Forex

Since 2004, I have tested real money trading accounts with 12 different forex brokers. They were: fxcm.com, forex.com, finifx.com, fxdd.com, atcbrokers.com, interbankfx.com, ac-markets.com, oanda.com, admd.com, hotspotfx.com, fxsol.com, mbtrading.com. These 12 do not include forex brokers that I tested through demo practice accounts.

The purpose of this article is not to talk crap about any of these forex brokers, even though some of them deserve it. The purpose of this article is not to praise any of these forex brokers either. The purpose of this article is to share with you a 5-step system that you will be able to use to evaluate any forex broker.
Bids & Offers Example.
Let’s say you are trading the GBP/USD pair. Let’s say you want to buy GBP/USD. Let’s say you login to your forex broker account, and you see that the price is 1.9950/1.9953.

That means that somebody out there is willing to buy GBP/USD for 1.9950, and somebody else out there is willing to sell GBP/USD for 1.9953. So if you wanted to buy GBP/USD, you would have to pay 1.9953 for it. If you wanted to sell it, you would have to pay 1.9950.

Let’s say you want to buy GBP/USD, and you do not want to pay 1.9953 for it, but you would be willing to pay 1.9952 for it. So you go ahead and you submit a limit order to your broker to buy GBP/USD at 1.9952.

If that forex broker has natural trading environment, you should immediately see the price on GBP/USD change from 1.9950/1.9953 to 1.9952/1.9953. Why? Because someone else was bidding 1.9950 for GBP/USD and now you are bidding 1.9952.

Your bid of 1.9952 is higher than 1.9950, so in natural trading environment, that should immediately be reflected in the price, and the spread must shrink.
ZERO Spread Phenomenon
he ZERO spread phenomenon is a very interesting one and is only possible in non-centralized markets such as forex. Let’s discover how ZERO spread is possible in forex market.

In my opinion the goal of every honest forex broker should be to provide traders the best possible price available. The way they can do that is by choosing the best possible price from several different banks and from every trader on their platform.

So let’s say Bank A has price of GBP/USD as 1.9950/1.9952, and Bank B has price of GBP/USD as 1.9948/1.9950.

So what your broker does is it takes the lowest bid price from Bank A, which is 1.9950, and it takes the lowest offer price from Bank B, which is also 1.9950. Because bid is from one bank, and offer is from another bank, they can stay on your broker with ZERO spread without executing against one another.
Getting screwed on Stop/Losses.
Let’s now discover why the stop/losses will get hit less often if you use a broker with natural trading environment.

Well…first of all, if the environment of the broker is not natural, it means that they constantly need to worry about the accuracy of their price.

Many forex traders trade during news, and when price gets very volatile during news, the forex broker with not-natural environment becomes afraid that the traders will take advantage of their price feed and will get filled on much better price than the real market price.

Because of that, the broker is forced to artificially raise their spread during news. It happens quite often that the spread is raised from 2 pips to 30 pips and sometimes more.

So if your stop/loss is 20 pips away, and the spread just got raised, even for 1 second, you will get stopped out on a price that you would never be stopped out on if you traded with broker that provides natural trading environment.

Every day is filled with many different news announcements, so if you do not have a broker with natural trading environment, you can get screwed on spread and stops very often.