Whenever a broker goes down, it is usually a shock and many times traders don’t get their money back. This happens every so often.
On this round of shocks, FXCM has secured funding, so it looks like they will be OK for now. Alpari was supposed to be insolvent, but they are now looking for a buyer. If you want to see real-time broker status reports related to the Swiss Franc event, check out this page.
This can happen to regulated brokers who are supposedly well capitalized. The aren’t necessarily shady offshore brokers. Even if you are dealing with the most reputable broker, things can still go wrong.
Many traders concentrate on trading risk (by using stop losses) and psychological risk (by meditating), but they completely ignore broker risk.
I also talked to Kim about this topic once. She had a few friends who lost accounts when Refco went down and she was adamant about implementing the tips below.
So in this post, I’m going to give you three simple ways that you can hedge your broker risk. Hopefully it helps you minimize your losses, in the unfortunate event that your broker is one that goes down next time.
If you have broker questions, you should consult with someone like Justin, who knows about a wide range of brokers.
1. Don’t Keep All Your Risk Capital In Your Trading Account
Leave a portion of what you need in your trading account and have the rest in an online bank that pays a little bit of interest or in a checking account at a traditional bank. This is your holding account.
Only keep what you absolutely need in your trading account. You can still take trades based on the risk that you are taking on your cumulative balance, even if your trading account itself is relatively small. The great thing about Forex is that you can use leverage, so you don’t have to have a lot of money in your trading account.
Broker risk can result in a 100% loss, so plan accordingly.
2. Clear Out Trading Profits Monthly
If you are a consistent trader, then profits will start to add up. It can be easy to just leave your profits in the account if you don’t need them.
Be disciplined and withdraw your profits each and every month. Broker failures are often sudden and unexpected. Don’t get caught with your pants down.
3. Deal With Multiple Brokers
Finally, don’t only trade with one broker. Have multiple accounts open at the same time, even if you only have a small amount of money at the two secondary brokers. Having the ability to transfer money back and forth between your holding account and your trading accounts can save you in an emergency. Opening a new account can take some time and you don’t want to be stuck without the ability to trade.
This is also useful when something less than catastrophic happens. One broker could be having temporary technical problems or you simply may need to hedge your current position in another account. Having multiple accounts at different brokers helps you prepare for a multitude of scenarios that don’t involve a broker going out of business.
I was happy to hear that Oanda make it through this incident fine. That is why they are my favorite broker. But who knows, something could happen to them in the future too. So even if you are trading with them, be sure to have a backup.
Trading is an unpredictable business, but that is also where profit opportunities lie. If you want something super safe, you might as well leave your money in an insured bank. Embrace the risk and be prepared for as many of those risks as possible.
So take a few minutes right now and start researching broker alternatives. If there was anything good about the Swiss Franc collapse was that it showed us the brokers that are doing well and exposed the weak brokers.