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How to Make It Easier to Trust Your Forex Broker

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Person trusting another on a mountain

Happy Friday!

This week’s question comes from Nadine, who asks:

I think I’ve found a good Forex broker, but how can I trust an entity I barely know with my money?

One of the most important decisions you will make as a trader is which Forex broker to trust with your money.

You don’t want to choose just anyone. After all, it’s your hard-earned money we’re talking about.

But many traders go about it the wrong way.

I do agree that you should conduct research before depositing money with any broker. You’ll want to check their spreads, reliability, charts, and of course, you should verify that they are fully regulated.

However, more than half of the equation depends on how prepared you are, rather than your future broker. The best broker in the world can’t do your job for you.

What is your job?

That’s what you’re about to find out. In this post I’m going to share what it means to trade with speculative capital. I will also discuss two ways to ease your mind when depositing funds with your broker, regardless of how much you’re depositing.

Ready to get started? Let’s do this!

Speculative Capital 101

Trading successfully is 80% mindset and 20% mechanics. The best trading strategy in the world is worthless if your mental game isn’t on point.

One facet of that mental game is keeping emotions at bay. It isn’t about blocking emotions altogether, but rather about controlling them in a way that allows you to make sound decisions.

Some common emotions traders experience are fear and greed. Both are driven by the gain or loss of money. Just the thought of making or losing a great deal of capital tends to trigger an emotional response.

Risking less per trade is one way to stop these emotions in their tracks.

However, even that isn’t enough. If you’re trading with money you can’t afford to lose, risking less per trade might help, but it won’t put your emotions to bed.

To do that, you have to trade with disposable income. This is money you don’t need for living expenses such as rent or food. Losing it wouldn’t be pleasant, but it also wouldn’t alter your life.

We also call this speculative or risk capital.

When it comes to trusting a Forex broker with your money, part of the equation is making sure that you are only depositing speculative capital. That way if something does go wrong, you don’t risk losing your way of life.

A Harsh Lesson From the SNB

Do you remember when the Swiss National Bank (SNB) unpegged the Swiss Franc in January 2015?

I do, and it wasn’t a pretty sight.

For those who started trading after January of 2015, here’s what that one decision did to the USDCHF daily chart:

USDCHF SNB unpegs Swiss Franc

As you can see, the Swiss Franc soared, causing pairs like the USDCHF to tank. The result was a brutal 1,800 pip loss.

As ugly as the chart above looks, it doesn’t show the full extent of the damage.

Alpari UK filed for insolvency, while FXCM Inc. said it was in violation of regulatory capital requirements after its clients lost a staggering $225 million.

Yes, in total, clients of FXCM lost more than $200 million from that one daily candle you see above.

Even Barclays, one of the world’s largest multinational banks, lost tens of millions in a matter of seconds.

Seems like an unforgiving lesson on the importance of using a stop loss, right?

Wrong. Stop losses didn’t help much, if at all. The market moved so fast that by the time those stops were triggered, it was too late.

The damage was already done. It not only wiped out accounts, but it also left some owing money to their brokers.

So what is a trader to do? Here are two simple ideas:

1. Leave Your Capital on the Sideline

Locked up piggy bankYou may be wondering why I shared these events from January 2015 above. After all, these types of events are incredibly rare and usually produce some warning signs before they strike.

In fact, I shared it with you because it’s a valuable lesson on what it means to protect your risk capital.

Remember, your first job as a trader is to protect your capital, making money comes second.

That primary job extends beyond risking 2% per trade and always using a stop loss.

Those two things are important, but the first step is missing.

How much should you deposit and what if you lose it all?

Those are the questions you should ask yourself before ever thinking about stop losses.

Let’s assume for a moment that you have $10,000 of speculative capital. This is money you don’t need to pay for living expenses. You don’t want to lose it, of course, but if you did it wouldn’t be life altering.

Most traders would deposit the entire $10,000. I mean, why not? It allows you to control larger positions sizes which means greater profits. Of course, you should also know that it means greater potential losses as well.

But you don’t need the entire $10,000 sitting in a Forex brokerage account to do that. Chances are you will only use a fraction of that sum each time you trade.

So why not deposit half or less and leave the rest in an insured account somewhere?

That’s what I do. I never deposit all of my speculative capital at once.

Although I’ve never had any issues with the brokers I use, I know that unfortunate things happen.

I also know that an insured account is much safer than any Forex brokerage account. And even using 20:1 or 30:1 leverage, I don’t need all of the speculative capital to put on trades.

You could even opt for a money market account or any other liquid investment. The goal is to protect your speculative capital, not just the funds in your trading account. 

The name of the game is preparation. If you wait until the next big event occurs before you act, it may be too late.

Because here’s the deal…

The money you set aside for trading is your most important asset. Nothing else even comes close. If you let that river run dry, you’re out of business, and it’s back to square one.

