How to reduce risks of being scammed before you set up a live account with new forex brokers?

Forex Trading Newbie Take Note :

Over the past few months, I have started to take a more serious interest in learning forex trading.  I find that forex trading offers a whole new dimension for traders who are already well versed in trading stocks like myself.  I like the fact that most serious forex traders usually focus only in 2 to 3 major pairs such USD/JPY, EUR/USD and EUR/JPY.  To me its like having to focus only in monitoring 2 to 3 stocks.  Plus I can tailor-make my trading time frame eg. using hourly or 5 minute charts accoding to my time.  

The biggest attraction for me for forex trading is that usually the live data is provided for FREE , this is down to 5 second charts for some brokers’ trading platforms, can you believe it!!  Lastly, most forex brokers offers free demo account so that you can practice using fake money as long as you wish using live data until you are confident to start using real money.  I know some newbie does demo trade for one year before going live trade.

However, as I begin to learn more about the market, I realized that there are also some risks that newbie have to be very careful about.

Firstly, the foreign exchange (also know as forex or fx) market is NOT regulated like stock market or futures or commodity market.  Stock brokers or securities companies in Singapore or other countries are regulated by the stock exchange whereby they have to meet very strict rules including capital requirement before they are granted license.  Their brokers are also required to take exams before they can begin to trade.  When there is proper regulation, it means lower risk of scams and higher safety for our cash deposits.

For forex market, it is almost completely unregulated.  Currently, most so-called forex brokers are NOT regulated by any specific exchange or rules.  Most of them are just private companies or even private individuals offering an electronic platform to trade currencies pairs.  Only a few reputable forex brokers are backed by banks but their rates are not cheap for retail traders, they tend to service only big clients.  As we know, when there is money involved and no proper regulation, it will lead to scams and frauds.

So far, two of my friends I know are having some problems withdrawing money from two separate overseas based forex brokers!  They were attracted by their competitive rates which usually comes in the form of “tight spreads” or “low pips” meaning the spread between buy and sell is very narrow.  But cheap does not mean good as we all know.  

For newbie retail investors or traders who do not wish to pay bank backed forex brokers high rates, what can we do to lower our risk when we are looking for brokers which offers competitive rates ?

When you set up a demo account, you can set it up with any brokers since it does not involve real money.  But once you plan to send your hard earned money to a new forex broker, you should do some basic homework.  It took me sometime to go through the process and I wish to share here my experience :

1.Goto Google and type “xxx forex broker” forex broker review

This is the fastest way to find out if the forex broker you intend to open a new account has any bad press or comments posted in the web about them before…….thank God for search engines haha.

After you make the forex broker review search in google, you will have a long list to read through.  At least take some time to visit the sites in the first page of the search. 

I would like to add that some of the comments in the website either negative or positive may be posted by competitors of the brokers or by the brokers themselves.  So read them with a pinch of salt.  But if there are enough negative comments around, just be more careful.  

2.Physical presence of office in prominent countries like Singapore, Hong Kong or USA should add to the credibility of the company but it is still not a guarantee.  But at least it is better than those based in obscure countries such as BVI, Bermuda, Cyprus or some eastern European countries.  There is a possible reason where they are based far away…..so that you cannot find them!!

3. Do not be fooled by special offers such as 20% FREE cash bonus for every dollar you deposit or extremely low commission offers such as zero pips or low spread.  Usually, it’s cheap for a reason….to lure you to put your hard earned money and disappear.

4.Testing sum from small to big

Do not send big amount over the first time.  To me more than USD1000 is big amount.  

After you have put money there, try to make a few withdrawals first over a period of 2 to 3 months.  If you can get your money back easily then you may consider gradually increase the cash deposit.  To me I think it is even better only let your winnings grow and stay in the account and withdraw your capital out as soon as possible.  So that if something bad happens, you only lose your winnings.  Even so, you only need to maintain the amount of winnings needed to fund your trading size and can still withdraw the excess cash winnings.

Most scams are only discovered when traders tried to withdraw money.  Because when you win and leave your money there, the Scam broker will not disturb you since the money is still with them.

5. Registration with NFA or FSA

This point is worth taking note.  Although forex trading industry are not regulated, but forex brokers who choose to be based in United States and United Kingdom are required to be registered with National Futures Association (NFA) in USA and to register with Financial Services Authority (FSA) in UK.

