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Choosing a broker is a difficult task, and not just for novice traders, but also for experienced professionals, in particular, because of common opinion about companies having a direct interest in their trader’s losses from which they make a profit. But is this really the case?
A group of independent researchers in the United States found that a number of successful clients a broker has can vary widely (on average from 10 to 50%), despite the fact that their traders have similar knowledge and use similar strategies, as confirmed by the NFA, a key regulator of the US derivatives market. For example, Interactive Brokers placed first in Q1 2017 with 47% of accounts having positive dynamics, at a time when it’s assumed that only 5% of all traders are earning money on financial markets.
A couple of logical questions arise.
- First, what determines the success of a brokerage company’s clients, given the difference in the number of profitable traders?
- Second, it is necessary to understand if it is profitable for the brokerages themselves to have a high percentage of successful clients, or if this is even a key parameter to judge their businesses by?
Every experienced trader knows that trading is a rather difficult way of generating income, as it requires a consistently strong concentration and the ability to constantly absorb new information due to market volatility. Add to this the possibility of losing capital, which can be mitigated by following a strict risk management plan, as well as the emotional aspects of trading.
What can be done to help improve the profitability of traders? First, attractive trading terms. For example, if you are using scalping strategies and doing dozens of trades every day, a difference in spreads of even a half point could deprive you of several hundred dollars a month. The same applies to commissions which differ by just a few cents, but over weeks or years add up to be a sizable sum.
Another even more important factor in determining success is the personal support of the mentor, who helps protect against costly mistakes. Of course, you shouldn’t follow recommendations blindly when seeking advice on trade idea implementation, however, you should ask about basic money management rules, acquiring useful training materials, as well as an overall market vision from a professional.
Additionally, many Forex brokers who understand that they profit when their traders’ profit, create additional analytical tools to help them determine market direction and find optimal points to enter trades. For example, AMarkets has developed its own indicator, based on the ratio buying and selling orders. Using this data, you can quickly understand which way the bulk of traders are moving and then form a trade idea to go “against the crowd.” It increased the number of successful traders by nearly 20%.
Yet another factor in success is the timely search for and discovery of problems. Thus, the leading brokers have introduced automatic trade analyzers. These tools record every trade and then provide analysis on what could have been done different or better. The most frequent recommendations deal with reducing the size of the position to reduce risk, stop losses and take profits in each transaction and when the list of tradable assets are too large.
An important factor in how well they work is the amount of seed capital. Most newcomers are doomed if they only fill up their account with $100-200 USD. As the amount of capital is quite low, the trader sharply increases risk with the hope of big profits, only to suffer negative consequences. Traders who take a more serious approach from the start and top up with a more acceptable deposit trade more cautiously and responsibly, soberly assessing the risks of losing their capital and observing the rules of money management and ultimately are more likely to succeed.
Returning to the rating of brokers with the highest percentage of successful customers, for the top 5 companies, 4 have established minimum deposit limits of $10,000.
So are brokers actually interested in helping their clients make money?
The answer is an unequivocal yes. Through analysis of brokerage companies, it turns out that they have two main income sources, which can be found in the quarterly financial statements they are required to publish if they are publicly traded on the US stock exchange.
- The first is the commissions that traders pay for to open and close transactions, which sometimes are included in the spread and not additionally added on.
- The second is the profit that the broker gets from the investment products, where its profit depends on the total portfolio income. It is logical that the more successful traders’ a company has, the more turnover and, accordingly, the more the broker’s income. This is what drives them to improve their analytical tools and trading conditions.
A prime example of how a broker succeeds when its clients do is AMarkets. Following the results of the first two-quarters of 2017, the company took second in the average number of successful clients amongst all brokers. This number started to rise in Q4 2014 when the number of profitable accounts increased from 17 to 42%. This happened largely due to factors listed previously. In particular, a system was established which placed every new client with a personal manager who had already displayed independent profitable experiences trading and contributed to competitive trading terms – spreads from 0.2 points on ECN accounts, accounts without writing off swaps and instant execution of orders. AMarkets has implemented its own knowledge base over the years, from its Cayman traders’ mood indicator, automated trade analyzer to individual trading plans, all have helped ensure rapid growth in the number of profitable accounts. However, it is necessary to discuss the whole set of decisions and not just individual measures.
So what should you take from all this information? First, it is unprofitable for a broker to have traders who incur losses since this directly affects trade turnover and commission income. It should also be understood that there will always be some difference in brokerage companies’ average amount of successful traders. Which is influenced by the broker’s approach to working with traders and creating the necessary conditions for increasing trading efficiency.
You can check out all of the above-mentioned unique developments on AMarkets official website, which are available to the company’s clients absolutely free of charge, making it an essential reason for registering and having at your disposal these useful and effective tools that thousands of traders around the world have experienced.