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Forex cash back rebates and why you should avoid them

Jan 27, 2011

There are websites offering you money back on your trades, this is a quote from one of those websites:
 
“When you open a broker account through us, we earn a commission on your trades. Your spreads do not increase! We give you cash back when you do business through us. We constantly improve our service to maintain the highest cash back rates, broker quality, and rebate volume in the industry. Please, compare our rates, service, technology, and experience to similar services! We are here to help you”
 
For a service like this to work the broker would give part of its benefits/profit to the Cash Back web site, the Cash Back web site would then give you part of this money, but the above paragraph is not true, because the only way for them to get paid by the broker is to have your account open via the Cash Back Web Site where you will be required to name them as your IB(Introducing Broker). IBs are paid by the broker increasing the Spread anywhere from a half a pip to as high as 5 pips. Some brokers may disclose exactly how much the spread increases but most have a clause on the account opening documents similar to this one from a contract with Alpari.
 
“This clause only applies when we offer our Introducing Brokers and Money Managers the capability of increasing the spreads which they in turn offer their own clients. ‘Limit’ and ‘Stop’ orders can be utilized at any time but there are certain restrictions regarding how close they can be set from the current market price. Minimum ‘Limit’ and ‘Stop’ order levels can be calculated by adding the advertised levels on our website to the additional spread charged by your IB or Money Manager”
 
For example, if you are trading GBP/USD and your spread is widened by an extra 3 pips on top of the official spread then the minimum limit/stop order level will be 3 pips (official
 
spread) + 3 pips (artificial spread widening) = 6 pips (total spread and minimum limit/stop level) from which you get about 0.7 pip back from the Cash Back Web Site.
 
For many traders a 3 pips increase in spread will cause a significant number of trades to hit the stop loss. The increase in losses will more likely offset any benefit you get from the cash back rebate.
 
Your best option is to look for an ECN broker, these brokers have very little spread and you can make much more money by increasing your take profit target by a few pips on a ECN broker than by any trade rebate you can find.

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