What are Currency Brokers
Currency broker could be somewhat of a confusing definition. On one hand, many people loosely use the term “currency broker” as a synonym for an “FX broker” but that is imprecise – in fact currency brokers are financial service providers which allow customer to transfer money abroad. What separates currency brokers from high-street banks is that they claim to access better currency rates for overseas currency transfers and money exchanges, alongside a more tailored service allowing you to speak to the deal directly.
FX Brokers, a different animal altogether….
In contrast to that, an FX broker (FX Trading Broker, that is) allows UK customers to access leveraged speculative trading positions on certain currency pairs. While UK currency brokers simply replace banks, FX brokers give customers the opportunity to trade on currencies, and oddly enough corporate customers often refer to business-facing currency brokers as “forex brokers”… which may be the source of this confusion.
Below you can a short table that will help you understand the differences between a currency broker and an FX broker:
|Currency Broker for Bank Transfers||FX Broker for Speculative Trading|
|Allow speculative trading||No||Yes|
|Purposes||Investments abroad, property abroad, relocation, business payments||Wager a certain amount of money to make profit|
|Selling point||Cheaper cross border transfers, better service||High leverage and good trading conditions|
|Reputation||A pretty clean type of business, customers satisfied overall||80% of customers lose money and hence many complaints online|
|Regulated in UK by||FCA||FCA|
|If and why use||Use if you need to transfer to a bank account abroad in foreign currency and wish to beat bank’s rates||Use if you are an advanced investor who wants to leverage his money into something 80% of all people lose money on|
While traders working for currency brokerages and fx brokerages make look the same (illustration below), they are definitely not the same.
In this guide we will cover both currency brokerages and FX brokerages in the UK. Our main focus lies with currency brokers that facilitate overseas payments over FX trading, and our target audience is prospective users of either service, but we will give our best effort to cover all angles.
Searching for UK’s Best Currency Brokers
One of the key things for success upon the endeavor of moving away from traditional banks into service-oriented fintech is finding out which service provider to use. It is twice as important when we’re talking about brokerages which are, in spite of being sometimes quite techy, first and foremost measured in their quality of service. When you seek out a currency broker for your international payments you should look into the following aspects:
Having someone who is both experienced and friendly is critical in order to maximise your value add as a result of using a broker. With the best brokers in the UK, you will get your own private dealer whom you can speak to directly, and over time – establish a real relation with him as he understands your, or your business’, needs.
At the end of the day, the main reason for people to search for top bank alternatives in the form of brokers, is that banks are notoriously expensive and opaque when it comes to foreign currency exchange rates. They will hit you with insane numbers if you are exchanging large sums of money, and you won’t have even as much as clarity on what you’re paying until it’s too late. A decent broker will provide you with full clarify on what’s the net after all fees and markups, and will of course beat the bank’s rate WITH EASE.
You’d optimally want to work with a broker who is readily available for your needs at extended workhours, with multiple offices around the world (so if you are located outside the UK you can still call them whenever it’s comfortable for you), and that of course has a fully functional online trading system so if you want to DIY you most certainly can.
Gone are the days where the sole purpose of currency brokers was to exchange money into foreign currency or transfer money from point A to point B. I’d be the first to admit this is still their main functionality but there are others as well. You’d want to have an account to RECEIVE funds into. You’ll also want to be able to hedge your transfers if these are occurring in the future and you are looking to fix today’s rate, right? Lastly, you’d be wanting to be able to log in with ease from your phone so they would have to have a fully functional app or a very mobile-friendly site that you could log into using your browser.
When all is said and done perhaps the most important thing is that safety and security will be in place so that your hard-earned money won’t be at any risk (of fraud, brokerage collapsing leaving customers out of funds, or the like). That’s why you’d be looking at credibility as a leading factor – you’d be wanting to find a company that has been around for some time, have had overwhelmingly positive customer experiences and is properly authorised to act as a currency broker by the FCA. Additionally you choose to use more valid resources and make sure you cross-check everything you read.
Lack of red flags:
If it’s too good to be true, be suspicious! Other than the factors we mentioned above, you should also look out for deals that don’t make sense. If you could conduct an international money transfer or a currency exchange at a rate that is very close to the interbank rate without fees, then there are either hidden fees, or these are “honeymoon rates” i.e. rates that will be applied to your first deal and then dissolve into thin air on your next trades (because brokers have to make money at the end of the day as well), … or the broker is running an inefficient business and could be at risk of shutting down due to a poor business model.
UK’s Best Broker List
We have listed the top 3 brokers based on our industry knowledge and our own due diligence. Please note the link to moneycorp is a partner referral link that grants us a referral fee. This is how we make money and we only feature vetted brokers who have passed our tests.
TorFX is a veteran currency broker operating out of Cornwall and are known to be one of the best employers around that area. The TorFX team boasts more than 50,000 business customers and a very large trading desk, one of the biggest in the UK currency broker industry. Similarly to moneycorp, TorFX is a very service oriented company that strives to provide optimal payment solutions for any type of customer based on their needs and requirements.
OFX is a currency broker which has transformed into an all inclusive cross-border payment system which can serve a variety of intents. OFX’s online system enables customers to transfer money abroad for excellent rates, with no minimum requirements meaning it is also usable for smaller transfers and remittances.
OFX is not just UK oriented – it is in fact composed of several businesses units in Australia, USA, and Europe so it accepts and can provide the same level of functionality and service to customers located anywhere else, whether across the pond, or somewhere else on this green planet.
OFX is an award-winning Australia-based company which is publicly traded and received excellent reviews throughout.
Additional notable brokers include
- Currencies Direct
- Key Currency
- Foreign Currency Direct (Lumon Pay)
- WorldFirst (business customers)
- Currency Solutions
- Smart Currency
and the list goes on and on with hundreds of different options to choose from. On top of brokerages you have fully-digital entities like Wise, Remitly, WorldRemit, CurrencyFair, to name a few.
