Most forex newbies have to deal with forex brokers rather than traders when they venture into the trading industry. Brokers mainly focus on selling forex accounts to clients and are not traders themselves. It is important to understand the difference between brokers and traders , so that new investors can make well-informed and correct decisions when it comes to trading.
Broking requires selling tradable financial products to people. A forex broker usually refers to a company that offers the service of an electronic trading platform that allows trading clients to buy and sell currencies and other financial products online. Introducing brokers (IB) are the marketing agents of the brokerage firm with the job of convincing potential clients to open trading accounts. IBs are usually paid a fixed monthly salary and commissions from spreads, or the difference between bid and ask quotes, every time their client opens up a trade in the trading account. Sometimes, the word ” broker’ is used to refer to IBs.
A trader is a person who buys and sells currency, and other financial products like stocks and commodities from the online trading platform provided by a specific broker of their choice. They do this by studying price behavior and employing various strategies in the hopes of generating profits.
The professional domains of an IB and a trader are completely different. While all IBs know how to execute trades and have a good understanding of financial instruments, they may or may not be trading. Moreover, their income depends largely on the commissions generated from trading transactions of client traders. On the other hand, successful traders make use of specific strategies to trade and make most of their money from trading.
There is conflict of interest between the trader and the IB in terms of how income is generated. IBs are paid a part of the spread as commission on every trade their clients take regardless of whether they profit or lose.
As a client, the more you trade, the more commissions (spread income) your IB will make. However, over-trading is inevitably associated with losses. Unfortunately, an IB, or any marketing representative of your broker can sabotage their commission income if they tell you to be cautious and not over-trade. The more selective or infrequent you are in your trading, the more the brokerage company loses out as a whole.
While some brokers might be well intentioned or uninformed, others might mislead you by doing some of the following:
Prompting you to over-trade. This could be by sending you frequent trading signals, news reports or price analysis that make you feel like you’re being genuinely guided. You may receive a lot of follow-up calls suggesting you trades, emphasizing ‘missed opportunities’, and asking you to trade more frequently so you make more money. In reality, the more selectively you trade, the better are your trading results.
Suggesting you a fund management service. You may be told that since you have been losing out recently, your trading account should be handled by more ‘experienced’ hands. This may be supplemented with some dubious track record to get you on board with a fund manager on a profit sharing basis. The fund manager may excessively trade or ‘churn’ your trading account to generate more spread income for themselves based on some agreement with the broker, regardless of whether your account grows or shrinks.
Convincing you to subscribe to a monthly/quarterly signalling service (see my article ‘Why not to trade with a signalling service’) or selling you a trading robot: While these help generate extra revenues for the broker, they will not really help with your trading results.
Advising against crucial money management principles: This could be done by discouraging stop loss placement or prompting you to take bigger position sizes which increases spread income. If your account is about to liquidate, your broker may persuade you to top up your account quickly to ‘save’ the account and keep your trades running. Without a robust strategy and money management, adding more to capital to your account will usually result in the loss of this capital as well.Remember that most brokers are ‘market makers’ which means that they are your counterparty in trading and all your loss is their profit.
As a trader, being aware of these intentional practices will save you from undue mental stress and losses and help you choose the optimal broker for yourself.