Choosing a new forex broker to trade with can be challenging for anyone. There is so much (mis)information available online, and it can be hard to navigate the landscape. There are also lots of stories about brokers using unethical practices and frankly scamming their clients. Therefore, it is very important that you do your own due diligence and be cautious about which broker you trust with your hard-earned money.
The dealing desk model is the dominant model among forex brokers today. When a broker has a dealing desk, it usually means that they take the other side of their clients’ trades. For the same reason, these brokers are also known as market makers. It is important to understand that trades you make with this type of broker may not even leave your brokerage firm.
The way these brokers operate can definitely create some conflict of interest with their clients. The main reason for this is because the broker will profit every time you lose on a trade. Also, being a dealing desk broker offers the broker more flexibility, and thereby opens up opportunities for the broker to employ various unethical practices that will not benefit you as a trader. For this reason, I would not recommend going with a dealing desk broker unless you have your own specific reasons for doing so.
No Dealing Desk
When a forex broker is a no dealing desk broker, it means that they don’t take the other side of the trade. The obvious benefit here is that the broker has no incentive to make you a losing trader Instead, your orders are passed on to various third parties, which can usually be categorized as:
- Straight Through Processing (STP): An STP broker essentially pass your orders on to a liquidity provider, which are usually big banks. These brokers may inflate the spread offered to you in order to keep a profit after they have turned your order over to the third party. This type of broker is sometimes referred to as a “fake” ECN broker, because you are not offered the “real” spreads from the interbank FX market. Many retail brokers who advertise themselves as “no dealing desk” fall into this category.
- Electronic Communication Network (ECN): This type of broker has become much more popular over the past few years. If it is a true ECN broker, it means that you are given direct access to the interbank market, in which case you will be charged a commission in addition to the spread. The spread in this case can often be extremely tight, especially on the most liquid currency pairs. Note that some retail brokers may advertise themselves as ECN without really being a true ECN broker, for example by marking up the spreads compared to those that exist in the interbank market.
Spread, leverage and minimum deposit
These three aspects are what most traders compare when choosing a broker to trade with. The spread is, or course, very important for all traders, as it determines how much potential profit the trader will be left with. You need to consider your total transaction cost, which includes spread, any commissions, and slippage. Whether you should choose tighter spreads + commission, or wider spreads with zero commission, depends on your trading style and how much money you are trading with. Very large traders obviously prefer to pay a fixed commission, but smaller retail traders may benefit more from paying only the spread.
Leverage is another aspect new traders often compare when choosing a forex broker. High leverage looks tempting, because it basically means that you will have more money to trade with in the market. However, it is a double-edged sword and something beginners should be very cautious with. The leverage offered usually depends on the regulation the broker is subject to. Some brokers with questionable regulation may offer up to 1:1000 leverage, whereas brokers based in the US will offer a maximum of 1:50.
When it comes to minimum deposit, the requirements vary wildly. As a general rule of thumb though, it is better to go with a broker or an account type that requires the highest minimum deposit you can afford. This is because bigger accounts are often offered far better trading conditions than smaller ones in terms of commissions and spread.
The regulatory environment your broker is operating in is a very important factor. This determines what the broker can or cannot do with your orders, and what kind of protection you are offered if the broker goes bankrupt. Remember that some countries don’t require brokers to be regulated at all. It is therefore best that you stick with brokers regulated in a jurisdiction you know and trust.
You will want to trade with a broker that is well-capitalized. Capitalization and reserve requirements depends mostly on the country where the broker is regulated. In addition, you should check if the broker has a policy to segregate client’s funds from the firm’s own funds. This is very important in order for your money to be safe if the broker is shut down. Again, well-known and trusted jurisdictions reduce the chances of the broker shutting down shop unexpectedly.
An often overlooked question is whether you can actually reach the broker and speak to a real person when you need it the most. Nothing is worse than experiencing for example a technical problem with the platform while you have an open position in the market. Make sure your broker offers reliable customer service and do some searching online about other trader’s experiences with the broker.
