|
Choosing the
Right Forex Broker
By Francis Gillen
If you've already made the decision to go ahead and start
trading forex, the first step you need to take is to choose
the right forex broker. Currency brokers vary more than the
U.S. Investment houses, so you really need to do your homework
before making a decision. This is very important because your
broker is almost like your business partner. They need to not
only treat you fairly, but also execute when called upon. Here
are some of the most important aspects to consider when
picking your broker:
Low Spreads. Always look for a broker that offers low spreads
(which are measured in pips). The spread is the difference
between how much you can buy or sell a currency at a specific
point in time. It's very similar to the bid and ask prices in
the stock market. Since you don't pay a commission to a forex
broker, they make their income through the spread. You don't
get anything in return for paying the spread, so you'll save
money on each trade if you pick a broker with low spreads.
Amount of Leverage Offered. Leverage is essential to making
big money in forex. When you're making a profitable trade, the
amount of “increase” in what you're holding amounts to just
fractions of a penny per unit. So if you're not investing tens
or hundreds of thousands of dollars, your total gain is
minimal. To make a stock market comparison, assume that you
buy $5,000 worth of a stock for $20. A few hours pass, and you
sell it for $20 1/8. Total gain? A barely noticeable $31.25.
Now lets say you were able to borrow your brokers money, and
buy $500,000 worth of the same stock. Your gain would now be
$3,125, which is much more substantial. An equity broker would
never give you that much margin, but you can find some forex
brokers who will offer as much as 100:1, which means that you
can borrow up to 100 times the amount of your own capital
invested. Obviously, this can be risky because you can lose
money as well. Do your homework on how margin and margin calls
work before using it, but understand that it is the fastest
way to big money.
Reputation of the Firm. All forex brokers should be registered
with the Futures Commission Merchant and the Commodity Futures
Trading Commission. You should verify that your potential
forex broker is in fact registered before giving them any
money. Also, because of the massive amount of capital required
in the foreign currency market, brokers are usually owned or
operated by large banking institutions. Verify their financial
stability to ensure the safety of your investments.
Account Types Available. Small investors should look for
brokers that offer mini accounts. A mini account usually
offers a high amount of leverage (otherwise it would take
decades of successful trading to grow $300 into anything
significant). Every broker should have standard accounts which
need $2000 to start the account with and offers more leverage
options. The third type of account is a premium account, which
will offer access to more powerful tools, services, and
research. The amount of capital needed for a premium account
will vary based on institution.
Quality of Tools and Research. Just as in online stock trading
accounts, the quality and availability of tools and research
will vary greatly between brokers. Most will have real time
charts, news, & data, along with technical analysis tools.
Some will have expert analysts writing articles and reports.
You can look these analysts up on Google to see how credible
they are. Also look for technical trading tools, economic
indicators, and good customer support. I suggest starting a
demo account at several brokers to get a feel for their
platforms and see what type of system is most comfortable to
you.
Choosing a forex broker is a very important decision, so take
your time and do your due diligence. If you end up with a good
one, you'll have everything you need to succeed and will be
able to focus solely on trading the forex. |
