Joshua Raymond has all the answers when it comes to brokers. Those answers are going to be useful to you whether you're an active trader, or even if you're just considering trading. So what makes a good broker? What con tricks do brokers use to hoodwink their clients? What should you stay away from when it comes to brokers and their tactics? Joshua Raymond can tell you.
Takeaways
There are some telltale signs to look out for when it comes to bad brokers
Each client will suit a specific broker, so search around
It is not true that brokers make money when the client loses
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76% of retail investor accounts lose money when trading CFDs with this provider.
76.6% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing
76% of retail investor accounts lose money when trading CFDs with this provider.
Joshua Raymond is the managing director of XTB and has had a meteoric rise to get there. He is well regarded in the world of brokers, and has a lot to say on the subject; all of it worth listening to.
It is hard to tell who is a good broker and who is not right from the start. It is important to think long and hard before you take the plunge and start working with one. The market for brokers is saturated. There are many different regulations around the world.
This does not mean that you cannot find a good broker. A quick Google search will give you a great start when it comes to finding a good broker for your perfect trade; you'll soon see who the bad ones are.
For Joshua, regulations are incredibly important. XTB, for example, is regulated by the Financial Conduct Authority and that has a great reputation as being a good regulatory body.
There are many others, some just as good, so look at where the brokers are regulated. Pick one that you know. There are certain protections under regulatory authorities that will keep your money safe and allay your trading fears such as money segregation.
This means that the money that clients put into their accounts is ring-fenced and kept separate from the money in the broker's account. It is what Joshua does at XTB. In essence, it helps to keep your money safe. Not all regulators require this, but the Financial Conduct Authority does, which is one of the reasons XTB subscribes to it.
It's also very much dependent on the client as to what broker they should use. Some brokers are more suited to beginners, some to people who can just manage without any additional support and so on.
Look at what stage of your trading journey you are on. Take a look at what the various brokers offer. What works for you? Which one ticks the most boxes?
Be aware that brokers and traders are not the same thing. This is a common misconception. Brokers do trade - each company will have its own policy as to how their brokers can trade.
Joshua Raymond requires those working at XTB to report all the trades they want to make. This ensures there is no conflict of interest. Most brokers probably have a similar policy - if they are good brokers. It makes sense for brokers to trade.
They need to be committed to trading and do it themselves to understand it. This educates them to know what to and when to avoid trading. This helps demonstrate they understand and believe in it. However, personal trading should always be secondary to the best interests of the client. That is essential.
Brokers can make their money in a variety of different ways. Different brokers will offer different spreads, and that indicates their margins. It is the amount of money they are prepared to make on a particular trade. It could be commission on equity trade, or even overnight financing. They also hedge their client trades and that can make them more money. This is all geared towards making sure clients are trading otherwise brokers will not be making any money. It is important for a client to be successful. It is in the broker's interest for clients to be trading for years.
Joshua Raymond also wants to clear up another common misconception. The idea that brokers make a lot of money when their clients lose. It is just not true.
What is true - certainly at XTB - is all client trades are hedged. The risk has to be managed. The risk committee sets up what risk parameters you can take. You can only take a certain amount of risk. This explains why it looks as though sometimes brokers do well when a client loses.
There are definitely some red flags to look out for. Sadly there have been examples of bad brokers recently. They create a shell company and pretend they are in the UK when they are not. Thankfully the regulators are clamping down on these ones now.
Other red flags include the broker not being regulated. That is a huge red flag. There are lots of checks and balances that can be carried out if a broker is regulated. This will give you an idea of whether you want to use them or not.
For those who are not regulated, you do not have that ability to check up on them. Can you go into an office and speak to someone face to face? That proves the business is real and not a fake shell.
Dodgy brokers are keen to take money from a debit or credit card. If you want to withdraw money they say that will take time. That is not the case, there is no reason why you shouldn't get your money back within a business day. If they say otherwise, they are not a good broker.
These bad brokers are so keen to get clients' money, they will carry out all sorts of tricks to get it. Joshua Raymond has seen a lot of these tricks and knows what to look out for. An account that suddenly makes a large amount of money is something to take with a pinch of salt.
It could just be a trick that involves manipulating prices. Keep an eye on it and you will see what is right and what is not. You can do a test on a broker if your not sure. Use some small amounts of money and see how quickly you can withdraw it. That will give you a good benchmark to work from.
Joshua Raymond always has his clients in the front of his mind. This is why he is pleased the cash bonus system is being banned as of the 1st August. The problem with them is that you are putting more money at risk than you would normally do. This can cause big problems.
The reason for the ESMA marketing restrictions that are coming in on 1st August is to protect the client. Joshua predicts clients will need to put more money into their accounts. In turn this will lead them to hold onto their trades for a lot longer. This could be a good thing, or a bad thing. Only time will tell.
Another change would be in terms of margin close out; the changes will affect the broker and the client. It means the broker guarantees that you cannot lose more than the money that is in your trading account. Basically, the client will not owe the broker money.
The final change is that there will be a standardized risk warning. Within that risk warning you will be able to see what percentage of clients lose money. That will help you to decide on a broker.
The ESMA changes are only impacting retail customers. The next step up from a retail customer is an elected professional. If you are an elected professional, you can keep all the benefits you had before the changes come in on 1st August. These include bonuses and cashback.
However, what you will not get is client money segregation. You are telling the broker that you know what you're doing, so you do not need the extra protection. (although at XTB this will not be the case). The broker has to approve the elected element.
There are some rules to adhere to, such as the client has to have done 10 significant trades every quarter for the last four quarters. 'Significant' means at least £50,000. You also need to have half a million pounds invested as cash, for example.
You cannot just choose to be an elected professional and become one; there are qualifications required. At XTB elected professionals are going to be able to keep most of their benefits from when they were retail clients. The difference will be in the risk warning.
There are many different facets to choosing a broker so considering what you are is important. This will influence which broker you chose. Choosing the right broker should require as much work as placing a trade. You need to think it through carefully! Joshua Raymond's pearls of wisdom are well worth listening to.
Joshua Raymond can be found at www.xtb.com
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