There are tons of websites offering forex broker reviews online, but most of these are not a reliable source of information. These websites are basically affiliate marketing sites for the brokers, and therefore have no incentive to do an honest review. Instead, refer to websites like FX Intelligence that actually provides trustworthy information on this topic.
Lastly, it is important to remember that most brokers want you to succeed because they want to continue to do business with you. As long as you are satisfied, the broker will also continue to make money from the relationship. You will also likely find that no broker is perfect, and there will always be pros and cons no matter who you choose.
Featured image from Pixabay.
Trading Commodities: Futures Market for Beginners
With high valuations and increasing uncertainty in the world’s stock markets, it is no surprise that investors are looking for stable alternatives for investing their money. Fortunately, commodities are there to take over as global stocks are losing their appeal, and investors are seeking effective ways for managing risks.
What Are Futures?
Futures contracts are basically financial contracts that obligate the seller to sell an asset or the buyer to buy an asset. The type of asset concerned could be a financial instrument, a commodity, stock market indexes, and currencies, and has a predetermined future price and date of delivery.
The futures contract itself contains details of the quantity and quality of the underlying asset and is standardized so it can be traded on the futures exchange. Some futures contracts call for payments to be made in cash, while others require physical delivery of the asset. The futures markets are particularly well known for their ability to use very high leverage, as compared to stock markets.
For the purposes of this article, we are focusing on futures as an instrument for trading commodities like oil, gold, silver, sugar, or even coffee beans. Lots of commodities and agricultural products are traded in the futures markets, but keep in mind that some of them might not be very liquid.
Marketplaces for Futures Trading
There are many marketplaces around the world where futures are traded. A few of them include the New York Mercantile Exchange, the Minneapolis Grain Exchange, the Chicago Mercantile Exchange, and the Chicago Board of Options Exchange.
The futures market is vast in size and typically increase in popularity during choppy times in the stock market.
Benefits of Futures Trading VS. Forex Trading
Some traders might be wondering which market they should choose; forex or futures. The truth is that they both offer some pros and cons. Some of the reasons for choosing futures over forex might be:
- Liquidity: The futures market is extremely liquid with huge volumes being traded every day. Of course, forex is also a liquid market, but the dynamics of the markets may often be different.
- Low cost: Futures is actually a very low-cost way of trading, and in some cases it can cost you less in fees than what is possible when trading forex.
- Reduced screentime: Some traders who have made the switch from forex to futures also say they have managed to reduce the amount of time they spend glued to their screens, while at the same time improving their profitability.
Traders have also experienced that their trading strategies are working better in the futures market than in forex. There is some indication that certain instruments in the futures market are actually responding better to technicals than is usually the case in the forex market.
In fact, some futures instruments such as the E-Mini Nasdaq and E-Mini Dow Jones even have a tendency to trend very nicely during certain hours of the day, providing shorter term trend following traders with great opportunities for making profits.
Choosing a Broker
When you are researching the best futures broker, there are some features you should keep a look out for before you ultimately make the decision. These features include:
- A transparent fee structure
- Quick execution of trades
- Trading platforms are intuitive and fully functional
- Ability to access several futures exchanges
Some well-known online futures brokers you might want to take a closer look at include:
- TD Ameritrade
- Interactive Brokers
- Optimus Futures
These brokers all have different fees and minimum deposit requirements, meaning you need to go through each of them to make an informed decision regarding which one best suites your particular situation.
Another great benefit of trading futures is the sheer amount of educational resources available to anyone online. There are huge forums such as futures.io that are dedicated to discussing anything related to futures, which can be a big help on the way for a beginning trader. In fact, there are even podcasts like the the Futures Radio Show that talks about all kinds of interesting topics related to futures trading.
As you have probably understood by now, futures trading can be a viable option for many retail traders and offers some real benefits over other markets. It may seem overwhelming at first to get started in futures, but for the traders who constantly strive to learn and improve themselves, chances are the efforts will pay off.
Featured image from Wikimedia Commons/Lars Plougmann.