Sooooooo… are currency brokers safe?
Yes, currency brokers are safe, if appropriately regulated. A currency broker must be authorised the Financial Conduct Authority, in which case – customer funds are segregated from the broker’s funds. Being registered with the Financial Conduct Authority and not authorised doesn’t really cut it, because the level of supervision will be much less (as compared to an authorised business).
It is even SAFER to deal with currency brokers who are regulated in multiple jurisdictions with multiple regulators supervising over them, such as the service providers appearing in the aforementioned best currency brokers in UK list.
Are currency brokers safe as banks?
Banks in the UK are regulated by the PRA (Prudential Regulation) as well as the FCA. The PRA is responsible for financial safety while the FCA supervises over customer complaints through it ombudsman service. The Bank of England is also supervising banks as well as the Payment Systems Regulators. Banks are also covered by the FSCS, a scheme that is meant to cover client losses in cases of a bank failing. Considering all of that, currency brokers are probably not as safe as banks in terms of compensation if the worst happens and the service provider falls under, but on the other hand ever since the Hayle / Crown Currency Exchange going under in 2010, there were no currency brokers who went under and left their clients looking to recover their funds. The chances of something happening to your money with a fully supervised broker is low.
How do currency brokers save you money?
Currency brokers are in fact wholesalers. They buy currency in large quantities, more than the average individual or business would, and as such – they get their currency for very cheap. Since they are not regulated like banks and don’t have the same operating costs, they roll over the discount in currency rates that they receive over to the end-customer. That means that while foreign exchange currency rates have embedded markup in them of 2-5% by banks (with some neo-banks slightly cheaper), currency brokers would normally have a markup of 0.25% (the lowest markup to be obtained, normally by corporate customers who transact a lot) and 1.5% (which is probably the default online markup for more exotic currencies). As a rough average, you could pay about a THIRD of the markup with a currency broker in comparison to banks.
Moreover, currency brokers don’t charge any wire fees of any sort. That means you could transfer currency abroad to any destination, as many times as you want, without incurring additional costs. That comes in handy for people or businesses who need to pay many people each month.
If you want to check the quote you have received from any currency broker on a transaction you could compare it to your bank, as well as to BoE’s official rate for the day (just don’t expect to get the bank rate on any transaction, otherwise your currency broker would be losing money on the deal – more on that below).
How do currency brokers make money?
Currency brokers make money by selling you currency for higher rates than they receive it. While the best currency brokerages in UK are significantly cheaper than banks for international money transfers, it doesn’t mean they’re not making good money while saving their customers money.
It’s easier to understand if we look at a single trade.
- Joe steps aside from his bank because he realises than on a 10,000 GBP to Euro transfer, he is paying £25 in fixed fees, as well as 2% (£200) in markups. That seem excessive for him so he goes shopping around for a cheap currency broker.
- Joe finds broker X which is offering him a rate which represents only a 0.7% markup and no wire fees. Joes decides to use that broker and pays £70 in total fees, saving up 70% of the original £225 in fees he would have paid via bank.
- Broker X which facilitated the trade got their currency for only 0.1%, so they made £60 in gross profit over that deal. That £60 in gross profit is likely to be just £10-£20 in net profit for the broker.
The process could be described in the following way:
- Stage A: Signing up. Done in compliance with international anti-money laundering laws (i.e. provision of legal documents is required).
- Stage B: Speaking to a representative. Explaining who you are, what do you need to do, and which additional services you might need.
- Stage C: Getting a free quote which you are not, I repeat, NOT obliged to take on. You could receive a quote as early as you’re approved in the system, either online (for smaller transfers) or via telephone (this is what most folks prefer). Alternatively, you could ask the dedicated dealer you will be assigned to give you a heads up when prices are more comfortable, and then you could potentially make the trade using lower rates. We shall discuss this topic in length later on.
- Stage D: If the quote is to your liking (if you’re interested in shopping for optimal pricing, then this quote must be compared simultaneously to quotes from other companies) – you can give the approval. That means that the rate will be locked at this point regardless of further currency shifts, but it also means you are obliged to make the transfer.
- Stage E: You are permitted to transfer the money domestically, in your local currency, to a segregated account. Then the money will be exchanged to the destination currency, and sent internationally to a bank account.
Currency brokers for business: a premium service
Currency brokers are specifically popular with businesses because businesses can, to a larger degree than individual/private clients, appreciate a premium service. As a business the level of complexity is normally higher than for individuals – your business may deal with multiple currencies, sending multiple payments each month, trying to control FX exposure, need to receive payments, and in many cases just require a professional opinion a phone call away. You can get all of the above with a bank, with even better rates than any UK currency broker can offer, but not as an SME.
Here is an easy table to summarise the differences between business FX using a currency broker vs managing your FX at the bank:
|Category||Business Currency Broker||High-Street Bank|
|Who handles FX for you||Dedicated currency dealer||Banker, no access to FX dealers|
|Hedging||FX Forwards, Swaps, Options||Usually inaccessible for SMEs|
|FX Treasury management||Offered as a part of the service||Usually inaccessible for SMEs|
|Currency rates||Low margins (0.25%-1%)||High margins (1.5%-5%)|
|Transfer fees||None||£10-15 per tranfer on average|
|Outbound transfers||Can circumvent SWIFT||Via SWIFT|
|Receive fx payments from abroad domestically?||Possible through a multi-currency bank account||Not possible|
|Online platform||Holistic platform for businesses with batch payments, rate alerts, set future payments, and real live follow up on each pending transfer||Many banks don’t even offer overseas bank transfers online|
If you are looking to find the best currency brokers in UK for your business use this link – all our top 10 currency brokers also service businesses and have designated corporate FX departments.
