How To Choose A Forex Trading Firm To Act As Your Broker
An account with a forex trading firm is something that you must have when you are beginning currency trading. Every trader needs to have a way into the market and your brokerage company will provide that access. Often, they will also provide software so that you can control your trades online.
For those wishing to take substantially higher risks, a brokerage will also provide leverage so that an individual can trade on margins and control much larger sums than may be available. It must be stressed that whilst borrowing - or leverage - can enhance gains substantially, it will also increase losses. This is a high-risk strategy that needs to be fully thought through before commencing. It is not considered to be a sound strategy for a beginner.
There are several things to take into account when choosing a forex trading broker. Some of the important elements to consider when looking for a brokerage include:
The forex market operates worldwide and there is currently no global regulatory body. This means that some brokers are unregulated. The situation that you need to assess as an individual relates to the geographic location in which you live.
American brokers should be registered with the Commodity Futures Trading Commission (CTFC) and/or the National Futures Association (NFA). Other countries have other associations.
2. Services provided
Foreign exchange is a 24 hour, five days a week, global marketplace. It is important that your broker's trading software is on and live (online) all of this time (most are). You may also want to check if the brokerage company has 24 hour customer support - Monday through Friday.
Check that they cover all of the major currency pairs, that is USD against EUR, JPY, GBP, CHF, CAD, AUD. If you plan to have a wide range of potential for trades, you will want them to also offer at least some cross pairs of the major currencies. This means two of the other currencies not including the US dollar.
All foreign exchange trading firms will offer charts and technical analysis. It is important that these meet your needs. You will also want to check whether they offer instant execution of orders at the displayed price without slippage.
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Forex trading firms generally do not charge a fee or commission, making money from the spread instead. This means that they profit from the difference between the bid and ask prices of a currency pair. The spread is usually in the range of 1-3 pips, depending on the broker and the currency pair, but it can vary at times of volatility. Obviously, this potential for higher dealing spreads at times of high volatility or low liquidity are the same as would be experienced in any stock market, especially when dealing in the shares of smaller companies.
The size of the spread can make a big difference to whether you make profits in the long term. If you know which pairs you are likely to trade most often, the spread on those pairs will be more important to you than others.
4. Minimum account and lot size
The minimum investment will be an important factor to an individual. Some foreign exchange brokers only offer standard accounts where the minimum investment could be US$10,000 or more. Mini forex trading accounts have a much lower minimum account balance, often as low as US$250-$1,000. These are better for almost all beginners. However, it can be argued - very well - that a newcomer that is only able to afford to trade with US$250 - for example - probably should be looking for safer and lower risk markets than foreign exchange.
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Leverage - otherwise known as borrowed money - is the factor that determines how much you can control with the money that is in your account. You can often control a lot that is up to 100 times the money that you actually put in, with your broker covering the rest. Some brokers offer even higher leverage but be aware that the higher the leverage, the more you are risking on each trade.
You can also look at a prospective broker's rollover percentages and other policies. We hope that these factors help you to select a forex trading firm or brokerage.
If you would like to read more about forex, please follow these links:
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