What is Cash Back Forex?
If you’re wondering “What is cash back Forex?” then you’ve come to the right place. Essentially, when you open a trading account with a broker that offers you “cash back”, they’re giving you a rebate on the spread that you pay on every single one of your trades. For example, if you’ve traded 100 lots on the EUR/USD in the past month, and the rebate is 0.5 pips per lot, you’ll get $500 credited back to your account.
You may be a bit skeptical about why a broker would literally give you money to trade with them. Rest assured that this is not a scam or anything shady, it’s just how some Forex brokers operate. This article will explain how it all works.
How Does A Broker Offer Cash Back For Your Trades?
To fully understand why some Forex brokers offer “cash back” or rebates, you need to know that there are essentially two different kinds of brokers in operation. First of all, there are full service Forex brokers that do everything from taking your orders, processing them into the market and handling your account proper. Then, there are “introducing brokers”, who have a direct relationship with clients, but delegates the order execution to the full service brokers.
Full service brokers earn their revenues from the bid/ask spread on the trades that you place through them, so obviously the more clients they have trading with them, the more money they will make. That’s why they partner with introducing brokers, who on their own don’t have the capabilities of taking orders and processing them to market, but what they do have is the ability to attract and take care of clients. In such a relationship, the full service broker will pay the introducing broker a commission based on the number of trades their referred clients make, which is where the introducing broker earns their revenues.
Somewhere along the line, a smart introducing broker decided that it would be a good idea to take part of the commission they make and pass on that savings to their customer to encourage more people to open an account with them instead of their competition. Thus, “FOREX BROKERS INDIA” was born.
Factors To Consider Before You Open A “Cash Back Forex” Account
While the ability to earn a rebate from every trade that you make may sound very attractive, there are a few thing that you should consider before you take up a “cash back” introducing broker’s offer. First of all, you need to consider if you’re really getting the best deal on the spread of the currency you are trading. For example, if the spread that you are paying on the EUR/USD through the “cash back” broker is 2 pips, and they’re offering you a 0.5 pip rebate on each lot that you trade, then you’re essentially paying a 1.5 pip spread. If you can find a Forex broker that offers you a 1 pip spread, then you’re better off going with the broker that’s offering you the cheaper spread than the “cash back” offer.
Even if the “cash back” offer is on par with what other non-rebate giving brokers are offering, you should still do your due diligence on the broker. Typically, when you’re considering any broker, you should pick one that has straight through processing and direct market access. Otherwise, they may be taking the other side of your trades and profiting from your losses. Do read up on customer reviews and check for any scams or danger signs before you sign up for any “cash back” offer. In short, use the offer to your advantage to get a cheaper spread, but don’t let that cloud your judgment. Do your homework just as you would if there wasn’t a “cash back” offer in place.
Now that you know “What is cash back Forex”, I hope that this will help you to make an informed decision about what the best broker for your needs is.