So how does a FX broker help you lose money in the market?
Benefits of Leverage
Sure you get the disclaimer about using leverage wisely but does any trader, need leverage of 500:1? There is no need whatsoever but of course the more leverage you give a trader, the more likely he is to use it especially if he is a beginner. Of course you could say that its up to the client and a service is just being provided but many regulators, such as those in the US have clamped down on excessive leverage and hopefully, more regulators will follow.
Low Account Minimums
I saw one broker, offering an account opening minimum of just $10.00 and most will open an account for just hundred dollars. What chance have you got of winning on such a small amount? Not much, you will lose money. Anyone trading currencies should not be trading such small amounts, because it reduces the odds of success dramatically.
The Opening Bonus
Open an account of $100.00 and get 50% on your deposit! Sounds attractive? Yes if there were no conditions with it but of course every broker who offers this service, gives conditions which mean, you will have to trade a set number of lots before you can get it. The amount of trading signals which you need to do, in a set time period, means you will have to over trade on most offers and this will see a trader lose his capital.
The Social Network
Social networking is huge online and traders have always hung around forums getting advice from losing traders, who if they were successful wouldn't be bothering to chat to other traders. All professional traders when they trade implement their strategies based upon their rules and don't get outside help. Social networks in currency trading are sold on the idea, you can “follow the best traders” but the whole idea of doing this is crazy. We have written an in depth article, on the rise of social networks else where on this site but here lets just give you the main reason traders lose by using them.
The networks present traders trading with small amounts of money, who will fluke a big trade and make profits, so its best trader of the day or week which are shown and the gains look good but their down to luck on most occasions. The naïve trader follows the traders trading signals and losses.
My own view of this is – it attracts people in on greed, with no education and who have no idea that professionals track records are judged over years not a few days, a week or a month. Its a great way for the brokerage, to make money and the following trader losses his money.
Promotion of Day Trading
Go to any seminar or webinar run by a broker and they like to teach day trading techniques for profit – but clients have little chance of making money with scalping or day trading methods so why do brokers promote it as a good way to invest in currencies? Because they make more money, from active traders and know that day trading appeals to the public’s perception of the currency markets as an easy way to make a regular income. Lots of money for the broker and losing trading signal, after trading signal is the result for the clients.
Trading Signals and Assisted Accounts
“Get trading signal alerts directly to your mobile from professional traders!” is just one of the marketing headlines I saw from a Forex broker and this again, appeals to greedy and naïve traders. These signals are normally generated in house by the broker and are based on standard support and resistance levels with stops to tight and targets to small and are just designed to help novice traders lose their money. Normally, the broker will pick one signal which won by luck and say something like - “Mr X made 1,1000 dollars, in just 2 hours and you can too!” of course, they don't reveal the huge number of trading signals which lost money. This sort of service, should be banned in my view or the performance records should be representative of ALL trading signals given.
You also get lots of brokers who give way their valuable research for “valuable” put support and resistance on a chart or the news which everyone knows anyway. You also get the “broker assist account” where one their trained and experienced brokers, who help you decide on trades for your trading strategy. Many of the public, take up this service and believe, brokers actually make money for their own accounts but the only account which they make money on is the commission account.
The online Forex trading industry, has gone the way of online gambling in the way it promotes itself. Most traders who trade FX are lured in by the services above but you could say what's wrong with that?
After all everyone can make up their own mind if they want to trade or not and its not for other people to tell them what to do – maybe, but for me, I think some of the more dubious practices like trading alert services picking out one good signal or taking minimums which are so low should be stopped but that's just my opinion.