Currency options and other means of currency hedging
While currency brokers, unlike FX brokers, don’t allow speculative trading at all, they do allow hedging against currency volatility through a variety of means such as
- FX Options
- FX Swaps
- Time Options
- Participating Currency Forwards
- Currency Forwards
Normally, with most currency brokers, individual customers would only be able to access Currency Forwards Contracts (and business customers could hedge using the fully array listed above, if the broker is properly registered to offer such FX options – not all brokers are).
The reason that individuals could only use Forwards is simple – a Forward is a pre-agreed purchase of currency in a future date at a set rate, and as such it doesn’t have an inherent speculation on the price. If a person needs to receive a certain amount of money in a future date then that person is only insuring himself against a downswing in his base currency, whereas buying FX options means that there could be a financial gain or less as a result of that activity.
Should I trade forex for profit?
Until this point in this article we have been addressing currency brokers for bank transfers almost exclusively, but now it’s the time to look at the other end of currency trading – currency trading for profit (or more likely, loss).
Before we get to the nitty-gritty of currency trading for speculative purposes it’s important to acknowledge the fact that if we look at global, as well as domestic UK statistics, 70% to 80% of all retail forex traders lose money. That’s not only a “fair disclaimer” but in fact a tell-tale sign for anyone who wishes to engage in such dangerous trading activity.
In essence, (speculative) forex trading is about making a wager on the direction of a certain currency pairing* direction. That wager is often leveraged by an FX broker so that each movement in the pairing’s rate would amplify (at x100 leverage, a -1% drop in the rate means your position will be wiped out).
* Currencies are quoted in pairings, with the most traded currency pairing being the EUR/USD. If the price quoted for the EUR/USD is 1.32071, this means that for one Euro you would get a total of 1.32071 US Dollars in exchange. So, if you bought the EUR/USD and the quoted price rose to 1.33071, you would have made one cent for each Euro bought. It is in this way that currency traders make money from trading Forex. Obviously, there is also the potential to lose money if in our fictional situation the quoted price for the EUR/USD fell to 1.31071, the currency trader would have lost 1 cent for each Euro he or she bought.
If most traders lose money in FX trading, why is it considered lucrative?
The foreign exchange market differs from other financial markets in several different ways. Firstly, there is little to no inside information, with currency prices usually being determined by actual monetary flows and various macroeconomic factors. Price sensitive news is released publicly and theoretically everyone in the world could receive this news at the same time.
Forex also differs from stock and futures trading as there is no centralised exchange responsible for handling trades. Instead, Forex is an interbank, over-the counter market which means there is no single exchange for each currency pairing. This in turn means that the foreign exchange markets trade 24 hours a day throughout the working week (but currency brokers for bank transfers only operate during the workday – please notice). The Foreign exchange market opens at 10pm GMT Sunday night and doesn’t close until 9pm GMT Friday night.
This means all the global currencies can be traded continuously during the week, allowing traders to react to news as it happens rather than waiting for the exchanges to open. This is also what makes the foreign exchange market very attractive to individual traders as the 24-5 nature of the marketplace allows them to trade around their job and other commitments.
The Foreign exchange market also happens to be the world’s largest financial market. The average daily trading volume is estimated by $5.0 trillion dollars (of which spot Forex makes up $1.5 trillion dollars). It is hard to understand quite how big the foreign exchange markets are without comparing them to other large financial markets. The New York Stock Exchange (NYSE) is the world’s largest stock exchange and has a trading volume of only $22.4 billion dollars a day. The London Stock Exchange (LSE), Europe’s biggest stock exchange has a daily trading volume of $7.2 billion dollars a day. This means that the foreign exchange markets are highly liquid with plenty trading opportunities for shrewd traders.
This also means leverage is extremely high and speculators who want to boom or bust are happy to partake in that scheme – most of them go bust, rather than boom.
The size and 24-5 nature of the forex markets makes Forex trading very popular with individual traders. As it allows them to trade around their other commitments which is often not possible with other forms of financial trading. With international trade increasing year on year, it seems very likely that the foreign exchange market will maintain its place as the world’s biggest financial market. This means that Forex is likely to remain one of the most popular forms of financial trading for individual speculators who use fx brokers (although online stock brokers do have a lot more customers collectively, in comparison to fx brokers).
Is Forex, or currency trading, a zero-sum game?
A zero-sum game is any game or activity where a participants’ gains, or losses, are exactly balanced with the losses and gains of the other participants. If the total gains are added together and the total losses subtracted the sum will be zero, hence the name zero sum game. Poker is one example of a zero-sum game where players can only gain at the expense of other players.
I have seen several debates regarding whether Forex is a zero-sum game. Technically Forex is in fact at best a zero-sum game as any gains made by one trader are equal to the losses of other traders. As currencies are traded in pairs, if one trader buys one lot in the EUR/USD and another trader sells one lot of the pairing any gains by one trader will be equal to the losses of the other trader. Thus, Spot Forex can accurately be described as a zero sum game.
It has been argued that Forex is not a zero-sum game as not all participants in the spot market are making speculative transactions. For instance, a tourist may swap his Pounds into Dollars and intend to spend all his Dollars while he is on holiday in Florida. Such a market participant will not care if the market moves against him while is on holiday. This does not change the fact that overall; the Spot Forex market is at best a zero-sum game as total gains will always be equal to total losses.
For retail traders spot forex is in fact a negative sum game. A negative sum game is any game or activity where the sum of total gains and losses is negative i.e., below zero. The reason why spot Forex can be considered a negative sum game is that traders incur substantial costs when trading the currency markets. Brokerages charge a marked up spread or commissions to traders, these mark-ups and commissions are used by the brokerages to cover their costs and to earn a profit. This means that the sum of gains and losses is in fact negative making Forex a negative sum game.
