonus||Visit Broker Read Review|
|Spread: 2 pips Average
Minimum Deposit: $100
Demo Account: Open
|$30 No Deposit Bonus||Visit Broker Read Review|
|Spread: From 0.0 pips
Minimum Deposit: $500
Demo Account: Open
|Up to 25% Welcome Bonus||Visit Broker Read Review|
|Spread: 0 Pips (ECN Account)
Minimum Deposit: $300
Demo Account: No
|Visit Broker Read Review|
|Spread: Fixed from 1.8 pips
Minimum Deposit: $25
Demo Account: Open
|Get $100 Bonus When You Deposit $100||Visit Broker Read Review|
|Spread: From 0.1
Leverage: Up to 1:500
Minimum Deposit: $250
Demo Account: Open
|N/A||Visit Broker Read Review|
It is possible for a trader to have the best trading skill, run a string of successful trades in the forex market, and then lose it all to a scam broker who simply walks away with this money. A look at sites like Forex Peace Army will reveal a plethora of cases where all manner of scams are perpetrated by shady brokers. In one case, a brokerage was found to be a husband-wife operation located in the kitchen of their home somewhere in Eastern Europe. When you consider that most forex traders will have to do business with brokers located in countries far away from theirs, it becomes super important to make sure that the process of choosing a forex broker is one that is done carefully and thoroughly in order to weed out the chaff from the real thing.
Role of Forex Brokers
Why are brokers so important in forex trading? Why do traders need to worry about brokers anyway?
a) Market Access
The forex market is structured in such a way that it is not possible for a retail trader to enter the market directly. Market access can only be provided through a forex brokerage account, provided by forex brokers.
b) Trading Access
Access to trade forex between the various market participants has to be done using any of the various trading platforms in the market. This provides uniformity of trading access to all who trade the forex market, linking a trader on the buy side of the market to another on the sell side of the market.
Brokers provide a depository where traders can lodge funds for trading, and clearing and settlement of trades which ensures that trading profits are added to the capital and losses deducted are all provided by the brokers’ back office desks.
How to Choose a Forex Broker
The foreign exchange market still holds the record as the world’s biggest financial market contributing to an average of more than $4 trillion of traded value each day.
The brokers act as the bridge between profits generated by traders and the trading process. An influx of these brokers has entered the market making it difficult for traders to choose the best from the lot.
The second you start realizing the roles of forex brokers in any foreign exchange trading market, then you start analyzing your position in this investment strategy and your capacity to earn profits.
A forex broker will provide the trading platform, clearing and settlement services, as well as, help provide the liquidity required to complete trades.
The biggest challenge with forex trading and your endeavors to find a broker that will satisfy your interest is linked to scam brokers.
The role of brokers in forex trading is a process that every trader needs to understand and accomplish.
Without a forex broker, it would be hard for the trader to gain access to new markets. Generally, the forex market is designed in such a way that it cannot simply be entered without a representative – who in this case is your forex brokerage account.
Another underlying course for traders to locate competent forex brokers is access to trading. Trading platforms are essential because they provide uniformity on trading access. Both buyers and sellers are virtually linked allowing them to transact businesses with ease.
Funds are safely deposited in running brokerage accounts where traders can easily access them when executing their trades.
There are several factors that new and existing traders can use in order to distinguish genuine forex brokers from time wasters or misleading firms.
Depending on the country at which the forex broker is based, there are varying regulatory bodies that the trader will observe to ensure that the broker is accredited to run such kind of business.
Regulated forex brokers help in settling more than 80% of problems that could affect traders. In the United Kingdom, all brokerage firms are required by the governing bodies to run segregated accounts. These accounts are necessary because they safeguard firms against future unforeseen bankruptcy, thereby protecting clients’ funds.
Regulation is important because it signifies the financial position of a broker and competence the firm holds into managing client funds. Regulatory agencies are always on the frontline to ensure that forex brokerage firms are in line with these regulations by conducting regular checks.
Regulation is also important in the sense that depending on your residence, there are brokers that you may not be eligible to use for trading. The US, the EU, the UK and other parts of the worlds have differing requirements for traders.
