How to Select the Right MT4 Dealing Firm

Transcription

1 How to Select the Right MT4 Dealing Firm Introduction to MetaTrader 4 MT4 (MetaTrader 4) is a widely used and versatile trading platform. Traders all over the world prefer MT4 because of its combination of utility and simplicity in one universal platform. Because it is so widely used, there are countless resources out there for a trader to take advantage of to better understand the platform. MetaTrader 4 offers a feature rich portal for a trader to speculate on currency movements and even gold and silver price movements too. If you are planning on trading a robot, also known as an Expert Advisor, you will need to use the MT4 platform in conjunction with your robot. Expert Advisors (robots) are written in the language that is only compatible with MT4, so it s imperative to your success that you are set up with a reputable dealing firm that can offer you the right platform. There are numerous Forex clearing firms (FCM) out there today that offer the popular MT4 (MetaTrader 4) trading platform. Unfortunately, not all dealing firms are safe and reputable. In addition, each dealing firm has its own distinct characteristics, which results in some proving to be a better fit for your trading needs and style compared to others. Things to Consider When Choosing a MT4 Dealing Firm Size & Stability: When selecting a dealing firm, you should always consider the size and stability of the firm. The dealing firm should hold enough capital to be able to cover itself on all trades that it processes. It is much better to have an overcapitalized firm (a firm with excess net capital) than an undercapitalized firm. Generally, you want a firm with over 20 million in excess net capital. A well capitalized firm tends to hold itself to a standard of professionalism with its customers. Smaller bucket shops with not much capital have nothing to lose besides your money. In addition to the higher standards of professionalism that well capitalized firms hold themselves to, they will also have strong customer service departments. Having the ability to contact your dealing firm with a question or concern and receiving a timely response is very crucial to your success in a market that has almost no down time. In nearly all cases, larger dealing firms have better operational execution than smaller firms. This means that your account set up will be smooth and that you will receive constant communication from someone at the dealing firm. These issues are very important to consider when getting set up with your new MT4 Forex account. You can look up your firm s financial status at the CFTC website here,

2 Dealing Practices / Execution You should also consider a dealing firm s dealing practices and execution when opening an MT4 Forex account. Next to safety of funds, a firm s dealing practices and execution on your trades are some of the most important factors to consider. A good dealing firm should have strict dealing practices so that it can handle all of its client s orders properly. All firms are different when it comes to execution, and you need to ensure that the dealing firm you choose to trade with has an execution structure that fits your trading style. Many variables need to be considered when looking at a firm s dealing practices, such as the firm s price feed, net capital, dealing desk, platform, banking relationships, order type and execution. Each variable cannot be looked at individually as they all correlate with each other. In order to identify which dealing firm has dealing practices that match most appropriately to your trading style, you should first determine exactly what your trading style is. It may make sense to compile a list of what it is you need in a dealing firm to make your trading style work effectively. From there you will know exactly what to look for in a dealing firm when you go shopping around. Keep in mind that there are companies known as Introducing Brokerages that can also help you get properly set up with the best fitting dealing firm. Introducing Brokers typically provide free information and resources that often improve your trading success. You will learn more about this type of company and the resources they can provide at the end of this report. You may be asking yourself why you need to pay such close attention to all the things mentioned above. Well, it could literally be the difference between success and failure depending on your trading style. Trading styles that involve trading around economic releases, scalping, and those that push your margin limits are susceptible to execution problems. When it comes to slippage, re quoting, and quoting off market there is nothing you can do but pick firms that fit your style. You are probably familiar with stop losses and take profits. It s good to keep in mind that some clearing firms will not allow you to set a stop loss or take profit too close to your entry price. At some clearing firms, the minimum stop loss is 5 pips, but at others it may be 10 pips. Depending on your trading style, this may or may not be an issue, but it s still a good idea to ask. Many problems may arise from trading with firms with little or no liquidity providers. If they are not able to trade off your orders and are forced to take the opposite side of the trade, they will end up in a position against yours, resulting with them in a fight against you on an individual basis. In this situation you will receive manual execution, slippage, and all the other issues possible from the dealing firm. Therefore, when reviewing firms to trade with, you should ask if they take risk on client positions as well as whom they hedge their risk with. Once again, you will learn later in this report how an Introducing Broker can help do this research for you and set you up with a firm that will fit your trading style. Another factor to consider when selecting a dealing firm for you is the quality of the price feed. Most firms show their clients various price feeds. Price feeds may work for or against you depending on your trading style. There are some firms that will show a low spread but will consistently be off the market price by 1 2 pips. This is a market making strategy. You can compare data feeds of different brokers by