Does it matter that Forex is zero or negative sum game?
This is where the debate really heats up. Some have alleged that retail traders face the problem of gamblers ruin. In a fair game (one with no information advantages) between two players which h continues until one player is made bankrupt, less well capitalized player has a much higher possibility of going bankrupt. It is argued that since the retail trader is speculating against the rest of the market which has vastly more capital the average retail trader is very likely to go bankrupt. This does seem to ring true with it being estimated that around 70-90% of retail traders ending up as losers.
The fact that Forex is a zero-sum game doesn’t preclude traders from making money. It simply means that any profits you make come at the expense of other market participants. There is no reason why skilled traders can’t end up making money.
Currency transfers are not a zero-sum game
When trading is made for the purpose of making fx payments, with a currency broker, it’s still a zero-sum game because eventually any trader will have to pay spreads on the Buy / Sell of a currency, but since there’s not one trading against you, there’s nothing negative about it.
How leverage works and makes FX trading highly dangerous
One of the major selling points of Forex is the significant amount of leverage offered by many Forex brokers. It is not uncommon to find Forex brokerages offering leverage more than 500:1, such leverage is unheard of. Leverage however is a double-edged sword, while leverage will increase returns when times are good but will increase loses when the market moves against you. The excessive amounts of leveraged used by many traders is what makes Spot Forex a particularly risky financial instrument. Many new traders don’t have a proper understanding of how leverage works, this article aims to provide traders with a full introduction to leverage when it comes to Forex.
Leverage involves borrowing a portion of the total amount needed to invest in something. When it comes to Forex, a trader will typically be borrowing money from a brokerage to open a trading position. The high levels of leverage offered by many Forex brokerages allows for traders to take on huge positions with very minimal initial margin requirements.
A brokerage requiring customers to have 1% of the total transaction value deposited in their account prior to opening a position would be offering leverage of 100:1. In this instance if a trader wanted to open a 0.5 lot position (equivalent to $50,000) in the USD/CHF he would be required to have at least $500 in the account. If a brokerage only required 0.5% of the total transaction value up front the trader would be getting leverage of 200:1 and would only need $250 in his account to open the same position in the USD/CHF. The significant sums of leverage on offer have made Forex trading one of the most accessible forms of financial trading.
Margin-based leverage is the type of leverage that fx brokerages will quote to you as a selling point when you consider opening trading account, and of course are not supported by currency brokers that deal with payments. It is important however to understand the difference between margin-based leverage and real leverage. The amount of margin-based leverage on offer may not necessarily increase a trader’s risk, as it is always possible for a trader to put additional funds aside. This means that a trader’s effective or real leverage differs from the margin-based leverage quoted by the brokerage.
Real or Effective Levereage = Total Transaction Value / Total Free Trading Capital
If you were to open a one lot $100,000 USD/CHF position with $50,000 deposited in your account, the effective or real leverage would be 2:1 (100,000/50,000=2). If you instead opened a two lot or $200,000 position with an account balance of $50,000, your real leverage would be 4:1 (200,000/50,000=4). If you were to open multiple positions with the free capital your real leverage will increase. But if you are holding capital beyond the minimum margin requirements your real leverage will be less than the quoted margin leverage. It should be clear to you that margin-based leverage is equal to the maximum leverage a trader can use.
Risks associated with excessive leverage
The use of real leverage has the potential to increase your profits significantly, but at the same time can increase the size of your losses. The greater amount of real leverage a trader uses the greater the risk they take on. It is often said that the main reason why the majority retail traders ultimately lose money is that they tend to use excessive amounts of leverage.
Imagine that there are two traders who both have $10,000 deposited in their trading accounts. Both of our traders use a brokerage that requires 1% initial margin. Additionally, they both decide to long in the GBP/USD. Trader 1 takes a $500,000 5 lot position in the GBP/USD, while trader number 2 takes a much smaller 1 lot position worth $100,000. Unfortunately, the market moves against our traders triggering their 50 pips stop loss.
From the above table you will notice the amount of leverage used by the traders has a huge effect on the kind loss the traders took. Trader 1 who used 50:1 real leverage lost a total of 25% of his account from one 50 pip loss, while the second trader who was more conservative took a 5% loss. Considering many traders are using real leverage far more than 50:1, a small move against a trader can wipe out an account. It would only take a 1% move against a trader to wipe out an entire account if a trader was using as little as 100:1 real leverage.
Hence, preserving capital is vital when trading and limiting the amount of real leverage you take on is one way in which traders can protect their capital. The use of excessive leverage is extremely risky, and many believe it is one of the main reasons why the majority of retail traders lose money. While limiting real leverage will mean that traders won’t make as much should the market move in their favour, many feel the trade off is worth it as reducing leverage will significantly reduce risk.
Binary options – a scam in disguise of a financial instrument
In theory, a Binary option is a type of option where the payoff is some fixed amount or nothing. For example a $100 option with 75% payoff, will payout $175 if the trader wins and nothing if the trader makes the wrong call. When you purchase a binary option the potential return is stated before the trade is opened. It is possible to offer Binary options for almost any tradable financial product. Binary options also allow a trader go either long or short, to take a long position a trader buys a call option and to go short a trader buys a put option.