In the US, forex trading attracts strict regulation when compared to other parts of the world. Forex trading is regulated by the NFA (National Futures Association) and CFTC (Commodities and Futures Trading Commission). In Europe, most forex brokers are licensed with Cyprus Securities and Exchange Commission (CySEC), whereas others have UK’s FCA (Financial Conduct Authority) regulation.
In the US, brokers are only permitted to provide a maximum leverage of 50:1 on major currency pairs and 20:1 on minor pairs. In Europe, traders can receive 200:1 to 400:1, or even more in leverage. There are also brokers that are licensed to provide their services on globally. It would be wise to choose the one that fits your bill well in terms of leverage expectations and legal status as per your residence.
In addition, most brokers in Europe provide CFD (Contracts for Difference) trading while UK-regulated brokers can also extend their services to providing Spread Betting services. In the US, however, trading of such instruments as CFDs and Spread Betting is forbidden.
Forex trading adds to the long list of 24/7 jobs. Many practitioners in this career path are always prepared to work long hours to satisfy the big list of clientele and thus firms operating forex brokerage services are required to provide the same kind of customer service.
Regardless of where a trader is reaching out from, he or she will have unlimited access in terms of talk time, live chat, efficient email response — among other customer based service techniques.
Generally, when choosing a good forex broker, a simple call can help determine how responsive they are and whether they would be in a position to provide excellent services with regards to waiting time before your call is picked, the representative’s ability to answer any questions you may have on spreads, leverage, regulation policies among other requested company details.
Any forex broker firm that prides with offering good service will be ahead on transparency. Several traders have had a hard time in the past dealing with organizations that had made some necessary features in the platform inaccessible or inactive.
At any given time, the brokerage platform remains the investor’s bridge to global markets in the forex exchange. For that reason, if the platform is not designed favoring the end user in terms of ease of use, it will affect the overall user experience hence rendering it unfit for use.
In other words, the trading platform could be designed in such a way that it opens trades that would provide minimal profit margins to traders. This means that times when other competitor platforms are providing trades with higher profit margins, the platform would throttle any margin that exceeds a certain number. For this reason, the users need to be extra vigilant when deciding on the best forex broker platform.
The first step towards securing an online platform is through the use of a Secure Sockets Layer encryption, popularly known as the SSL. If you come around a brokerage platform that is not secured with this encryption, then run away from that platform as quick as you can.
In order to determine whether or not your broker has an SSL encryption, all you have to do is look at the browser section and see whether the URL begins with HTTPS://. Without SSL encryption, critical trader information can easily be stolen and used for malicious purposes. But still, this does not guarantee 100% protection.
Some Forex brokers go a step further by providing a two-factor authentication process as a requirement for logging in. This makes your account more difficult to hack by providing an extra layer of security.
This is another important item that traders should look at when selecting their forex trading broker. Nearly all brokers provide traders with the opportunity to engage in trading via three platforms: a downloadable platform such as the MT4 platform, CTrader platform and Trading Station; a web-based trading platform-many run on Citrix trading platform; and then of course through various mobile apps/mobile web traders.
There is a little difference when it comes to these. The only notable difference is that several brokers provide their Forex trading service via the MT4 trading platform while a few provide the services via CTrader platforms.
Nonetheless, depending on which platform the broker has chosen to provide its services, there could be some key features unique to the platform. For instance, the MT4 platform allows traders to engage in social trading using EAs (Expert Advisers). Others also allow traders to install custom indicators to refine their trading process.
However, if you choose to use a web-based trading platform such as Citrix, you may not be able to engage in copy/social trading.
Trading Assets and Execution
You need to assess the trading methods allowed by the broker on the platform. One of the most important features to look at is whether the broker offers guaranteed stop loss execution. The stop loss and take profit features are used by traders to mitigate trading losses while at the same time capitalizing on every bit of profit taking opportunity.
However, when the market experiences high volatility periods, the gaps between quotations could be large with short periods of time thereby leading to huge losses. With guaranteed stop loss, traders are assured that their trades will only be executed at their selected stop loss and not the closest price/quotation.
The same thing goes for brokers that re-quote prices during high volatility trading sessions. In such cases, it is good to go for brokers that have stated clearly in their terms and conditions that there are no requotes. This can prevent you from unnecessary losses as well as provide you with profitable opportunities.
