The Key Ingredients For Choosing a Forex Brokers Revealed
Before you can do anything in the forex market you have to choose a forex broker. A forex broker in the simplest terms is a someone or a company who carries out your trade orders and receives a commission for every trade.
There are many many forex brokers out there in the market and there are a few important considerations you must take into account before you choose any broker.
Some are better than others for a variety of reasons, and I’m going to give you the scoop on a few ‘key ingredients’ that your forex broker must offer you.
1- Your forex broker should offer you a minimum of the main 7 currency to trade with. These are USD, CHF, AUD, CAD, GBP, EUR and JPY. If you want to trade with some of the smaller currencies such as the New Zealand dollar you should check before hand to make sure your broker can offer that service.
2 - Most good online forex brokers will offer you a suite of free tools to allow you to effectively analyse currency prices in real time, identify trends and plan possible entry and exit points. These should include charting tool as well as technical analysis tools. The majority of online forex brokers will offer you a range of free tools, with optional upgrades to more advanced services.
3 - This is quite a biggie - the cost per transaction. Forex brokers are paid through the bid-ask spread, thus you shouldn’t encounter any hidden charges or fees in order to trade. However as mentioned above you may get charged extra to use advanced tools or reporting services that your trading platform may offer. Thus to reduce fees you want smaller spreads, and pips spreads do vary (often significantly) from broker to broker (as do currency pairings). So make sure you spend some time find the broker that is most appropriate for your skill level and budget.
4 - Will they execute your orders immediately. Due to the ever changing nature of the forex markets you need to have your trade orders executed as soon as you place them. You don’t want any delay in waiting for your orders to be placed, otherwise the prices may drop and cause you to lose money or eat into your profits. Thus it is imperative that you choose a forex broker who will be able to execute a trade order at the price you see on your computer, in real time. The occasional delay may happen, but if this happens more than on a few occasions, start shopping around for a new broker.
5 - As an individual trader and small investor, you want to find a broker who will let you trade with a small minimum account balance. Most forex brokers that operate online will let you open a small or ‘mini’ account with as little as $100-200.
6 - Excellent customer service. When you do business with any company you should expect nothing but excellent customer service and this is no different when working with forex brokers. A good broker will answer your questions quickly and help you when you need assistance. They should have readily available and easy to find contact information, so that you can call them on the phone at any time. They should be knowledgeable and well trained so that they understand the concerns that most forex traders will experience.
7 - A low margin requirement. You give yourself more leverage by choosing a broker with a low margin requirement. You can leverage margin to generate potentially massive profits, but if you are not careful you can clean yourself out by getting too much margin. As for example if your broker lets you have a 100:1 leverage, you can effectively trade $100,000 with only $1000.
8 - A trading platform which is easy to understand and use. Some forex brokers will let you trade through their own online trading platform, while others will need you to download and install their trading software on your PC. It’s worth signing up with a few different forex brokers and testing their systems and trading platforms using demo account.
In conclusion, don’t just jump straight in a start trading with any old forex broker. Carefully shop around and find a online broker that is right for you and your circumstances. Test out a few different brokers using demo accounts and test their customer service to find one which is suitable.
Online Forex Brokers You Must Avoid
Brokers that you need to avoid
Just like there are brokers that you want, there are also brokers that you will want to stay away from. For example brokers who are prone to prematurely buying or selling near preset points (commonly referred to as sniping and hunting) are trifling things that are committed by brokers who only seek to increase profits.
Obviously, no broker would actually admit to doing this, but there are ways to know if a broker has committed this offence. Read this article (and the comments) to get a good idea of what some brokers can be like…
Unfortunately, the only way that you can really determine which brokers do this and which brokers don’t is to talk to fellow traders. There is no actual list or organization that reports this kind of activity. The point here is that you have to talk to others in person or visit online discussion forums to find out who is an honest broker.
Strict Margin Rules
When you are trading with borrowed money, your broker should have a say in how much risk you are able to take. With this in mind, your broker can buy or sell at its discretion, which can be a really bad thing for you.