3 comparing high frequency charts, for example, 1 minute charts. Look at how often the price moves and in what direction to get a better idea about the quality of a firm s data feed. Firms may use this strategy because they forecast a general tendency of the market and want you to overpay in that direction. For instance, if the firm forecasts an upward tendency in the market, they will always give you a price feed 1 2 pips higher than the true market price. You should keep this price shift in mind when placing your stops or limits. If you know you are dealing with a price feed that is a few pips above the true price, you should set up a slightly tighter target than you would normally. This way when they hedge your trade, they hedge it at a lower price with their liquidity provider and pick up a few more pips. In order to stay on top of a shifted price feed by a dealing firm, you should get an esignal or Reuters price feed. esignal and Reuters are independent data providers. They compile pricing from numerous institutions and quote an aggregate price. This price will always update quickly and serves as a good indication of where the true market price stands. Some traders actually use esignal price feed to identify scalping opportunities on slower price feeds by some dealing firms. This strategy offers short term money, but these traders are usually caught and kicked out of trading quickly. Some Introducing Brokers can offer you a free esignal data feed just for using them to set up your account. Another thing to pay attention to, especially as a short term trader, is how dynamic the price feed is or, in other words, how many times the price changes during a particular time interval. Certain dealing firms will present less price movement on their feeds on purpose to eliminate short term scalping. All in all, bigger dealing firms that have been around longer are better to use than smaller shops. You should also select firms that have solid liquidity providers to hedge trades with and good price feeds. Registration When selecting an MT4 dealing firm, one thing you should consider is its registration status with the NFA or other regulatory agency. The NFA is a self regulatory organization for the Forex market. It reviews dealing firms capitalization levels, trade reconciliation operations, business solicitation practices, anti money laundering policies, and much more. You can visit the NFA website at During the registration period, the firm will undergo a review process by the NFA. If all businesses at the dealing firm are in check, the firm should be approved for registration with the NFA. At the NFA website, you can check the registration status of all dealing firms. This service can be found specifically at where you can input a firm s NFA ID or name. In return, you will receive the firm s registration information, the names of the firm s principles, and prior registration of the principles. You will also see any history of complaints against the firm. When looking at the history of complaints against the firm, you should consider the size of the firm. The more customers a firm has, the more likely they will have a complaint against them. Therefore, do not evaluate a firm s quality based on complaints alone. You should also consider a firm s capitalization level and client base as well.

4 One other regulatory agency that can work is the FSA. This is the regulatory agency in the United Kingdom. They also do a diligent review of various firms and one nice aspect is that the FSA rules require Forex brokers to keep your account segregated. This means that you will be considered a secured creditor and be first in line to get your money back in case something happens to the Dealing firm. Trading Rules and Regulations Besides finding the most trustworthy broker, one of the key elements to choosing an MT4 dealing firm is to consider the trading rules and regulations you will be subject to. For example certain NFA regulations prevent traders from using Hedging and require brokers to execute your orders in accordance with First in First out (FIFO). Certain Trading robots require this functionality therefore you need to take appropriate measures to make sure that you can properly use them. In case you are not already aware, Hedging is a practice used by many forex traders and Expert Advisors, where you have both a long and short position open on the same pair. There are several different reasons why a trader might want to use hedging. In particular it is an effective way to mitigate your price exposure without having to close out your initial position. One example of when hedging is often used is during times of extreme market volatility, such as during major new announcements. For example, a trader who is long the EUR/USD might open a short position right before a major news announcement in order to protect their account from any sudden and unexpected moves. Because the trader has both a long and short position open, the gains from one side will offset the loss on the other side, thus protecting the account during uncertain and volatile periods. FIFO on the other hand is a change to the way trade executions are made. Instead of being able to control the order in which you open and close your individual trades, FIFO requires forex brokers to close the first order before any other on the same pair. For instance, if you went long 5 lots of the GBP/USD and then later went long 5 more, you would have to close out the first trade before you could close the remaining 5 lots. Although this might not seem like too big of deal, the actual effects can be astounding. Particularly if you use any type of contingency order such as a trailing stop or even a stop loss, you can run into several problems. For instance, in the same example imagine if you put a tight trailing stop on the second order of 5 lots which eventually gets triggered. However since the broker must execute your trades in accordance with FIFO, instead of closing out the 5 lots that triggered the stop, the broker would close out 5 of your original 5 lots. This would leave your second order of 5 lots open and unprotected by any stop orders - a potentially dangerous situation. However there are some alternatives that you can take advantage of in order to use position based stops and limits and be able to hedge your trades. You can find a reputable forex broker who operates in both the US and the United Kingdom. By opening an account under their UK branch you can avoid the new regulations since you will fall under the Financial Services Authority (FSA) regulations rather than the NFA. At the same time you will be dealing with a reputable firm that also has their primary

