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During a gold rush, the people making money are those selling picks and shovels
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Dear Forex Researcher,
The forex market is a global network of market makers. At the core of this network is a group of the the world's leading commercial banks, investment banks and large 'security houses', the so-called inter bank market. Historically this group and its institutional and large corporate clients have dominated all forex trading activities in all forex instruments. It is very important to understand that forex trading in the spot market is only one part of the foreign exchange market. For example, in 2004 forex swaps accounted for 53% of turnover and spot trading 35% of turnover. Foreign exchange forwards accounted for the balance.
During the last ten to fifteen years the forex market has seen the development of what is now called the "retail market". According to the Bank for International Settlements during the last 12 years the dealing with "financial customers" by the inter bank market has increased with 62%. "Financial customers" are the smaller banks, investment banks and securities houses.
Based on developments in electronic data exchange, particularly Internet technology, the retail foreign exchange market came down to street level. The spot retail forex market is characterised by standard transaction (lot) sizes are $100,000, well below the $1,000,000 de facto minimum in the professional market.
An Over-the-Counter (OTC) Market
OTC means the transactions are not done through, and the integrity not guaranteed by, an exchange like a stock exchange. Therefore, unlike on the stock market or the exchange traded futures markets participants in the forex market have to cope with counter party risk.
The forex broker or forex market maker where the retail investor deposits his margin is his counter party.
"White lables"
White labelling is an excellent marketing concept where the product provider (forex market counter party) sells it products through intermediaries (forex introducing brokers), utilising Internet technology in such a way that it seems as if the introducing broker is the forex broker. Usually, but not always the only disctinction is in the banking particulars where the client funds are deposited and the dealing room support / contact, as the forex broker and not the "white label company" is the actual counter party.
How to evaluate a forex broker
Test #1: The Regulatory Test
It is imperative that you make sure that you are comfortable with the risks associated with your forex broker. You have to use common sense to make sure you get satisfactory answers to some basic questions:
- Is your forex broker subject to a globally recognised regulator?
- Does the regulator specifically oversee the retail OTC forex market?
- Does your broker have a registration / license number with the regulator?
- Does your broker have a disciplinary record with the regulator?
Test #2: The Business Model Test
The question here is does your forex broker immediately offsets positions with their clearing house or do they actively take positions on the other side of their clients' trades?
Now, remember even if he passes the transaction on to a clearing house or clearing broker, your forex broker is your only counter party. You trade EUR/USD. You buy, broker sell. You win, broker lose. You lose, broker wins.
If your forex broker builds the risk of carrying most client positions up to certain limits (determined by their risk model) into their business model, they will be inclined to entice clients:
- to make smaller deposits,
- use higher leverage in order to do
- proportionally bigger sized trades (relative to your margin),
- focus on intra day timing
- place short stops
- focus on narrow spreads, in order to make
- very very short term trades seemingly attractive
The reason why they will do this is because they know this business model works, (for them, not for you, an individual client), they get a huge revenue stream from the many trader's capital losses, (from stop losses too close to the market). This is ideal for a forex broker.
If this is their business model, they are not at risk, you are at risk if you fit the "typical customer" picture.
Other brokers do not make a big deal of clients' positions and offset all or most trades with clearing brokers and banks. They usually have larger minimum accounts sizes, do not offer the ridiculously high leverage (200:1 - 500:1), but do everything in their power to get you to do higher volume of trades, because their income is mainly from the net spread (after offsetting). This is obviously only possible with a large customer base doing huge volumes in order to sustain the cost associated with running a forex broker operation.
Test #3: The Management Test
This is very subjective, but I try to categorise the company as Marketing Wizards or Market Wizards. Originally there were only Marekting Wizards, but as the popularity of forex trading grows, more emphasis falls on supporting traders to actually become sustainable traders and clients.
Test #4: The "Big Daddy" Test
Is your forex broker a small independent entrepreneurial firm or is it part of a larger financial group? If the firm is part of a large financial group it is possible that many of the risks associated with a smaller firm do not come into play. It is also possible for your broker in such case to indeed offset all trades with "mother ship", thereby limiting the riks of "running stops", which may sometimes be to your disadvantage.
Test #5: The "means" Test
Find a broker where you can trade with low leverage. Remember there is a big difference between the minimum margin required and leverage. If you don't understand these concepts you are at risk. Nothing a broker offers in terms of technology, charts, news, training, narrow spreads, interest on unused margin or any of the many tricks the marketing wizards play will save you from the peril of too highly geared trading.
If the broker, or especially the "white labels", offer trading on 100K lots only - find someone else. White labelled brokers are only marketing agents. If they can get one person to trade on 100K lots it is as good as 10 people that trade on 10K lots. They will talk down the dangers of being too highly geared. Watch out for this.
Use the following as guideline from my experience working with many clients over several years
- Minimum lot size $100,000 - you need $50,000
- Minimum lot size $50,000 - you need $25,000
- Minimum lot size $10,000 - you need $5,000
- Minimum lot size $1,000 - you need $500
DayForex as Introducing Agent
DayForex's business model is to equip our clients to trade over the long run with low leverage. We want our clients to use their expertise, acquired with our guidance, to build their own investment portfolio as self-directed traders. We assist our clients on the road with our mentoring programme. We explain our trading strategy, and then, on a daily basis, comment on our application of the strategy. This allows our clients to trade on their own, within this comfort zone of professional analysis and support.
In order to keep this operation going, we depend on introducing agent fees from the brokers we decided to partner with. IA fees are paid by the brokers for referring customers to them.
DayForex's customers can chose from five companies. We are comfortable to refer specific customers to one of them, depending on certain risk parameters, the "means test" and other client preferences.
Even though you may chose not to make use of our mentoring service we can help you to find a suitable forex broker and would we gladly refer you to one of our partners.
Tell me more
Sincerely,
Dirk D. du Toit
CEO, DayForex
"What it takes to reach the destination"
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RISK WARNING : Customers should be aware of the risks associated with over-the-counter, spot Forex trading. In the off-exchange market, also called the over-the-counter market, a retail customer trades directly with a counterparty and there is no exchange or central clearing house to support the transaction. Forex trading is highly speculative in nature, which can mean prices may become extremely volatile. Forex trading is highly leveraged. Since low margin deposits normally are required, an extremely high degree of leverage is obtainable in over-the-counter trading. A relatively small market movement will have a proportionately larger impact on the funds you have deposited. You may sustain a total loss of your funds. Since the possibility of losing your entire cash balance does exist, speculation in the over-the-counter market should only be conducted with risk capital you can afford to lose and which will not dramatically impact your lifestyle."
