Is Switching Brokers Ever a Good Idea?

By: DailyForex.com

The best reason you will ever have for switching brokers will occur if you ever find that you have a good reason to fear for the safety of your deposit. If you ever ask your broker to withdraw some funds in your account, and they are unreasonably slow or unresponsive, then this is an excellent reason for switching brokers right away. Of course, if you hear any reliable information about the financial or ethical health of your broker, it is something to look into. Consider testing your broker after you have some good results, by asking to withdraw some of your recent winnings. If there is any undue delay, it is advisable to shut the account down right away and, if necessary, threaten to contact the appropriate regulator.

Moving from crisis mode to some more commonplace reasons, one of the most common factors prompting client to switch brokers is the average level of the spreads being charged. For example, there are still brokers out there charging a 3 pip spread on the EUR/USD. While this was the norm a few years ago, it is rapidly becoming considered to be outrageously expensive. Switching brokers to one offering EUR/USD at 1.5 pips or lower makes sense as the spread is a “cost of doing business”, and over time can really add up to lost revenue for the trader, especially if they are trading frequently using shorter timeframes.

Another good reason to switch brokers is if the broker has an unstable platform. If you find that the trading platform disconnects quite frequently or that it takes a long time to execute a trade, and it keeps happening, then this is prima facie evidence of incompetence or downright dishonesty. Dishonesty is more likely if these disconnections or freezes happen every time you are trying to enter a trade that would have gone on to be a fast winner. Of course, it is important not to be paranoid and blame your broker for all your bad or losing trades. Nevertheless, as Forex has no centralized marketplace, brokers do have a commercial incentive to “shade” their spread just over levels where a lot of their clients have stop losses set on open trades. You should bear in mind though that during periods of low liquidity, the market often naturally tends to hunt common stop loss levels. The best way to determine whether your broker is acting shady is to see whether these price moves are not matched by other broker’s price feeds. Keep an eye on two or three. If your broker tends to produce sudden unexplained spikes in the price that are not followed by other brokers, it is time to think about getting away from them.

A good way to get a better understanding of whether a particular broker is best for you is to think about what the brokers are actually doing, and looking at things from their point of view. In order to do this, it is helpful to start with a few facts about the Forex industry:

1. Most Forex brokers are not actually exchanging any currency on the market. They are simply providing a price feed, the movements of which their clients are allowed to bet on in exchange for two effective fees: the spread or commission, and a small overnight charge that is incurred every night any position is left open. These brokers are in adversarial relationships with their clients: they make money when their clients lose, and lose money when their clients win.

2. The remaining Forex brokers tend to monitor the trades of their clients that have records of trading profitably, and cover the aggregate positions of these traders with a bank. These brokers have a less adversarial relationship with their clients, but still can face problems in adequately covering themselves in fast-moving markets.

3. The real Forex market is dominated by four large banks that together make up about 85% of the market’s volume. These banks provide liquidity to smaller banks, which then do the same to smaller banks, who then provide liquidity to brokers, and so on down the chain in size and importance. This tends to mean that the smaller your broker, the worse the price and spread they are probably going to be able or willing to give you, as they themselves will not be able to get first-rate prices and spreads. The trade-off here is that these smaller brokers tend to offer very low minimum deposit and trade sizes. The more money you have to deposit, the better the service that will be available to you. Of course, this does not mean that you have to go higher up the chain than is appropriate for your account size. Generally speaking, it is a good idea to fit your Forex broker to your account size.

4. Much of the Forex industry has a bad reputation and is poorly regulated. When these facts are combined with the natural human tendency to allow better judgment to be clouded by greed, it creates a profitable vacuum for unscrupulous brokerages that have no reputation to protect. That is not to say that small Forex brokers are all crooked, but do not assume that your deposit will be safe and segregated just because you sent it to a Forex broker. However if that broker has a public reputation and is subject to strong regulation and supervision, you should be able to rest easier.

There are other good specific reasons that can play a role in determining choice of broker, such as the availability of a specific pair that you want to trade, platform, quality of customer service and other “concrete” things. Now that you’ve covered all of the critical aspects to consider when choosing a broker or switching brokers, it’s time to shift your focus to how you can conquer the Forex markets - with hard work and patience, of course!

The DailyForex.com team is comprised of analysts and researchers from around the world who watch the market throughout the day to provide you with unique perspectives and helpful analysis that can help improve your Forex trading.