How financially secure are your Forex Funds?

My first thing to consider when looking for a broker is its financial footing. I thought I would share some information about the financial state of the main forex brokers in the market.

I have sourced the data to help people make a sensible decision. No good making money if some swindler makes off with it!

The following firms are not regulated and as a customer you have no rights in a dispute or if the firm gets into trouble and goes bankrupt:

Unregulated Brokers
Finex
Tradex Swiss AG
ACM
WestCapFX
MIG
DukasCopy
GFX Group (Forex.CH)
Crown Forex
GCI
Northfinance
FXDD


Ok. Now we have wiped out all the extreme nasty brokers off the list. Here is a ranking of the net value of some of the leading retail forex players.

These are CFTC Net Capital figures from December 2007. The US Government recently increased capital requirements of forex brokers to $5 million.

The US Government is close to passing a law which would require firms to have a minimum of $20 million to stay in business. Should it pass the industry may only have about a dozen firms left.

The Big Six (Above $20 Million)

1. Oanda $156 million
2. RJ O'Brien $92 million
3. FXCM $75 million
4. GFT $69 million
5. Gain Capital $50 million
6. I Trade FX $34 million

Below $20 Million

7. PFG $19.7 million
8. Interbank FX $19.2 million
9. FX Solutions $17.9 million
10. IFX $15.5 million
11. CMS $13.8 million
12. GFS Futures & Forex $10.2 million
13. CMC $8.7 million
14. Alpari $8 million
15. Ikon $7.9 million
16. Easy Forex $7.6 million
17. Friedberg Mercantile $7.5 million
18. Forex Club $7.4 million
19. MB Trading $7 million
20. ODL $6.9 million
21. Hotspot $6.1 million
22. Money Garden $6 million
23. Bacera $5.4 million
24. Advanced Markets $5.2 million

More figures can be found here: http://www.brokerontop.com/ Read more!

The Risk of Risk

I have recently become aware of why only risking 2-5% of total account balance on any one trade is vital. Rather then trying to explain the theories behind having controlled risk on trades I have linked readers with a small excel sheet to show the results graphically. The results show that using a risk ratio which is too high will almost always lead to the account being bankrupted. Download it and run it for yourself.



Matt Bowen over at mptrader.com has written a great little excel sheet the shows why having appropriate risk controls are important. Download it here and have a play with it: http://www.mtptrader.com/MoneyExpert.xls

If the excel sheet seems a bit confusing and you can't figure out how to use it; this video should explain it easily: http://www.mtptrader.com/videos/MoneyExpert.html

After playing with the risk variable it should be noticeable that the rate of account bankruptcy dramatically increases above 5%. At 10% risk exposure per trade it is more likely then not you will blow your account, unless returning a good amount of timely winning trades.

Why is this the case?

Effectively by having a high risk ratio the trader is trading too large a quantity of currency. That effectively is making the trader 'under capitalised' for the position he is taking. The problem with under capitalisation? - it reduces the Trader to that of a gambler and the gambler's ruin problem (http://en.wikipedia.org/wiki/Gambler's_Ruin) whereby the participent in the game with the most money (the market) send the other player (the trader) broke.

From these two observations I have strictly limited myself to exposure of 2% on any given trade. I have begun to develop a website with calculations on how many lots to purchase on a trade. Until I finish that and post it up for others to share, I suggest you check out this website to help you calculate how many lots you should purchase given the currency, account balance and stop loss level http://www.forexcalc.com/ . I have used this for the basis of my calculations for position size. Read more!