Another thing that traders should look at in this section is the negative balance protection feature. This feature protects traders from losing finances that are presently not in their trading accounts. Ideally, it is possible that a trade could go terribly for you such that all the money in your trading account is won’t be able to cover for it. A good example is the EUR/CHF flash crash of January 2015, which cleared the accounts of many traders along with broker accounts.
Traders should also make sure that the type of broker they choose suits their trading needs. Some brokers are nothing more but market makers, which mean that they do not provide liquidity by linking client trades direct to the main forex trading market (the interbank market) where banks and corporate traders are involved. In such a case, a trader would want to go for STP ( a Straight-Through-Processing) broker.
These are the ones that link the clients to the interbank market. Others also offer trading access to the electronic trading network (ECN) where traders can see the best price offered at the moment as well as the buy and sell orders of other ECN participants. These are the two main market accessibility networks offered by brokers. As for market makers, they can be highly unpredictable, and even cases of trade manipulation cannot be ruled out.
Although all forex brokerage firms offer great deals of currencies, not so many have the luxury of emphasizing on most considerable pairs. For this reason, the chances of trading in liquidity would be almost inevitable.
Major trading pairs in the market are USD/JPY, EUR/USD, USD/CHF as well as GBP/USD. There are some brokers who would offer tens of currency pairs but miss out on the most valuable part, those that the trader would be interested in.
Most brokers offer multiple trading assets aside from currency pairs. It is possible to trade commodities, indices and various stocks on some platforms, especially those that provide CFDs trading.
Depending on your targeted range of market, it is good to assess whether the instruments that you are experienced in are available on the trading platform of the broker you choose. In addition, most of the brokers will provide different spreads and margin requirements for the various assets on their platforms. Make sure that if everything else amongst your select list of preferred brokers matches, then things such as spread and margin requirements make the difference.
Deposits and Withdrawals
A big number of forex accounts across the globe do not require huge initial deposits. The reason why forex trading has maintained its position in the market is perhaps because the buying power is usually higher when compared with minimum deposits. Accounts can range from standard to micro, all with varying minimum deposits.
All forex broker platforms present differing withdrawal and account funding policies. For instance, some can be funded online with credit cards, ACH, wire transfers or online payment systems such as PayPal. The transaction fee may be charged by the bank, the broker or both.
Best Forex Brokers November 2016
Markets.com: Markets.com is licensed (092/08) and regulated by Cyprus Securities Exchange Commission (CySEC). The broker was established in 2006 and offers trading via the MT4 trading platform, a Citrix-based web-trader, and a mobile web-trader. The minimum amount required to open an account is $100.
HotForex: This is an STP/ECN broker registered in Mauritius. The broker offers traders a leverage of up to 1000:1 and traders can begin trading with as little as $50.
AvaTrade: This broker is owned and operated by the same company that runs AvaFX, a widely known forex trading brand. AvaTrade is regulated by the Central Bank of Ireland and licensed by MiFID in the European Union. It is also regulated by ASIC in Australia, the Financial Services Commission (FSC) in Japan, as well as by the B.V.I Financial Services Commission in the British Virgin Islands. Traders can begin trading with as little as $100.
EasyMarkets: This is one of the few forex brokers that guarantee trade execution on the pre-set stop loss and profit taking levels. However, these are only guaranteed for trades made via the web-trader. In addition, this is only made via “Inside Viewer” and “Trade Controller” tools available through the web-trader.
Plus500: XM.com: This is one of the veteran Forex trading brokers in the market. They specifically target clients based in Europe, and provide among other services, CFD trading. Plus500 is one of the few Forex Brokers that are publicly traded at the London Stocks Exchange. Public listing subjects companies to more scrutiny thereby making them a lot safer for traders when it comes to choosing brokers.
By understanding the services offered by a given forex broker, you would be able to classify the platform decide whether it suits your interests when you start trading or not.
Performing a bit of research and comparing one brokerage firm to the other would play a pivotal role towards ensuring that you choose the best forex broker, which in return will multiply your odds towards calculated positive returns on investments.
In this endeavor, factors such as regulation, customer service, currency pairs, minimum deposits and withdrawals as well as commissions and spreads will all be featured in your research.