1. Brokers are Salespeople. Just like most other salespeople, they work on commissions. The more trades you make, the more commissions they earn. However, don't mistake this with brokers not looking out for your best interest. Almost every broker I have known honestly wants to see their clients make money and continue their relationship for a long time. Sadly, some brokers just don't have the knowledge or experience to be successful. They may be trying their best, but they just don't have what it takes to make money trading futures and options. The warning signs should occur when your broker changes his mind too often for your taste and doesn't seem to have an organized trading plan. In order to rack up a lot of commissions, unscrupulous brokers will often turn to day-trading the S & P or some other volatile markets. Making money day trading is not easy, especially if you are paying $100+ per round turn. If your broker suggests day trading, make sure you can see some logic to their plan. Some brokers once made a living on the trading floors so they are very good at day trading and others may just be using this strategy to generate a lot of commissions.
2. Beware of problem prone firms and brokers. You may be looking for trouble if you are trading with a firm that has a plethora of complaints and fines by the NFA and CFTC(regulatory bodies of the industry). You owe it to yourself to investigate the firm and broker you are using, especially before you open the account. If the firm and broker have a clean record and have been licensed for a number of years, chances are they are looking out for your best interest. However, if your broker has a number of complaints and fines you may want to be careful. Actually, some brokers are just lucky they haven't had any complaints, while others are just unfortunate enough to have run into a client that wanted to make their life hell because he lost two grand. South Florida tends to be a hot spot for problem firms, but there also happens to be a lot of brokerage firms in this area and also some very credible ones. Also, check the previous firms at which your broker worked. Some firms will stay open for a couple years and blow through a thousand clients. When the complaints from clients peak the interest of the NFA and the house of cards comes tumbling down, they just open another firm under a different name and start the process over.
3. Beware of extremely high commissions. If you are paying $200+ per round turn, chances are you could probaly get a better deal somewhere else. Usually the firms that charge these high commissions tend to do a lot of TV advertising. In order to pay for these TV spots, they charge high commissions. Here's how it normally works: They open an account fo $10,000 and buy 10 options (usually in soybeans, unleaded gas or heating oil) and the broker makes about $70 per contract or $700. If the position becomes profitable, they will probaly turn the positions into spreads and tack on 10 more contract for 10 more commissions. The client has just paid over $4,000 in commissions and fees in a short period of time. If the trade goes bad and the client loses all their money, the firm has made a nice chunk of change and the broker just made about $1,400 for opening one account. The broker may feel bad, but looking in his wallet tends to take some of the pain away.
If you don't mind paying these high commissions and your broker is consistently making you money, that is perfectly fine. These days it's hard to find good service and paying a premium might be one way to get it. Most full-service brokers will charge around $50-70. It also depends on the frequency of your trading. If you're day trading you should probaly pay less. If you're holding your positions for several months, charging over $100 may be very reasonable. Don't forget that your brokerage firm has to pay for rent, phones, employees, research and everything else you need to run a business and they would like to show a profit on the bottom line.
4. Advertisement and sales pitches that seem too good to be true. A very aggressive sales pitch is probaly the biggest caution flag that if waving right in front of your eyes. Some of these brokers will call potential clients everyday and claim they are excellent day traders and will make you a pile of money everyday. Well, how could they do this if they are calling you everyday and probaly a number of other potential suckers? When are they trading and how are they watching the markets?
Have you seen the commercials where people are at a party talking about how simple it is to double or triple your money trading commodities? Hopefully, you will realize how big of a joke it is. It is not easy to make money trading commodities and no reputable firm would partake in this garbage. Also, beware of the broker who tells you to start dreaming about the new car or boat you'll be able to buy after you open an account and place your money into his "sure thing" trade. Trading the seasonal markets like heating oil, unleaded gas and soybeans purely because it's that time of the year is also a good reason to be cautious.
5. Does the firm publish research on the markets? Most of the larger firms have several analysts who release regular research on the markets. Firms like Prudential and Merril Lynch have very good research if you can get your hands on it. If your broker sends you a piece of information on a market you should read it carefully to see how much hype is in the report. If it is very one sided (bullish or bearish) and it points to unimaginable returns, you may want to be careful. However, the CFTC and NFA are cracking down on this. Firms are required to keep on file any written information that is sent to clients or potential clients.
6. Realize that you can lose money trading futures options. Many new traders tend to ignore the fact that most people lose money when they trade futures and options. The potential certainly exists to make incredible profits, however, more risk usually must be taken in order to achieve these greater profits. So, the more risk you take, the greater chance you have to lose your money. I always told my clients to only risk capital for trading these markets and if they can't afford to lose the money, they should try a different game. Your broker should tell you the same thing even if he is one of the best in the business. Even the best brokers have times when things just aren't going their way.
7. Who's to blame if you lose money? Probaly you! You should have known the risks before you opened your account. Most brokers will do their best to make you money, but the fact is that people are going to lose money trading these markets. If the markets just did something crazy or you had a string of bad trades, there is probaly no need to blame your broker. You probaly just need to accept the loss and move on. (In my experience, I have found that many people see their loss as a failure and have to blame someone other than themselves-their broker). However, if you think your broker was lying to you or did something you told him not to do, then you may want to take another route. First discuss it with the broker to resolve the issue and if that dosen't work then talk with the branch manager. If all that fails, then you may want to talk with the NFA.
8. How do you know if your broker can return a profit on your money? You Don't! Most brokers will tell you they can make you money, but there is no guarantee. You have to use your common sense and do a little research on your broker. You can do this by asking him questions about his trading philosophy and how he has done in the past with other clients. How many other clients does he have? How long has he been in the business? Where does he get his research? Ask questions to find out how much he knows about the markets. Some brokers might actually think they are on a sure trade such as heating oil making a profit every year, because it gets cold every winter. Well, this might be his first year as a broker and he hasen't lived through the actual results that this trade is not an automatic profit.
9. What should you expect from your broker? You should expect your broker to look out for your best interest. Aside from the normal ethical issues, it is up to the client to tell the broker what he wants to accomplish and what he expects. Setting unrealistic expectations of 100% returns every month should cause the broker to send your money back. I've had to do that on a couple of occasions. Some people just set unrealistic expectations and cry when they aren't met. That's not fair to the broker. Before you make that firts trade with your broker, you should feel that you both have the same goals. Thses may include trading futures conmtracts and risking no more than $500 per trade or maybe just trading options on several different markets to diversify.
Being a broker can be a very stressful job. There are times when the market beats you silly and you have to tell your clients the bad news. There are times when uncontrollable bad things just happen or you experience drawdowns and clients just don't understand. Some clients expect to have only good times and don't realize there will be difficult times in trading commodities. So, realize that you and your broker are a team and work together. The reality is that your broker probaly won't call you as much if you're constantly causing him grief. Without being a pushover, you should probaly let him know that you understand there will be losing trades.
10. Should you trade on your own? If you're just starting , you may be in for more than you bargained for. Most people will tell you trading commodities and futures is much more difficult than trading stocks. The main reason is due to the huge leverage that futures have. A small move in the price can mean big losses or big gains. Most people will recommend using a broker to learn about the markets for a period of time and then if you feel comfortable you may want to open another account on your own. However, if you feel you don't need your broker for information anymore, you should tell him you would like discount commissions. The bottom line is that a knowledgeable broker is an excellent source of information and he may keep you from making costly mistakes that most new traders make. So, paying a little more for full service commissions might save you a lot in the long run.