Quote:
Originally posted by Smooth Operator
Do the brokers with the narrowest spreads try to make up for it in other ways? I have been paying a 5 pip spread to trade GBPUSD and I'm tempted to switch to a broker with a spread of 3 pips.
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The reason why they make the spreads narrower is because they hope to attract more suckers to lose their money with them instead of with their competitors.
It sounds like a way to save trading costs.
If one thinks clearly through the process how the brokers operate - their only source of "risk free" revenue is the margin accounts of the clients. (They also have risk based revenue from the offsetting of positions at their clearing houses. You must however understand that they can not realistically offset each small trade, so they constantly monitor the net position they have per currency pair and hedge that position. As a net result they may incur profits or losses from that process).
As long as their clients (all together) are net losers they are net winners. So the story of narrow spreads is just part of the marketing wizardry / half truths they use in their marketing to lure stupid money that will inevitably be lost via losing trades to them.
Think about it for a moment
1. They don't ask commission. No free money taken out of clients' accounts there.
2. They ask rollover fees. There they make free money. (But not nearly enough to make a business out of it.)
3. They can use tactics built into the software like, "price shifts". With this they effectively just take a pip or two out of clients accounts. Price-shifts is a sure fire way to do it, but I think it is not used that much anymore because (1) they MAKE ALL THEIR LOOT FROM THE STOP LOSSES THE CLIENTS PLACE THE WHOLE TIME (2) they rather convince them to place say 30 point stops and make 30 X 1 pip than ripping 1 pip out of 30 accounts?! Or rather 30 X 30 pips rather than 30 X 1 pip ?!
4. Consider this. All of them do everything possible to convince you to over leverage and place close stops. WHY? Because the only way they make money is if you really are a net loser - "at the end of the day".
5. Its really immaterial to them if they have a 3,4 or 5 point spread. On all clients via introducing brokers they have to pay over usually 1/2 to 1 pip in any case. If they have to offset at a clearinghouse the spread they trade on is usually 2 or 3 pips. They therefore don't necessarily make money from the spread. They make money from your losses.
6. And i say it again. They subtly convince you to follow trading strategies that cause you (inevitably) to do many losing trades. And in other respects they turn the concepts of "risk management" against you to convince you you better not leave that screen before you have placed a stop much closer to the entry point than a limit to the entry point, or your profit target.
Why do they do it? Because they know, from high up, your trade, how cool you might think it is, how right, how perfect a signal, it is just one more random entry like a million others in the global FX market done by thousands and thousands of "gamblers with randomness" and a stop 3 times closer to it than a limit, has a three times better chance to be hit. And they then take the winnings.
But Smooth operator, yes, move. Especially if you have a realistic history of profits. That means you may bargain on taking on average in the future x number of pips net per trade and if you can add 2 pips to that, its more effective. If you don't have such a history, you shouldn't even bother to move, but rather spend your time getting to the point where you can realistically know that on average you will net x number of pips if you push the buy / sell button to open a trade.
May I add here that any beginner should have this as part of his goals: Get a long run of real money trades behind your back and know why you did them. Then you calculate the net profit you make per trade. If it is a long enough series you should have confidence that you will be able in future to repeat it. (How much is long enough? Tough to say, probably about a 8 months to one year, where you have had a few ranging periods and up and down trending in the currency / currencies you are trading. Obviously if the result is a net loss, you should preferably stop doing it and leave the FX or get someone to teach you to make a series of net winning trades.
The moment you reach that point your broker is in trouble ... cause they are going to become a net loser with respect to you.
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