Non-exchange traded Binary options have come in for a lot of criticism, part of this criticism is due to the way that the platforms make their money. The platforms do not charge their users any fees or commissions, but rather make their money acting as the counterparty to client positions. Thus the odds are skewed in the platforms favour, for a trader to make a profit they will have to predict price movement correctly at least 55% of the time.
|Call/Put||Stake||Strike Price||Return (%)||Actual Close||Payout||P&L|
|Call (UP)||$100||100 =>||70||101||$170||$70|
|Put (Down)||$100||99 <=||70||101||$0||-$100|
For example our trader named John believes the USD/JPY will close above 100 at the end of the day. So John then buys a $100 Call/UP option from the platform with a fixed return of 70%. If the USD/JPY is above a hundred at the end of the day, John receives a total of $170. If the USD/JPY closes below 100, then our trader will receive nothing. It should be clear that in this case the odds are skewed in the providers favour. Assuming that each event was equally likely, a fair return for the option would have been 100%. In this situation John will have to be correct around 60% of the time to make profit, giving the provider a distinct edge.
Since their introduction back in 2008, Binary Options have risen quickly to prominence and are often marketed as the easiest way for the average joe to trade the financial markets. This rise of prominence is likely down to couple of different factors, firstly the Binary Options industry has fully embraced the affiliate marketing model and has offered those willing to promote their services handsome rewards. Secondly, Binary Options appeal to a new demographic who see traditional Forex or Share trading as too complex yet still want a way to make money from trading the financial markets. There is quite a lot of confusion surrounding Binary Options, this is in part due to the fact that there exist both Binary Options as offered by online platforms such as Banc De Binary and there are exchange traded versions offered by Nadex.
Binary Options were mostly offered by online platforms such Banc De Binary, GTOptions and, 24 Options. Prior to the introduction of these platforms, Binary Options were seen as exotic instrument due to the fact there was no market for the trading of these over the counter instruments. It was common to find these Options embedded into an options contract and these Options were normally only purchased by extremely sophisticated buyers. It was not until 2008 that Binary Options became more firmly established in the public psyche, with a number of online web platforms offering the ability to trade Binary Options. The Binary Options as offered by these platforms were essentially just a simplified version of traditional exchange traded Binaries. The number of platforms operating quickly proliferated with it being estimated that by early 2012, there were over 90 of these such platforms operating. Part of the reason why the industry grew at such an astonishing rate was that the product was skewed heavily in the houses favor, with Binary Options being a very profitable instrument to offer.
In 2017, the biggest providers of binary options in the world – Banc de Binary and AnyOption (operating under multiple entities as a so called “service provider”) were exposed as a scam and ceased to exist. Banc de Binary was charged by the Commodity Futures Trading Commission and the Securities and Exchange Commission for alleged violations of U.S. financial regulations back in 2013, and was even considered to be persecuted under RICO statue (used to put some of the most fearsome criminals in the U.S in bars). It was ordered to pay back $11 in restitutions and several people who were involved in this fraudulent operation were criminally persecuted for fraud. AnyOption, which was reported to go public in 2014 under a valuation of $200m also ceased to exist in 2017, and its CEO was arrested in the U.S and trialed there receiving 22 years in prison!
The only logical conclusion is that binary options that were considered just a terrible financial investment tool with odds worse than the roulette was a straight up SCAM from the get-go, and is something that anyone who wants to speculate on currencies (let alone make a long term investment) should never consider using.
Why retail traders lose money on fx trading?
FX trading aficionados lose money trading forex more time than not (whereas currency brokers only facilitate a transfer, and you can’t lose money with them). These are the reasons.
Gambler’s Ruin: Version Number 1
We shall start with the original application of the idea and how this same idea can be applied to FX trading. The original statistical idea is typically presented in the following way:
“A gambler who raises his bet to a fixed fraction of his bankroll when he wins, but doesn’t reduce it when he loses, will eventually lose his entire bankroll, even if his bets have a positive expected value.”
It should be clear how this particular idea can be applied to FX trading. A trader who wins his trades increases the number of Lots he trades each time he pulls of a successful trade. But the trader doesn’t scale back his trading volume after losing trades, meaning the size of his trades get increasingly large. Eventually, the trader will lose a trade which put’s his entire capital on the line at once. Clearly, this a case of bad money management, as no sensible trader would refuse to scale down his volume in-spite of losses.
Surprisingly, a number of trades do end up losing their capital, at least at a faster rate due to a similar phenomenon. Many traders begin trading a set volume and do not adjust this volume regardless of how well their account has been performing. This sees each trade putting a consistently larger percentage sum of their capital at risk, leading them into a situation where all of the capital is on the line. This version of the Gambler’s ruin, should not pose much a problem for those who are engaging in proper money management and have ensured they have adequate capital to begin with.
Gambler’s Ruin: Version Number 2
The second common application of the idea of Gambler’s ruin to Forex, goes as follows;
“Two gamblers, begin flipping a coin with one another betting a $1 on each flip. The coin is fair meaning that each player is equally as likely to win each bet. However, one player starts with a $100 bankroll, while the other player begins with an infinite or significant sum such as $100,000. Despite each player having an equal chance of winning each individual bet, the player with the smaller bankroll is extremely likely to go bust first. Though, this will likely take a huge number of coin flips to happen.”
Again, it should be quite easy to see how this can be applied to Forex, particularly to retail FX traders who tend to have limited amount of capital in the first place. Imagine, you are trading against a market maker/dealing desk broker, and each time you place a trade you either win or lose.
With possible two results we are going to assume a trader has an about 50% chance of winning a trade. However, the broker is much better capitalised than the trader, so the broker can simply wait out a traders winning streak, until things turn against the trader. Ultimately, leading to the trader lose all of his capital to the market maker. This is one way, which market makers are able to profit without any form of manipulation or hedging. In fact, the situation is worse for the retail trader who has to pay the broker a spread each time he enters into the market, meaning that things are skewed slightly into the brokers favour.
