I’ve dealt with the good ones and the bad ones.
In a nutshell, there are basically 3 types of Forex brokers:
1. Regulated & Trusted (dealing desk brokers)
Pros: Governing body oversight and accountability
Cons: Limited leverage, too many trading restrictions to win for maximum gains, and no ability to fund with Crypto (Bitcoin)
2. Unregulated & Trusted (ECN or STP Brokers)
Pros: Higher leverage, no trading restrictions, the ability to fund with Crypto, and no sharing of your account information with any third-party agency (very important if you value your privacy)
Cons: At each investor or trader’s risk and discretion based on other’s experiences, due diligence, and results only since there’s governing/regulatory protection.
3. Unregulated & Unknown/Untrusted Brokers
No explanation needed here. We just stay away!
Here are some additional insights based on 15+ years of Forex industry experience:
When the Dodd Frank Act was passed in 2010, it fundamentally changed the game (in a negative way) for all retail Forex traders in the U.S. Done under the guise of ‘protecting the little guy’, this heavy-handed regulation pretty much killed the potential for those of us in the U.S. to make bigger profits.
Not only were U.S. brokers forced to reduce leverage amounts from 1:200 down to 1:50, they eliminated the ability for us to hedge (take both sides of a trade to mitigate risk).
All U.S.-based Forex brokers are regulated by the National Futures Association (NFA) and must comply with their requirements. However, unlike trading U.S. stocks, we’re not required to use regulated brokers in a decentralized market like Forex.
Unregulated Forex brokers offer traders more freedom and flexibility than their regulated counterparts. Regulation is always a double-edged sword because you gain some protection as an investor/trader, but you lose some significant advantages.
Using regulated brokers is not going to yield you the best results with my Hedgehog bot for these simple reasons:
- No hedging allowed (the bot requires hedging capabilities).
- FIFO Restrictions (First in, First Out): The bot doesn’t follow any FIFO restrictions.
- Leverage (50:1).
Fortunately, there are several reputable Non-U.S. Forex brokers that are willing to accept U.S. clients without any restrictions. LQDFX is one of them. LQDFX is registered in the Marshall Islands (registration number: MH96960). They’re technically unregulated, but trusted.
They’re very strict when it comes to global AML (Anti-Money Laundering) laws and KYC (Know Your Customer) banking rules. They keep client funds in segregated bank accounts that are held with tier-one EU banking institutions including Barclays, HSBC, and Deutsche bank. Holding funds in segregated accounts means these funds can’t be used for any other reason other than trading activities initiated by us.
I’ve personally had accounts with LQDFX for 4 years and have never had a problem with deposits or withdrawals (and I’ve made several large 5-figure withdrawals).
I have over 100 clients that are using LQDFX and none of them (that I’m aware of) have had any withdrawal issues whatsoever.
LQDFX is one of the few offshore brokers to offer live phone support, which is super helpful if you ever need to talk to a real person about your account(s).
That being said, we’re conditioned to believe that “regulated” brokers are better than the non-regulated ones. Many people naïvely think that their money is somehow safe because it is with a regulated broker. But the truth is, even the most well-researched regulated brokers can and do fail.
Just ask anyone who was a client of Lehman Brothers, or MF Global, another one of the largest brokers in the U.S. who filed for bankruptcy just days after posting a $192 million quarterly loss and disclosing $6.3 billion in bets on European government bonds.
Or PFG Best, which was shut down in 2011 after the owner was charged with embezzlement. Thousands of wealthy individual and institutional investors had all the due diligence in the world, yet they still lost hundreds of millions of dollars when these brokers collapsed.
Here are some facts about regulated Forex brokers:
- FXCM got sued by CFTC for falsifying their B-Book model
- MF Global redirected their clients funds to buy Euro bonds and went bust
- A large UK broker (Beaufort Securities) got busted for money laundering
- Average client loss ratio at so called “regulated” brokers is 77% based on ESMA (European Securities And Markets Authority) disclosures
- Latest ESMA regulations require all “regulated” brokers to get a so-called “B-Book” license if they want to keep offering services to retail clients.
“B-Book” refers to brokers that will take the other side of their clients’ trades and trade against them – they have an incentive for you to lose!
So… if there is a 77% probability of retail clients making a loss and “regulated” brokers are operating with the right to “b-book” you, do you still think that “regulated” brokers are better? I don’t!
The point is, no one can guarantee that your money is safe any more than the U.S. government could guarantee Lehman Brothers or MF Global was “safe”.
The best policy is to focus on getting back your seed capital as soon as possible so you’re playing with the “house” money. Whenever I fund a new account, I withdraw my profits weekly until I’ve recovered my entire principal, no exceptions.
Once you have all your principal back in your pocket, you can compound for as long as you want without risking a dime of your own money anymore.
One last thing on the topic of Forex brokers…
When researching brokers, the most important thing to look out for is a broker’s reputation and reviews online. Because no matter whether a particular broker is regulated or not, if they’re trusted among traders, they’re way more likely to focus on maintaining their positive business image for long-term success.
However, let me warn you about something. When you’re doing your own due diligence on LQDFX, or any other Forex broker for that matter, you’ll undoubtedly stumble across broker review sites and articles with sensationalized titles like: “Is [XYZ Broker] a Scam or Legit Broker?”
In my experience, 9 out of 10 of these so-called “reviews” are nothing more than a bait and switch used by affiliate marketers to drive tons of free traffic to other offers they get paid on.
These “click bait” reviews are manipulative and borderline on being unethical because they use negative marketing tactics to attract and influence newbies to their offers, while causing distrust and uncertainty about legit brokers that, in reality, are rock solid.
Myself and many other professional traders I know wouldn’t use and recommend LQDFX if there was even a hint of any serious problems with deposits, withdrawals or anything else that would affect our overall trading experience.
Very good article, Brad! What you are saying makes a lot of sense.