My Golden Rules for Financial Freedom: Why I’m going to Reach $1 000 000
This is the most important overall lesson I can teach you. It involves multiple of my strategies, strategies that I’ve written about before. But I’m writing this article to give you an overview of what I’m doing. Since I started Hacked.com and the new strategy for reaching $1 000 000 and financial freedom (in my eyes, could be very different for you) I’ve made more money than I’ve ever made before. My cashflow is increasing monthly thanks to CCN.LA, Hacked.com and Wilhelmsen (my regular job), and my investments are doing very well, including my trading strategy – the 2% Club.
I’ll make this article to the point. No bullshitting around. I sincerely hope that you will follow the same strategy as I am, it will make you financially independent in the long run.
Golden Rule #1
Always be cashflow positive.
You must have a job or a business where you receive positive cashflow on a monthly basis.
Golden Rule #2
Have a side gig.
If you are employed, try to establish a second revenue stream. This can be done by creating a business on the side or even having a second job (even though I would not recommend the latter). With a second revenue stream, you are certain that you will be cashflow positive even though you would lose your regular job or business. I’m currently employed in Wilhelmsen, but I have two separate revenue streams from Hacked.com and CCN.LA, including the one I’m receiving at Wilhelmsen.
Also read: You will lose your job
Golden Rule #3
Continuously increase your monthly income.
This might be hard if you are employed in a company. But then you should have a side gig you can focus on off-hours. Always try to find new revenue streams.
Golden Rule #4
If you have loans, try to pay them as fast as possible. I do not like to have loans. You could benefit from having loans if you get tax deduction – as we do in Norway, but still, I’m no big promotor of having debt.
Golden Rule #5
Invest surplus money.
If you have surplus money, money that you do not spend on the most essential things, invest a certain percentage on a monthly basis. I’m investing 33% of my monthly income and will do so for many years to come. That’s why I created the 33% Club.
Golden Rule #6
All these golden rules should be followed in the same chronological order. If you fail at one golden rule, you should not continue to the next one. There’s a reason for having “trading” as the last golden rule. You should not trade with money unless you are able to complete the first five golden rules. Trading is risky, you can lose more money than you put in, and that fast. However, if you have reached the sixth golden rule, then you could join me in the 2% Club (or create your own trading strategy).
And finally, remember: Never lose money.
Please comment below if you have inputs.
Featured image from Shutterstock.
What Do Rising Interest Rates Mean For Investors?
With interest rates inching upward in the U.S. and elsewhere following a period of sustained low rates, what should investors do to maximize their earnings?
Last month, the Federal Reserve raised interest rates and signaled it will raise interest rates more this year. This followed a raise in December, the first in more than a year.
Interest rates can impact all types of investments, from savings accounts to certificates of deposits, to investment grade equities, to high quality debt, to junk bonds.
Market Reaction Uncertain
When interest rates rise, the price of bonds drops, according to Investopedia. Many analysts predicted that falling bond prices would cause equities to lose value. This, however, has not been the case. Equity values have not suffered on account of the rising interest rates to date.
But this does not mean the situation won’t change, especially with further rate hikes planned.
The stock market’s strength has been driven by expectations that the Trump administration will increase spending and lower taxes.
But when stock markets react to political and economic events, stock market corrections often follow.
Hence, it’s not hard to see that in the present climate, uncertainties exist for stock values. Investors are advised to consult with professionals on investing and not act on impulse, regardless of their bonds and equities mix.
More Rate Hikes To Come
In December, The Fed voted to raise the federal funds rate by 0.25% to a target 0.5 to 0.75%. Stock prices did not change, giving investors a signal not to change investment strategy.
However, the Federal Open Market Committee, the Fed’s interest rate setting panel, indicated there will be three rate hikes in each of the next three years, marking a faster pace of hikes than it previously indicated.
The target range could be as high as 2.75% to 3.00% by the end of 2019.
Since the range was 0.00% to 0.25% through December 2015, the change could be seen as dramatic.
Impact On Banks
The key policy rate applies to lending between banks out of the reserves they hold at the Fed. It does not impact non-bank borrowing directly, but it does affect it indirectly.
The federal funds rate represents the cost that depository institutions pay for borrowing from Federal Reserve banks. It is the rate the Fed uses to control inflation. By increasing this rate, the Fed shrinks the supply of money available for financial activity by making money more expensive.