Let’s just say that you have a margin account, and your position takes a headlong nosedive before it begins to rebound to all-time highs. Even if you have enough cash to cover it, some brokers will liquidate your position on a margin call at that low. This action on their part can cost you dearly. Talk to others in person or visit online discussion forums to find out who the honest brokers are.
Signing up for a FOREX account is a great deal like getting an equity account. The only major difference is that, for FOREX accounts, you are obligated to sign a margin agreement.
This agreement basically says that you are trading with borrowed money, and, because of this the brokerage firm has the right to interfere with your trades in order to protect its interests. Once you sign up, all you have to do is fund your account and you’ll be ready to trade right away.
NB - Pipoholic has a good section reviewing a range of forex brokers which is worth studying.
Best Forex Brokers: Leverage And Account Types
A Variety of Leverage Options
Leverage is a key necessity in FOREX trading because the price deviations (the sources of profit) are just set at mere fractions of a cent. Leverage, which is expressed as a ratio between total capitals that is available to actual capital, which is the amount of money a broker will lend you for trading.
For example, when you have a ratio of 100:1, this means that your broker would lend you $100 for every $1 of actual capital. Many brokerage firms will offer you as much as 250:1.
Of course, you need to remember that lower leverage also means lower risk of a margin call, but it also means that you will get a lower bang for your buck (and vice-versa). Basically if you have limited capital, you need to make sure that your broker offers high leverage.
If capital is not a problem, you can rest assured that any broker that has a wide variety of leverage options should suffice. A variety of options lets you vary the amount of risk you are willing to take. For example, less leverage (and therefore less risk) may be preferable if you are dealing with highly volatile (exotic) currency pairs.
Account Types
Many brokers will offer you two or more types of accounts. The smallest account is known as a mini account and it requires you to trade with a minimum of maybe $300.
This offers you a high amount of leverage (which you need in order to make money with so little initial capital). The standard account allows you to trade at a variety of different leverage’s, but it also requires a minimum initial capital of $2,000 to get you started.
Lastly, there are premium accounts, which often require significant amounts of capital to get you started. It also lets you use different amounts of leverage and often offer additional tools and services. You will need to make sure that the broker you choose has the right leverage, tools, and services that are relevant to the amount of capital that you are able to work with.
Choosing A Forex Broker The Right Way
When it comes to getting started in forex trading, there are quite a few things that you have to consider first. The first thing that you need to do is to find and choose the right broker to help you in making your trades.
When you are choosing a Broker you need to know that there are many FOREX brokers to choose from, just as in any other market. Here are some things that you need to look for in making your choice:
Low Spreads
The spread, which is calculated in pips, is the difference between the price at which a currency can be bought and the price at which it can be sold at any specific point in time. FOREX brokers don’t charge a commission, so this difference is how they are going to make money.
When you are comparing brokers, you will find that the difference in spreads in FOREX is as large as the difference in commissions in the stock arena. What this means is that lower spreads will save you money and therefore, look for a broker that offers low spreads.
Quality of the Institution
Unlike equity brokers, FOREX brokers are usually attached to large banks or lending institutions because of the large amounts of capital that are required. Also, FOREX brokers should be registered with the Futures Commission Merchant (FCM) as well as regulated by the Commodity Futures Trading Commission (CFTC). You’ve got to be very careful when choosing a broker, get a bad egg and you could lose your shirt.
You can find this and other financial information and statistics about a FOREX brokerage on the company’s website or the website of its parent company. You will want to make sure that your broker is backed by a reliable institution.
Extensive Tools and Research
FOREX brokers offer many different trading platforms for their clients just like brokers in other markets do. These different trading platforms often show real-time charts, technical analysis tools, real-time news and data, and even support for the various trading systems.
Before you commit to any one broker in specific, you will need to be sure to request free trials so that you can test their different trading platforms. Brokers usually provide technical as well as fundamental commentaries, economic calendars, and other research as a means of assisting you. Basically, you will want to find a broker who will give you everything that you need to succeed.
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