The form of Gambler’s ruin can also be applied to traders who are trading with Non-Dealing Desk/STP Brokers. In this application, the opposing player is not the brokerage but rather all the opposing and liquidity providers active in the FX market. Retail Traders are by definition less capitalised than professional and institutional traders. This in essence means that the institutional players are able to bare longer losing streaks, while a short losing streak has the potential to wipe out a retail trader. By simply, remaining an active market participant in theory the institutional or professional trader can profit from those who are less capitalised.
This application of gamblers ruin to retail FX trading is particularly contentious, as it assumes that FX is a fair game. This would see the result of each trade being equivalent to the flip of a coin. Most skilled traders would object that FX trading involves a considerable amount of skill, and the best traders can call the market with a high degree of accuracy/profitability. What this application does highlight is the benefits that being highly capitalised has on potential account performance, as it allows traders/institutions to remain in the market and profit when they experience big moves in their favour.
Gambler’s Ruin: Version Number 3
This is the most common use of the idea today, and goes as follows:
“A gambler playing a negative sum game, will eventually go broke regardless of his betting system.”
Someone who plays Roulette will eventually go bust, if he continues to play indefinitely due to the fact that the odds are set with a built in advantage given to the house. Now some people claim that Forex is a Negative Sum game, as all profits are made at the expensive of other traders and that brokers collect spreads taking money out of the ‘prize pool’. For one it is highly contentious whether Spot Forex is even a Zero Sum game, for a summary of the controversy we recommend you to hop over to this section.
Spot FX, could even be a negative sum game but akin to Poker played in a casino. Poker is a widely accepted Zero Sum game, as one player can only profit at the expense of another player. When played casinos, the casino takes a share of each pot known as ‘the rake’. This turns casino Poker into a negative sum game. It should be noted that there are many Poker players, who consistently turn a profit playing Poker in a casino, despite it being a negative sum game. There is no reason why the same could not be true for Spot FX traders, even if one accepted that trading Spot FX was a negative sum game (which is controversial in itself).
Can you predict future currency rates using technical analysis?
Technical analysis is the idea that traders can look at historical price movements and us this data to work out current market conditions and potentially predict future price movements. Many proponents of technical analysis claim that all current market information is reflected in the current price and historical prices. If all market information is contained within current and historical price action, then traders would have all the information they need readily available to them.
Technical traders put a lot of weight in price history, holding that history tends to repeat itself. Technical traders often use historical prices to help determine where support and resistance levels might be, using these price levels as the basis for entering and exiting positions.
Technical analysts don’t only look out for support and resistance levels. Many technical traders also keep an eye out for patterns, believing that certain patterns will repeat themselves. For instance, proponents of Elliot Waves look out for certain price patterns, creator R.N Elliot believed that human action was governed by certain natural laws which were bound to repeat themselves.
Technical analysis is strongly associated with charting; this is since charts are probably the best way to visualise historical price action. It is easy to use charts and indicators to identify potential trading opportunities.
Technical Analysis is used by many trading the financial markets with some making trading decisions based solely on technical analysis. While the value of technical analysis is somewhat by much of the wider trading community, there is a group of ardent critics who are very skeptical of technical analysis, claiming that:
1) There is no hard proof that technical analysis works.
Those who are critical of technical analysis often state that there is no hard proof that technical analysis works. However this claim is slightly nebulous due to the fact that it is not specific. It is clear that there can never be hard proof demonstrating that all technical analysis works or that certain methods of technical analysis will work for an indefinite period of time. In fact there seems to be evidence suggesting that the kinds of technical analysis that work change over time with different markets and time periods being suited to different methods of technical analysis.
Not only does this claim misunderstand the nature of technical analysis, it also appears to be false. There has been much research regarding technical analysis during the last few years and a number of studies have suggested that certain forms of technical analysis can be used to effectively predict price movements. So it appears that we can rebut the claim their is no evidence or hard proof regarding the effectiveness of technical analysis.
2) Technical Analysis works because it’s self-fulfilling.
Another claim that is often made though less frequently, is that technical analysis only works because traders believe it works and therefore act accordingly. It seems easy to provide examples of technical analysis acting as a self-fulfilling prophecy. For instance many stock traders believe that when a stock falls below its 200-day moving average, its time to dump the stock. If enough traders believe this we should expect to see a significant fall in price when the said stock does fall below its 200-day moving average. With the large scale sell-off acting to further suppress the stocks price.
While this could sometimes be true, the sheer number of people and institutions trading the financial markets mean that such situations are very unlikely to occur. For instance Elliot Wave theory is one of the more popular forms of technical analysis among traders in the former Eastern Bloc, but has a much smaller following among traders in Western Europe. The sheer number of trading systems and strategies adopted by different individuals and institutions often precludes technical analysis from being a self-fulfilling strategy. It should also be noted that not all traders are influenced by technical analysis, with many traders instead adopting a sentiment or fundamental based approach to trading.
3) Price Changes are random and can’t be predicted.
This criticism is related to the Random Walk Theory made popular by Burton Malkiel, in his 1973 book ‘A Random Walk Down Wall Street’. The basic idea is that price history is no accurate guide to future price direction, adherents to this view hold that financial markets are efficient. Essentially efficient market theorists hold that price fluctuates randomly around a particular intrinsic value. Market price reflects everything that can be known about a particular instrument. This is position which is in fact quite similar to one often made by technical analysts. The main difference being that adherents to the efficient market hypothesis hold the believe that markets react immediately to information effecting an instruments intrinsic price, while those who embrace technical analysis hold that such discounting ebbs and flows in a way which can be predicted using technical analysis.
The concept of Gambler’s ruin refers a number of related statistical ideas, related to gambling and negative sum games. Typically the concept of Gambler’s ruin is used to persuade people that gambling against the house (for example in the casino) is likely to lead a gambler losing all of his bankroll. Others have attempted to apply these same statistical ideas, to retail Forex trading leading them to suggest that traders are likely to end losing all of their capital trading retail FX.