The federal funds rate determines the prime lending rate, the rate commercial banks charge their most creditworthy customers. The prime rate is the basis for credit card rates, mortgage rates and other loan rates.
Following the Fed rate change, every major bank said they would raise their prime lending rates from 3.5% to 3.75%.
Savings And Money Market Accounts
Banks also pay depositors higher borrowing costs. Hence, a savings or money market account that only pays a few dollars a year will pay more.
Banks profit from the spread between their lending rates and their borrowing rates, and they have little incentive to pay more on deposits and reduce their profits. But deposit rates are still likely to rise on account of competition among banks.
A small number of banks have recently raised rates for savers, according to Forbes. These increases are not great, but they are moving in the right direction. The best rates are offered by online banks, small banks and credit unions.
Banks have been more willing to raise rates on certificates of deposit, according to depositaccounts.com.
Due to the length of time it takes for banks to raise rates on deposits, they will incur better profits, and their investors will share in these gains. Bank of America’s stock rose 2.9% in a two-day period in December. JPMorgan’s rose 1.9%.
Impact On Corporate Profits And Stocks
The impact of the federal funds rate on the stock market is not direct. But there is an indirect effect.
Since they have to pay more to borrow money, banks increase the rate they charge their customers to borrow money. This results in higher mortgage and credit card rates, particularly those loans carrying variable interest rates. This reduces the amount of money for consumers to spend. When paying bills becomes more costly, there is less disposable income, which impacts companies’ revenues and profits.
Businesses also borrow from banks. When businesses have to pay more for money, they often choose to borrow less money, which in turn slows their growth. This can hurt earnings, causing a decline in stock prices.
If a company cuts back on investing, its estimated future cash flows will decline, which lowers the price of its stock.
Should a large number of companies suffer declining stock prices, the market indexes such as the S&P 500 and Dow Jones Industrial Average decline.
Investors do not get as much stock price appreciation when stock values decline.
Financial Stocks And T-bills
The financial sector, however, often benefits from interest rate hikes. Banks, insurance companies, brokerage houses and mortgage companies often earn more since they can charge more for lending.
Interest rates also impact bond prices and returns for T-bonds, T-bills and certificates of deposit. As interest rates rise, bond prices fall.
The longer the bond’s maturity, the more it fluctuates in relation to the interest rate.
When the federal funds rate rises, new government securities like bonds and T-bills are seen as safe investments and post an increase in interest rates. The “risk free” return rate increases, making such investments more attractive.
When the risk-free rate rises, the return needed for investing in stocks also increases. If the required risk premium falls while the potential return decreases, investors are likely to see stocks as risks and will invest elsewhere.
Impact On Bonds
Businesses and governments often raise funds through bond sales. When interest rates rise, so does the cost of borrowing. The demand for lower-yield bonds falls, bringing their price down with them.
Jeffrey Gundlach, DoubleLine Capital chief investment officer, noted the Fed tightening corresponded to a gain in 10-year Treasury yields. These could reach 4% in the next year. A sell-off in government debt could drive a bear bond market, which began following Trump’s election victory.
Gundlach said equities could also suffer. A 10-year Treasury above 3% calls into question certain aspects of the stock market.
Since bond prices correlate to the federal funds rate, the tightening indicates a bond rout, especially with trillions in government bonds being bid up to trading with negative yields.
Further Impact On Stocks
Changes in interest rates also affect investor psychology. When the Fed announces a rate increase, businesses and consumers oftentimes cut spending, which can cause earnings and stock values to decline.
But expected actions do not always materialize.
The economy’s condition can also affect the market’s reaction. When the economy weakens, a slight decrease in interest rates may not be enough to offset weak economic activity, causing a decline in stocks to continue. Conversely, near the end of a strong economy, when the Fed increases rates, certain sectors could continue to do well, such as entertainment and technology stocks.
While the relationship between the stock market and interest rates is indirect, they tend to move in opposite directions. When the Fed raises interest rates, stocks as a whole decline, but there is no guarantee how the market reacts to a given interest rate change.