How much of your risk capital you decide to deposit is up to you. But even leaving 20% or 30% on the sideline is better than having the entire amount sit idle in a trading account.

That’s just my opinion. You may disagree, and that’s okay. The point here is that you have options when it comes to protecting your risk capital. There’s nothing that says you have to deposit all of it at once.

Nor do you need to maintain only one account, which brings us to the second option.

2. Spread Your Money Around

Man handing over moneyNo rule says you must only have one Forex brokerage account. Yet that’s what I see most traders do.

They search the internet for weeks looking for the ‘best’ Forex broker. Once they find a suitable match, they open an account and deposit funds; the search is over.

But what happens if that broker goes belly up?

Will you be able to continue on or would it be a career-ending event?

For many traders, these questions go unanswered.

It seems like such an unlikely event. Plus, who wants to think about their hard-earned cash going up in smoke?

It isn’t a pleasant thought, regardless of how much money you have in the bank.

While it may not be fun to think about, it is necessary to plan for unforeseen events like those mentioned above.

In addition to leaving the majority of your speculative capital on the sideline, why not open more than one trading account?

I’ve been down this path and can tell you that the pros outweigh the cons. In fact, the only downside is that you have to manage more than one account.

That’s something you can work out over time. The risk of keeping all your eggs in one basket, on the other hand, is unacceptable in my opinion.

How many accounts do you need?

Only you can answer that. It depends on your circumstances, preferences and whether or not you find more than two suitable and reliable Forex brokers.

You may also disagree with me and decide that you only need one trading account, and that’s okay. The point is that you find an arrangement you’re comfortable with.

For instance, you may decide to deposit just 10% or 20% of your speculative capital into a single brokerage account. If you’re that conservative, it may not be necessary to open a second account at another firm.

However, if you deposit 50% or more of your speculative capital, I would argue that a second account with a different broker is a good decision. I’d much rather lose 25% of my trading capital than 50% or more.

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What if You Can't Afford to Do the Above?

I realize that some of you may not be able to deposit money you can afford to lose. Or maybe depositing half of your speculative capital won’t give you enough to get started.

In these cases, it may be a good idea to hold off on opening a live account.

That’s especially true if you don’t have money you can afford to lose. Don’t make the mistake of risking rent or food money. There are many different ways to make money in this business, risking money you need to live isn’t one of them.

You see, the question isn’t how much money you need to open a live trading account, but rather, can you afford to lose the entire deposit?

If the answer is no, then you should probably wait.

No rule says you need more than one brokerage account or that you must deposit no more than 50% of your speculative capital at one time.

Like everything on this site, the views expressed in this post are my own. That said, controlling your emotions becomes much easier when you know that the majority of your risk capital is safe and sound.

Spreading your funds around is one of the simplest ways to avoid unforeseen events like the one that brought a number of Forex brokers to their knees in January 2015.

Nobody knows when events like the Swiss National Bank unpegging the franc will occur again. However, history has shown us that they do happen, so why not prepare for the next one today?

Final Words

There are many facets to becoming a successful Forex trader and it’s not a one-size-fits-all business. Each individual needs to find a suitable approach.

However, there is one universal truth: If you trade with money you can’t afford to lose, your chances of achieving success are greatly reduced.

Trading can be a stressful business. The key is to limit emotions as much as possible, and the best way to do that is to only risk money you can afford to lose.

Another method that has worked great for me is to deposit a fraction of my speculative capital. With the leverage offered by Forex brokers, there’s no need to deposit all your risk capital at once.

Regardless of how well capitalized and secure your broker may be, there’s always some risk when depositing money with an outside entity.

One way around that is to deposit funds with more than one Forex broker. Doing so helps to spread the risk so that if one broker goes under, you won’t lose all of your speculative capital.

If you don’t have disposable income right now, you’re probably better off sticking with a demo account. Once you get to a better place in life financially, you can start thinking about making the move from demo to live.

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Your Turn: Ask Justin Anything

I’d love for this new weekly Q&A to be successful and provide an invaluable repository of answers to common Forex questions.

To do that, I need your help.

Here’s what you can do to get involved and have your question answered in next week’s post:

  1. Ask questions. Post them in the comments below or Tweet them to me @JustinBennettFX
  2. Help me answer questions. If I missed something or if you have something to add, don’t hesitate to leave a comment below.

Leave a Comment:

35 comments
Darius says

That really sucks if the stop losses do not work and you can have huge debt because of it. In other business at least you can plan your debt. But here you cannot know how price will change.

Reply
    Justin Bennett says

    Many business owners who were hit by the 2008/2009 crisis would strongly disagree with you. There are ALWAYS unknowns and forces beyond your control, regardless of industry.

    That said, there were warning signs leading up to the January 2015 SNB event. The unknown was how exposed each broker was leading up to the unpegging on January 15, but that’s why I wrote this post.