Best FX Brokers in UK (speculative trading)
We started off this guide by covering the best currency brokers in UK, explained what are their added values and how safe they are compared banks, and then proceeded to give what could probably be considered the world’s longest and most detailed disclaimer on speculative forex trading. The reason for that is simple – while currency brokers enable customers to save money, in most cases forex brokers “help” customers lose money, while their body is releasing dopamine and serotonin. That doesn’t mean you can’t make money trading forex, or that this activity should be banned like binary options, but a long and detailed disclaimer was due.
Why stick to ECN/ STP Brokerages
CN/STP brokerages, are also known as No-Dealing Desk brokerages. These brokerages simply act as agents for their clients either passing trades straight through to their liquidity providers (known as Straight-Through-Processing) or are matched up with other traders using the brokerages ECN (Electronic Communication Network.ECN/STP brokerages are preferred by many traders, as this execution model allows a brokerage to make a profit regardless of whether a trader is profitable or not. This is due to the fact that the brokerage never takes the other side of a client’s trade and simply passes the risk onto a liquidity provider or trading using the firm’s Electronic-Communication-Network (ECN) – this is known as ‘A-booking’ a client’s trade.
Market Makers or Dealing Desk brokerages in contrast do not pass all trades onto liquidity providers or other traders, but on occasion take the other side of trader’s position (this is known as ‘B-booking’ a client). This can often mean that the brokerage’s profits are equal to the trader’s losses. This is thought to introduce an unpalatable conflict of interest, which many traders believe could lead to brokerages using manipulative tactics to remain profitable. There is no such conflict of interest with genuine STP/ECN brokerages, with the brokerage making profit by marking up the spread or charging commission. In fact, ECN/STP brokerages want traders to profit, with traders continued business allowing the brokerage to continue to profit from the spread mark-up/commission charged.
ECN/STP brokerages are also favoured by traders, as these firms often able to offer more competitive spreads. Market Makers typically offer wider spreads as this is one way in which they can manage risk, though this is not true of all Market Makers. ECN/STP brokers pass many trades onto liquidity providers who are able to offer very tight spreads due to the huge volumes they are dealing in, meaning under standard market conditions spreads tend to be much tighter.
Brokerages that operate an ECN can often go a step further and allow traders to benefit from Spreads starting at 0 pips, with the brokerage matching up traders who want to take opposite positions in a particular instrument. These brokerages then profit by charging the traders involved commission for taking advantage of the brokerages Electronic-Communication-Network (ECN).
These are our favourite fx brokers
eToro was founded in 2007 and has maintained an excellent reputation in the murky forex and CFD trading industry. It is regulated by the FCA, as well as ASIC, and very recently was approved by FinCEN to operate in the USA as well. The company is going on an IPO shortly at a valuation of $10bn and is one of the biggest companies of its kind.
eToro’s strong points are clarity, transparency, and excellent reputation, as well a proprietary, powerful, online system which also supports social trading. eToro’s breakthrough could have been contributed to cryptocurrency trading, and they were among the first CFD providers to offer that.
IG is one of the biggest names in FX trading, being a 1974 founded, publicly traded company with more than £650m in revenue in 2020, which is regulated almost globally. The company offers slightly better spreads than eToro as a whole, and better rebates, but we believe their online platform is slightly less usable and friendly than eToro’s.
Interactive Brokers (IB)
IB is not a forex broker, but it is a stock broker which offers CFDs and a very wide array of complex, leveraged, financial instruments. It’s very reliable being a NASDAQ traded company, founded in 1977 and accepts customers globally, and it’s probably the cheapest on EVERYTHING. From stocks, options, to leverage and CFDs, it’s tough to compete with Interactive Brokers. On the other hand, it’s quite difficult to know your way around their system and in order to get approval to trade forex CFDs you have to provide a lot of paperwork and it’s going to be a lengthy process. Using IB is potentially the best pick for professional full-time traders with large accounts.
FXCM, founded in 1999, is part of Jefferies Financial, a NYSE traded company, and is an absolute FX giant. Although the company’s selection of CFDs is somewhat limited as compared to its competitor, and its spreads are not the best in the industry, FXCM is completely trustworthy and a solid choice for an FX broker.
Should I consider using a non-regulated FX broker?
Regulation is seen by many as adding to a brokers credibility, and this is reflected in the fact that many Forex brokers are keen to point out their regulatory pedigree. Despite this many brokerages choose to operate without being regulated, opting to establish themselves in an offshore jurisdiction where the provision of FX trading services is not regulated.
One of the main reasons that a number of FX brokerages choose to operate without being regulated is that doing so can significantly decrease the brokerages total operating costs. Gaining and maintaining a regulatory licence can be very costly and it has been estimated that the costs of maintaining a FCA licence can run into the millions. Capital requirements set out by regulatory frameworks such a MiFID (For European Forex Traders), can constitute a significant barrier to entry for new brokerages who are simply unable to raise the required capital. In fact there have been a number of instances where new brokerages have operated as unregulated entities for a year or two, until the firm was able to face the costs of regulation. Additionally, as the majority of unregulated brokerages base themselves in offshore tax havens they are able to reduce their tax burden significantly which is another prime reason brokerage opt to continue as an unregulated entity.
Another reason why brokerages choose to operate without regulatory oversight is that this allows firms to offer a different product range or to cater to customers they wouldn’t be otherwise able to serve. A good example from circa 2012 would be FXCM, who once launched an unregulated subsidiary FXCM Markets. This has allowed FXCM Markets to offer up to 400:1 leverage and interest paying accounts to their clients, which are unavailable at the firms regulated subsidiaries. It should be noted that FXCM Markets doesn’t exist anymore.