In 2013, both the S&P 500 and interest rates rose significantly, defying conventional wisdom.
Financial advisors cannot predict the stock market and its reaction to interest rate hikes. But they can advise clients to try to benefit from higher interest rates while taking into account all possible risks.
If a client has a 60/40 mix of equities and fixed income investments like bonds in a declining interest rate environment, for example, it could make sense to reverse the mix and have 60% in fixed income and 40% in equity to take advantage of higher bond prices.
Better Yields On Higher Quality Debt?
Nearly a decade of low interest rates has forced many investors to buy lower rated bonds from riskier firms in order to get a reasonable yield, pushing up prices, according to Barrons. Rising interest rates will make yields on higher-quality debt more attractive—and could result in a selloff in the lower-rated areas of the market as investors bolt riskier bonds.
Wells Fargo Securities recommended that investment grade buyers focus on higher quality debt. The bank distributed a list of trade ideas to help investors navigate through the transition. It noted that the difference in yield premiums between ratings categories like single-A and double-A is small, so investors won’t give up a lot of value. In some cases, yields could be higher even on higher-rated bonds.
For example, a 2021 bond from Lowe’s, the home improvement chain, carried single-A-minus ratings and yielded 2.49% recently. In contrast, a 2021 bond from Apple with a double-A-plus rating yielded 2.51%, according to Wells Fargo. A triple-B-minus 2022 Molson Coors Brewing bond yielded 2.94%, compared to a single-A-minus rated Anheuser-Busch 2022 bond at 3.01%.
Such trades help investors buffer against possible spikes in volatility by rotating back toward more defensive portfolios, Wells Fargo analysts wrote.
For those with a stomach to take on more risk and buy high-yield bonds, the same strategy can apply. Portfolio managers at Brandywine Global Investment Management recommended higher quality junk bonds, such as those with single-B and double-B ratings. Such bonds offer a lower risk of default than triple-C-rated debt and are easier to trade. Investors can quit their positions without assuming major losses if there’s market turmoil.
In a rising interest rate environment, higher quality junk bonds perform well, according to Brian Kloss, a Brandywine Global portfolio manager.
Some investors say the best way to deal with the accelerating pace of Fed rate increases is to stay flexible. Portfolio managers at Eaton Vance Management favored corporate bonds from emerging market countries since they offer attractive pricing and insulate investors from interest rate risks in the U.S.
The Dollar Strengthens
When higher interest rates make investing in safe, dollar denominated assets like Treasuries attractive, capital flows in from other countries, especially the emerging markets, according to Investopedia. The dollar then gains against foreign currencies, impacting trade.
The Fed’s hike also drove the dollar up against the yuan. China is the third largest US. trading partner. The dollar’s strength makes U.S. exports more expensive, putting the squeeze on the manufacturing sector.
Foreign Exchange Strategies
Changes in interest rates can affect strategies for exchanging foreign currencies for domestic currency.
If one U.S. dollar equals $1.35 Canadian dollars, it is not a good time to exchange Canadian money into U.S. dollars since the Canadian dollar will only be worth 0.65 U.S dollar. It would, however, be a good time for Americans to invest in Canadian currency when the U.S. dollar is stronger than the Canadian dollar.
When investing in foreign currency, investors still should buy low and sell high. The U.S. dollar currently equals 0.94 Euros.
Rising interest rates can strengthen the domestic currency, but they do not always. The last time the Fed raised interest rates, the U.S. dollar rose while the most recent rate hike was followed by a fall.
Long Or Short Term Investing?
When investing for the long term, investors must put aside short-term changes. If their portfolio asset mix matches investment objectives and some level of risk can be tolerated, there is no need to buy and sell frequently.
It is never smart to try to “time the market,” especially during uncertain political periods.
The Federal Reserve isn’t the only central bank raising interest rates, according to The Street.
On Thursday, Mexico’s central bank raised its benchmark interest rate for the fifth meeting in a row, increasing rates by 25 basis points to 6.50%. The increase signals confidence in the Mexican peso that has rebounded thanks, in part, to a softening of anxieties over the Trump administration’s positions on Mexico.
Images from Shutterstock.
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