    Reply
      Anetor Ibikunle says

      Thanks Justin. This is Really an Eye Opener.

      Reply
    manz says

    you can purchase guaranteed stoploss in the event of government currency intervention or against sudden gap-up at the weekend

    Reply
Joseph says

Hi Justin I have two questions
1. What is the best setting for the Moving Average if one wants to trade weekly. He would like to use the moving average to determine if a currency pair is trending up or down.
2.How do you determine currency strength say how can you tell the Euro is getting stronger than the Usd and vice versa..?

Reply
    tho says

    2.How do you determine currency strength say how can you tell the Euro is getting stronger than the Usd and vice versa..?

    Reply
Guy Bouchard says

Everything great as usual. Thanks once more. Nowk, curious to know what do you think about cryptos? Do you, would you trade these actually?

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Sifiso says

Thank you so much Chris as always. I am in the process of finding a broker FXCM was on my list. Is it safe now to use them? been using their demo and I enjoyed the platform

Reply
    chucks says

    Justine has provided a best broke. so for one to come here and be talking about another broker is NOT fair at all

    Reply
Du says

I noticed there are so huge different the pairs between OANDA, AxiTrader, AvaTrade and Pepperstone after market closed.

To named a few, take a look at following:
EURPLN USDPLN NZDCHF USDNOK USDCZK EURTRY, GBPTRY

Reply
    chucks says

    It would be nice if the observation is made in reference to the broker introduced by Justine

    Reply
Petrus Kriel says

Hi Justin, thank you very much for this valuable and important advice, which is priceless!

It would be great if you could post something on sensible and preferred Risk / Reward Ratios when it comes to actual trading.

Once again, thanks for the great and good work you’re doing!

Reply
chucks says

Thanks for this wonderful post. What i can deduce from it is that NO broker is immuned to unforseen shock in the market. so the bottom line is to guard your funds seriouly

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Roy says

Wow, i’m sure may people lost money and some people were made rich because of that huge bearish candle. Nice article.

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Benneth Obiorah says

I think I perfectly agree with you sir. Thank you for sharing sir.
How can a day trader that major on 1hour chart take advantage on your wedge trading parttern as your emphasy is on 4hours and Daily chart

Reply
Chris says

Thank you for this write up, I hope to do this asap.
God bless you

Reply
Jimmy Foo says

Hi Justin

I plan to open an additional account just for Compounding. Meaning trading and letting the amount grow over the years (2-3 years). Is this not a good idea when unforeseen situation arise?

Reply
taiwo says

this write up has really opened my eyes to the other risks of forex trading that has nothing to do with the actual placement, winning or losing of trades.
thanks so much ,i think this is a great idea in protecting my funds henceforth

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Iskanda says

Yeah,no stop lost

Reply
Laurie says

Thanks for this reminder, Justin! I got shut down when FXCM closed its doors and it took quite some time to get set back up with Oanda. I’d like to find a second broker, but I have no idea where to turn here in the USA…do you have a second favorite?

Reply
M Ilyas says

I just loose 100 usd with instaforex
And 150 with fbs broker

Reply
john says

How do one make use of the leverage offered brokers.. Let’s say i have 3000 dollar as conservative capital..

Reply
Fola says

This is such an eye opener. how come i never thought of this? I could minimise my deposit with my broker while the rest of the funds could sit in an income earning account. Wow

Reply
Solomon Oyeniyi says

Thanks for the information.

Reply
Ellison Tino says

Hi Justin
i would like to find out more on the issue of brokers. Does it really matter whether a broker has a dealing desk or non dealing desk when it comes to choosing a good broker? I heard that brokers with dealing desk (market makers) can manipulate the prices since they take the opposite side of their clients. Oanda is also a market maker i guess!

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Ikhaghu says

Good advice for me.
How to i take good advantage of your weekly update as most time you just analyse the currency pair and leave newbies like me wondering which position to take.

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Steven says

Thanks Justin it’s an eye opener.

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Yousri says

completely agree . I split my trading money in 3 parts , I use 2 different brokers with 1/3 of my capital in each account , and keep the remaining 1/3 I keep in the bank saving account to use later if I want to increase my trading or in case I lose some money

Reply
BrokersDiff says

Hello I am BrokersDiff . I read your blog its very interesting and I get useful knowledge from here.
Thanks for sharing with us.

Reply
Francis says

Thanks a lot for that information. It really worth knowing.

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Hieu Nguyen says

I have a question!
How can I set up a good trading system (hardware + software)? Thanks

Reply
Siyabonga Mkhize says

Mmm, this is serious Justin yoo, but it’s an eye opener. Thank you

Reply
Craig Bennett says

Question: how many times did you fail/ blow accounts or be unsuccessful before you started getting good and started making consistent profits?

Reply
Al Shuaib says

Thank you for the informative content.

Reply
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