Tuesday, May 12, 2009

Should You Have More Than One Forex Dealer?

By John Jagerson.

I was recently involved in an interesting conversation about forex dealers and there was discussion and debate as to whether certain companies were financially sound. I think that is certainly a great question to ask, because when financial institutions run into trouble, as many are now, the account holders are the last group to recoup their money, if they ever do.

When it comes to your forex trading account, there are some great solutions to deal with this potential uncertainty.

Don't miss reading: 10 Rules for Surviving This Bear Market

Dealer Diversification

I am sure all of us have either been affected directly, or through someone we know, by a dealer or broker's solvency problem. Any of us that have been in the forex business for more than a few years can remember Refco, the largest futures dealer in the market, going out of business in a period of just a few weeks.

To deal with these potential risks and to optimize their own performance, I think traders should consider dealer diversification.

Risk Mitigation

Just like diversifying across asset classes and strategies, having more than one account is a great way to minimize your exposure to the risk of a dealer problem. A collapse or closure by a regulator agency can happen quickly, leaving all your money exposed or in the hands of someone you don't even really know.

Let your dealer know they don't have all the money you could deposit to keep them on their toes and

Strategy Optimization

Some of us are long-term traders, others are carry traders, and a lot of us are short-term traders. Each dealer competes on their relative advantages, and I haven't seen a one-size-fits-all solution.

A dealer that pays great rollover rates may have wider spreads. They may be great for long-term traders, but terrible for short-term traders and scalpers. Pick the dealer that fits your strategy. Most of us probably use a blend of strategies and should pick a dealer for that part of our account that offers the best advantages.

Product Breadth

No dealer is created equal. Some may offer very tight spreads but don't have the breadth of crosses you may want for other strategies. One important differentiator right now is options. If you want to trade options but don't want to abandon the dealer you have currently, what can you do? Work with both of them.

If you have ever been torn between two attractive dealers but felt like it may be difficult to manage your accounts, I think you may be surprised how useful a good spreadsheet can be. Use all the tools that you have available and you may be shocked about how much the variety keeps your trading creativity flowing.

Good investing, Kingsley.

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