Without exaggeration, currency pairs can be called the most popular financial instrument. The instability of the exchange rate, combined with the high threshold of credit leverage offered by brokers, creates favorable conditions for making a profit. If you compare currency pair trading with stock market assets, the advantages are obvious:
- Higher volatility creates conditions for virtually unlimited profit potential;
- Stock brokers are ready to offer clients the credit leverage up to 1:3, and when you trade with currencies and CFD contracts, the level of financial support for intermediary companies ranges from 1:1 to 1: 1000 what depends on the broker's jurisdiction;
- Forex trading can start with $1 or even without investments, which are carried out mainly by companies in offshore jurisdictions (participation in tournaments or bonus programs).
It is not superfluous to pay attention to the fact that the daily turnover of the decentralized Forex market exceeds 5 billion US dollars. Significant by the level of capitalization industries have always attracted the attention of not only investors and ordinary people but also scammers. Thousands of dubious brokerage companies are ready to offer their services to inexperienced traders uniquely for the purpose of personal enrichment.
Many beginners, who collided with representatives of such organizations, stop trading on financial markets forever. For the same reason, some traders prefer to trade exclusively through banks, but how is justified this? After all, cooperation with such organizations conceals with a number of negative features that might have a significant influence on the financial result.
In this article we will talk in detail about the advantages and disadvantages of Forex trading through a Bank which will allow everyone to make an informed decision about the feasibility of cooperation with these formations.
Security of Forex trading via a Bank
Speaking about the safety and security of funds during trading on Forex through a Bank you should pay attention to a number of features:
Transparent business model
Commission is charged for each trading operation including withdrawals of funds
Guarantees of fund`s safety
The terms of the client regulations do not allow the broker to dispose of the client's funds without their knowledge, as well as to block the trading account without prior notice and for good reason
The conditions offered by banks for trading in a decentralized currency market differ in many ways from those that offshore companies are ready to provide. This can be explained by stricter regulation of commercial activities, but in return, users can expect to avoid non-trading risks. Let's analyze each aspect of trading conditions separately.
Opening a trading account
In most cases, opening a trading account with a Bank is only possible if you personally visit the office to sign the relevant documents, make an initial Deposit and verify it. If, for a number of reasons, personal presence in the Bank is not possible then confirmation of the potential client's identity is made via video link with a representative of the organization, and the necessary documents for opening an account will be sent to your email address. You will need to print them out, fill them out by hand and upload scans. It is also worth to say that some banks may require sending documents by registered mail.
In cooperation with offshore brokers it is possible to open a trading account and pass verification online. Registration and uploading of identity documents will not take more than 5 minutes. Then you will need to wait for the company's representative to check the documents (up to 2 business days), choose a convenient way to add funds to your account from the suggested ones, make a transaction and start trading.
Starting deposit and credit leverage
It is not difficult to start trading on a decentralized currency market in cooperation with offshore organizations. Often this may not even require a starting deposit. Such organizations periodically have a contest for traders on demo accounts with a formed real prize fund. If you manage to win a prize, in accordance with the terms of the competition, the profit will be credited to the trading account. After that you can use it in your work or output it using one of the available methods. In addition, a row of offshore companies often offer to potential clients welcome no deposit bonuses so,thanks to it, you can start working on Forex without investing personal funds. These are all small sums but this money is quite enough to assess the quality of processing trade orders.
The situation is more severe when working with banks. For example, for trading through the platforms of Swiss banks (Dukascopy Bank SA and Swissquote Bank SA) it is enough to Deposit 1000 USD or EUR what depends on the base currency of the account issued during registration. But for cooperation with Saxo Bank the trading account will need to be replenished in the amount of 10,000 USD. By the way, as for the reliability of the company and the question of the safety of funds, brokers from the United States (Nadex, InteractiveBrokers) are not inferior to banks. This is due to the rather strict measures of legislative regulation. Control over the activities of Forex brokers in the United States is carried out by the CFTC, NFA.
Attention! In accordance with regulatory requirements, the credit leverage for Forex trading via a Bank is 1:30 (MiFID directive) and not higher than 1:100 (FINMA requirements, which regulates the activities of Swiss banks).