You may visit their websites and see if the brokers you wish to trade with are register with either of them.  Just type in the FX brokers’ names in the websites below :

FSA website to search if the broker is registered in UK :

http://www.fsa.gov.uk/register/firmSearchForm.do

NFA website to search if the broker is registered in US :

http://www.nfa.futures.org/basicnet/

The last time I checked, the following three FX brokers are registered with NFA :

Oanda – since march 2003

http://www.nfa.futures.org/basicnet/Details.aspx?entityid=0325821&rn=Y

Interbank FX – since dec 2004

http://www.nfa.futures.org/basicnet/Details.aspx?entityid=0326091&rn=Y

CMC markets – since july 2005

http://www.nfa.futures.org/basicnet/Details.aspx?entityid=0356817&rn=Y

In the NFA website, you can also try to find out if the registered brokers have been fined before for any previous wrongdoings.

I read in NFA website that Interbank FX were fined USD25,000 and USD100,000 before for taking inadequate deposit from customers and for using misleading marketing materials but I do not think that is a very serious offence.  But it just shows that NFA website is very good and informative and you can make a better assessment of brokers who are registered with them.

If the brokers you plan to set up account are registered with either NFA or FSA, at least it is better than those that are not registered.  DO NOT just believe the brokers when they say they are registered, make sure you go to the websites above to double check it yourself.

Final note, as long as FX trading market is not properly regulated, there is a chance that your deposit may be gone suddenly, so I would prefer to take back my capital as soon as possible and only leave my winnings there.

Article by,

Rooney

singapore stock market update 29/9/08

if we look at the singapore share market behaviour over the past six months, apart from it being in an obvious downtrend, i also noticed one other pattern, that the singpaore stock market tend to stage a nice technical rebound 2-3 weeks before the results reporting seaons.

1Q08 correction

the singapore straits times index (STI) rebounded from 3042 around 14th april 2008 to 3241 on 16th may and proceeded to a big correction once the results reporting season ended.

2Q08 correction

the STI and the share market did a one way traffic downwards from 3241 points on 16th may and again rebounded 2-3 weeks before the 2Q08 results reporting season starts around 2835 points 16th july.

3Q08 rebound ?

so based on the recent historical behaviour, we can expect that the present sell down in the stock market which started after the 2Q08 results reporting season ended may have a chance to see some reprieve as we get close to around 15th of october, which is again 2-3 weeks before the 3Q08 results reporting seaons begins.

So…..be patient.

cheers

rooney

I am only human so that means sometimes I succumb to “temptation” when it comes to trading stocks.  By that, I do not mean a sexy remisier calling me to place orders with her la.

Recently, I traded some stocks ahead of the results season in the Singapore stock exchange. The net outcome was Breakeven as I have entered the first batch of positions prematurely BEFORE the trigger breakout signals present themself and had to cut loss as the stock price retreated.  The circumstance surrounding the entry decisions was that the market has been down a few days and then regional markets rebounded in the morning, so i naturally ASSUME that the stocks i am monitoring would also follow suit.  Actually there is nothing wrong with this assumption as long as i am aware of the potential risk and prepared to cut loss if i am proven wrong……which was the case.

During the subsequent sell down of stocks in singapore stock exchange, i was more determined to wait out for the buy signals to be triggered. This time, I would be rewarded with some trading gains…..some of my recent trades were posted here:  http://mojostock.com/forums/forumdisplay.php?f=33

And when the results seasons come to an end for the singapore share market, I have closed all my positions once the results season “window” period is over. I ended this round just about breakeven after closing all positions.

As i look at the recent trades, the bad ones were the ones which i entered “in anticipation” of a breakout.

So last Friday as i did my homework, the chart for Ferrochina looked “tempting” again……but this time round, i have decided NOT to anticipate the breakout even though US and Japan stock markets had performed strongly prior to the opening of the singapore stock market.  As i mentioned last week, the breakout trigger for Ferrochina is 1.03……and this morning the highest done was 1.02.  Had I tried to anticipate the breakout and entered prematurely, it would have ended up being a bad trade as it has fallen back to 0.98….and in the process triggered the cut loss point.

This incident reminded me the importance of being disciplined and having patience to wait for the fish to come around……

rooney