The biggest issue is that not all unregulated brokerages choose to operate unregulated for legitimate business reasons, with some firms opting to operate from offshore locations in order to take advantage of their clientèle. There have been a number of instances where unregulated brokerages most often based offshore have engaged in fraudulent behaviour or rogue practices which have ended up costing there customers significantly. For example fx broker 4XP who closed up shop without returning client funds. The fact that 4XP was unregulated has left customers with little recourse and has left a number of traders having to accept significant losses.
Scalping and relevant brokerages
When Forex traders talk about scalping or scalping strategies they tend to be referring to trading strategies which see traders enter into positions for only a short period of time. It is for this reason that scalping is sometimes also referred to as quick trading. Most scalpers do not keep positions open for any more than a few minutes, there is however no formal definition of what constitutes scalping.
Scalping as a trading strategy is particularly popular among spot FX traders who are able to use the ample amounts of leverage on offer to potentially make impressive returns from even small movements in the price of a currency pairing. Supposing a trader opens a one Lot position in the EUR/USD could make a $50 profit from just a 5 pip move in their favour. Of course if the market moved the other way a trader would be out of pocket for same amount.
Occasionally, the term scalping is used to refer to other things than quick trading. Scalping can be used to describe certain types of arbitrage trading and can also be used to describe certain forms of market manipulation. However, scalping is most commonly used to describe any type of trading which seeks to profit from quick momentum trades.
Not all brokerages take a favourable view of scalping, with some brokerages looking to limit or ban traders from using scalping strategies. Brokerages which place limitations on scalping, tend to be operating using a Market Making model and may not be able to adequately hedge the risk posed by traders who are engaging in scalping. Though again there are a number of brokerages who operate as Market Makers who are more than happy to accept the trading activity of scalpers with no limitations. There be a number of other reasons why a brokerage may take a dim of view of scalping-
Why Do Brokerages Ban Scalping?
Brokerages that ban scalping will more than likely operate using some kind of Market Maker model. While STP/ECN brokerages place all of their customer’s trades with a liquidity provider or with another trader or institution, market Makers do not necessarily place customer’s trades in the underlying market. Instead these brokerages will either take on the risk themselves acting as a counterparty or alternatively hedge using a particular risk management model. Not all Market Makers ban scalping in fact there are a number of Market Makers that provide their clients with a high level of service.
Bucket shops are like market makers in the sense that they don’t necessarily place client trades in the underlying market. But unlike legitimate market makers, bucket shops will rarely if ever engage in any form hedging or risk management. In order to be profitable the customers of a bucket shop must lose more money overall. Banning or placing limits on the use of scalping strategies is just one way in which these brokerages can ensure they remain profitable. Rather than outright banning all scalping activity these brokerages place rules which make very difficult to profit from the use of scalping strategies. Forcing traders to keep positions open for a set period of time is one classic move which prevents a trader from closing a position if the market moves against them. Brokerages which place such limits should be avoided.
Brokerages that have a delayed or lagging price feed will often prevent traders from using scalping strategies. A delay of even a second could open the brokerage up to significant arbitrage opportunities. Traders could monitor a more up to date price feed and when an instrument moves significantly in one direction place a trade with a brokerage before their price feed had caught up, locking in guaranteed profits. Brokerages in such a position have no choice but to ban scalping as they could be taken to the cleaners. This is not to say that these brokerages should be excused in the day and age of fibre optic broadband there is no excuse for a brokerage to have a significantly delayed price feed.
Importance of Tight Spreads
While it is always important to look around for competitive spreads, scalpers should be particularly interested in the spreads on offer at the brokerages they are considering. With scalpers often only looking to take advantage of 5-10 pip movement, significant spreads can seriously eat into profits/increase the extent of a traders losses. While Spreads are one important factor for traders to consider, traders should also take a number of other factors into account.
Execution/Slippage & Liquidity
The quality of execution is also vitally important for those looking to scalp the FX markets. Slippage can seriously damage the performance of a scalping strategy and while some slippage is to be expected, it is vitally important that the brokerage can execute and close your orders with little slippage. Often the quality of execution will be dependent on the pool of liquidity that the brokerage has access to, which means its worth doing some research to find out what other traders think of the quality of the brokerages execution.
Many are attracted to scalping strategies, as the idea that you can get in and out of trades taking a small profit sounds both plausible and attractive. It should be noted that scalping can be risky, as it can only take one wrong decision to wipe out all the gains you made from successful scalps. Many scalpers don’t have a clear idea of why they are entering into a particular trade and fail to set stop losses. It is often said that scalping is one of the riskiest trading strategies to adopt, and this is in part down to traders use of excessive leverage which can really work against traders if risk isn’t managed correctly.
Grand conclusions for this Currency and FX brokers guide
- Currency brokers help you transfer money internationally, geared at high volume and business transfer, offering the value-add of bespoke service alongside preferential rates as compared to high street banks.
- Currency brokers are safe to use and are regulated by the FCA. None of the major currency brokerages in the UK even left clients out of money with the exception of one firm circa 2010 which wasn’t particularly large or known and was not authorised and supervised by the FCA.
- Currency brokers do offer a variety of hedging instruments mainly for business FX usage, as well as advanced payment and rate alter technology on their website and app.
- Currency brokers do not allow any form of speculative trading.
- Speculative trading in currencies can be done via FX brokers, who offer leveraged positions on specific currency pairings.
- 70% or more of all retail traders lose money with FX brokers because they treat trading like gambling, most importantly choose brokers with high fees and high leverage, leverage to the max and put themselves in a position that almost always losses. Other traders lose money because they rely on questionably-reliable techniques such as short term technical analysis to form their trades.
- It is very important to choose the right type of FX broker which uses ECN / STP, and is properly regulated.
- There are techniques like scalping that can work if you are methodological about them but not all brokers are happy to accept customers who trade using scalping.