As a comparison, during working with offshore Forex brokers the level of financial support is almost unlimited but it is difficult to call it an unambiguous advantage. After all, the higher credit leverage is, the higher the risk for each transaction is also. This is the reason for the limitations of regulatory structures.
Commissions and spreads
Commissions for processing trade orders are charged by both offshore intermediary organizations and banks. However, in the first case, such costs are integrated into the spread (the difference between the purchase/sale prices). During cooperation with banks commission costs are in a separate column in the terminal. On average, such trading expenses are identical which is not true for withdrawal fees, but we will talk about this later.
Attention! In accordance with the requirements of regulatory structures, banks providing the intermediary services in financial markets are required to withdraw all customer transactions to the interbank market. This ensures that traders receive market spreads (from 0 points on liquid currency pairs) and quotes, and also eliminates conflicts of interest.
The Deposit and withdrawal of funds
At the conclusion of the brokerage contract, the Bank Manager will suggest to issue a debit card for quick transfer of funds from the trading balance to the main account. It`s worth to refuse this offer because in this case there are no Commission costs for withdrawing funds. If the base currency of the trading account is USD or EUR, the conversion will be performed automatically at the exchange rate of the Central Bank. You should also pay attention to the limited ways to Deposit funds: through the cashier of the parent Bank or partner Bank, or through other services of the Bank.
Methods of depositing / withdrawing of funds with the cooperation with offshore brokers are provided for a variety of ways:
- Electronic payment systems (Skrill, Neteller, WebMoney, Perfect Money, Yandex Money, QIWI and others);
- VISA or MasterCard debit and credit cards;
- Cryptocurrencies (this Deposit method is recommended to abstain as in the case of unjustified blocking of accounts by the broker the trader will not be able to prove the fact of transfer of means for initiating a chargeback procedure).
Attention! Regardless of the type of intermediary organization, practice shows that funds are credited to the trading account within 1 minute after the confirming of transaction. It will take no more than 1 business day to withdraw the profit in cooperation with banks. The funds will be credited to your debit card. By Forex trading through offshore companies, the trader will need to fill out their own tax returns to avoid trouble with the tax service. Moreover, it may take up to 5 business days to withdraw funds to a Bank card in this case. Funds are transferred to the balance of e-wallets more quickly then described above, after which they will in any case need to be withdrawn to a Bank card which is associated with additional Commission costs.
The technology of execution of orders
There is a widespread opinion on the Internet that banks use unique trading platforms and technologies for processing trade orders. Such information is outdated. Today almost all intermediary services provide clients with the opportunity to work with the usual MetaTrader terminals. As for the order execution technology, all trading orders are processed using NDD or ECN in accordance with the requirements of regulators, which implies direct withdrawal of transactions to the interbank market with no direct intervention of the broker in the flow of quotes. Thus, in this aspect, banks are not inferior to their offshore counterparts.
Conclusions: who is suitable for Bank Forex?
Based on the facts presented in this article, we can say with confidence that Forex trading through a Bank is primarily suitable for novice traders. There are a number of reasons for this:
- Quality consulting support.
- The absence of non-trading risks.
- The terms of the internal regulations have been checked by the Central Bank.
- Low spreads.
- Quick withdrawal of funds to a Bank card.
- Limited leverage significantly reduces trading risks.
- Verification in person at the Bank's office in opening an account or via video link.
The last point of advantages of Bank Forex deserves special attention. In fact, difficulties with identity verification often become an obstacle to withdrawing funds in cooperation with offshore organizations.
Despite on the mentioned advantages of Bank Forex, trading conditions of offshore brokers should not be ignored. Because of almost unlimited financial support, welcome bonuses and tournaments for traders will allow you to realize your full trading potential even without the need to top up your account. Cooperation with such organizations is more suitable for supporters of aggressive trading, as well as for traders who prefer to work with contracts for difference. It is important to note that Forex banks do not provide the opportunity to work with CFDs and other derivative financial instruments (with rare exceptions). In this case, only operations with currency pairs are available for earning.
Author: Kira Ostrovskaya for forex-ratings.comâ€‹