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Diversification of funds between brokers

created Paweł MosionekJanuary 31 2017

Diversification of funds - an issue that is constantly present in the field of investment. It is usually associated with the concept of investment risk, where the action is to trade on several different instruments at the same time, and the effect of reducing the possibility of severe loss (earning on one instrument is to minimize or compensate for the loss on the other). Unfortunately, the side effect of diversification is that it also reduces potential gains. The financial industry is fond of the saying "Do not put all eggs in one trash ”while Warren Buffet believes that diversification is for those who don't know what to do. So, is it worth it, isn't it worth it? Perhaps Warren, who suffers from excess cash, can confidently take a different approach, but a sane trader who prefers a safety-related approach to risk should definitely choose to ungroup his investments.

However, let's skip the question of what and how much to invest in, so that it is "good" and let's enter the subject Forex brokers. The main question is:

Is it worth having several FX accounts with different brokers and sharing the capital between them? In my opinion - absolutely YES.

Why? Let me explain.

"Houston we have a problem"

Bankruptcy of brokers, as well as companies from every industry, this is not a novelty, nor a secret. They have happened in the past and will continue to happen. No broker can be proud of the emerging financial problems, and the symptoms are sometimes difficult to diagnose. When withdrawals are held, it is probably too late. The bankruptcy of our broker is of course the worst case scenario. I do not wish this to anyone, but this is a great example to show that diversifying resources makes sense. After all, it's better to lose half of your deposit than all, and the risk that two unrelated brokers will suddenly collapse is extremely low.

There is a certain method for this, which is to only deposit part of the funds to the broker and leave the rest in the bank account, while we treat it in aggregate (30% deposited, 70% in the account and trading is based on the entire 100%). Unfortunately, in some strategies this will not fulfill its role or will make it difficult for us to trade from a psychological point of view.

Now less pessimistic. Let us assume, therefore, that we choose only regulated institutions that are covered by a guarantee fund, have a stable financial situation or are so attractive to the market that in case of financial problems, another company will take over our broker along with deposits. In other words, our deposit is unthreatened. So why diversify funds between brokers?

First of all, failures ...

They can happen when you least expect it. Both from the broker and our side. In the first case, when we have an open position with defined levels SL and TP there are no major worries. The broker will execute the order normally or after the fact and will take these levels into account. In a situation where we have an open position, but without SL and TP, the matter becomes a bit more complicated, because when submitting a complaint, we must somehow convince the broker where we wanted to close the position - maybe it will work, or maybe not. Most often, the regulations say that we should call the Trading Desk and submit a closing order. But wait ... The market is running like crazy, the line is busy, because a lot of customers are calling, we don't remember our phone password and the broker is from the UK, and we used to go to Russian at school. Does that mean "game over"? Not necessarily.


READ NECESSARY: Diversification and volatility of currency pairs


The second platform and the opening of a second opposite transaction that will secure our profit completely deprives us of this risk - quickly and efficiently. Of course, we can be angry with the broker for failing, but take my word for it - sooner or later everyone will screw up, and we have to be able to deal with it.

… And breakdowns

Now the second case - the failure is on our side. We have an open position, nothing is happening in the market waiting for Non-Farm Payrolls. So it's time to take care of your computer's security and install a new anti-virus. Computer restart, 5 minutes to publish data and ... The platform does not want to connect :-). Some ports have been blocked, including the one used by our MT4. At this point, while reading this, you immediately thought that you just need to quickly disable the anti-virus. Sure, just like watching the historical chart, we know where we want to buy and where to sell :-). In practice, the first suspicions fall on the broker and we do not even associate that a new acquisition that cares about security can sabotage our investment account. If we are lucky, we will quickly log into the Web platform - but what if our broker does not offer it? The complaint will not be considered ... And the second broker comes to the rescue again.

A less dangerous, but equally annoying scenario is a situation where the same thing happens, but we do not have an open position, but "only" a whole plan prepared for it. If you have one account, you lose the setup. Having at least two, there is a chance that we will continue to use it, even with a smaller volume.

Periodic changes to the offer

It also happens that as a result of certain market events (or expectations regarding them), the broker decides to introduce periodic changes in the offer, which will temporarily prevent us from freely trading our favorite instrument (or all). I mean, for example, reducing leverage, disabling the instrument from trading, raising spreads, setting stop-limit levels, etc. etc. If we have been satisfied with the broker so far, it does not make sense to say goodbye to him completely due to, e.g. The procedure for opening a new account with a transfer in the case of Polish brokerage houses takes from 3 to 7 business days. With foreign brokers, from 1 day to 5 days - this is our forced vacation, i.e. a loss in a situation where we do not have at least a second account ready to trade.

How to approach the diversification of funds

Experienced traders most often choose to keep one main account, where they trade on a daily basis. They keep the vast majority of funds there (70-90%). Additionally, they open a side account with a relative "penny" (10-30%) for emergency actions. Sometimes there are more of these accounts, but they are not credited with equally large amounts or are completely empty. It also happens that they differentiate brokers depending on the strategies used (dividing the deposit evenly), and at the same time they are fully prepared for a possible continuation of trading from the second account to the first.


READ ALSO: Diversification of investments in the Forex market


But what if we are novice investors and do not have enough capital to divide it reasonably? In this case, despite everything, it is worth having a second real account, which will wait only for the payment to be credited. With the express transaction options, the entire transfer should not take more than several dozen minutes (e.g. via Skrill or DotPay). Having an active account in stock eliminates the time needed to set up and activate an account. Going through dozens of offers again and selecting the right optional broker is time wasted again.

Which broker to choose for backup

There are several key factors to pay attention to:

  1. If you plan to keep your deposited funds with him, make sure he does not charge for inactivity. In the case of a zero account balance, you do not need to worry about it - the broker will not create an overdraft.
  2. The backup broker can not be associated with the main broker. In the case of bankruptcy, one company may bring a second.
  3. The second broker should have a similar offer to the first, especially in terms of instruments and costs. Weekly scalping with, for example, twice as high fees can be felt.
  4.  The advantage is the possibility of quick deposits / withdrawals in both companies. Skrill transactions, cards or express transfers can be helpful, especially if you do not plan to hold funds on two accounts at the same time.
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About the Author
Paweł Mosionek
An active trader on the Forex market since 2006. Editor of the Forex Nawigator portal and editor-in-chief and co-creator of the ForexClub.pl website. Speaker at the "Focus on Forex" conference at the Warsaw School of Economics, "NetVision" at the Gdańsk University of Technology and "Financial Intelligence" at the University of Gdańsk. Twice winner of "Junior Trader" - investment game for students organized by DM XTB. Addicted to travel, motorbikes and parachuting.