5 operations in the US. This can ensure you that you ll get superior customer service. The best way to find out which firms offer the option to trade under a UK branch would be to contact an Introducing Broker. A reputable Introducing Broker should be able to provide you with the best options for trading in the UK as well as the specific details about the differences between a US and UK broker. Another benefit of trading with a UK forex broker deals with the safety of your funds. Considering that the forex market is relatively unregulated, knowing that your money is secure is of the utmost importance. As mentioned before, UK brokers are regulated by the Financial Services Authority (FSA). One of the FSA s rules is that client s funds must be held in a segregated account. This means that the client is seen as a secured creditor and will receive priority in a bankruptcy proceeding. This is an excellent way to add a layer of safety to your funds Benefits of Using an Introducing Broker One thing to consider when selecting a dealing firm is signing up with a reputable introducing broker. An introducing broker can prove to be an invaluable resource in the dealing firm selection process. An IB can act as an independent third party that will help you make the correct decision. The best part of using an Introducing Broker is that their services are complimentary to you since they are compensated by the dealing firm. Basically for every client an introducing broker brings to a forex dealer, they get a portion of the spread that the forex dealer would make. Nothing changes for the client; meaning that your spreads and execution stay the exact same as they would ve been had you gone directly through the broker. One thing to keep in mind is that some introducing brokers may be biased to refer you to firms that pay the most to them and do not have your best interest in mind. It is important to make sure that the introducing broker you are dealing with works with multiple different brokers so that they can offer you the best option for your particular trading situation. Most firms today pay the same compensation to introducing brokers. It is still always good to ask, however, so there are no issues. The introducing broker identifies and drives business as well as provides additional customer support for the dealing firm. In most cases, the dealing firm has a close relationship with the introducing broker and provides them with many perks that are then passed on to the introducing broker s clients. Introducing brokers can add value to your trading through methods such as enhanced customer support, better execution of your trades, and a possible cash bonus program. Since an Introducing broker is compensated with a portion of your spread, the IB will often pass a portion of their payment onto you. This helps to cut down your transaction costs, and therefore enhance your trading. Receiving cash bonuses is one huge benefit that the client can receive by using an introducing broker. Like dealing firms, there are numerous introducing brokers. Therefore, it is important to choose a large and reputable firm when selecting an introducing broker. Certain introducing brokers do not have your

6 best interests in mind and may push you to make more trades, which increases their profit. These firms are not as concerned with your success in the market. An introducing broker can be a vital piece of your trading success and ultimately offers you benefits you would not receive by singing up directly through a forex dealing firm. One of the most overlooked benefits of an introducing broker is their ability to escalate the resolution of any issue you may have with the dealing firm. Because a reputable introducing broker will have a large amount of clients at any particular dealing firm, they are treated as a preferred intuitional client. Even though your particular account could only be a very small fraction of the brokers business, you will receive greatly improved service because of your relation to the introducing broker. Typically this can lead to many benefits such as an expedited account opening process, greatly improved customer service, and many other intangibles that come along with your relationship to an introducing broker. Considering that all of the services that an IB can offer you are free, this is largely a win-win situation.