You may be wondering about the title of this section. Why do you need to beware of Forex brokers? Well, there are some tricks that they play that are not in your best interests, as I shall explain. Please don’t think this applies to all Forex brokers, but there are certainly some dishonest ones, or at least ones that look first to their own best interests at the expense of their clients.
Firstly, to set the scene, you must think about where brokers make their money. Typically when trading Forex you may not pay a commission but you do have a spread. A spread is a difference between the price that you can buy and the price that you can sell at.
For instance, at this moment of writing, I am looking at GBPUSD (British pounds and US dollars), and see 1.6476/1.6481 as the quoted prices. These prices are known as the bid and ask. The first currency named is traded for X quantity of the other currency. In this case 1 pound sterling will buy US$1.6476, but if I want to buy 1 pound sterling I would need US$1.6481. So the broker would make US$0.0005 each time they bought and sold 1 pound sterling. It certainly doesn’t seem that the broker will get rich on that, but you must realize that the standard size traded is 100,000 units, so if the broker bought your lot of currency and sold it again they would make £50.
You should expect the spread to be lower on the major frequently traded currency pairs, but perhaps a little higher on exotics. Forex robots are usually designed to be traded…