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Tips on choosing the right forex broker

By:   Forexpros.com
  • 02-04-2008
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To trade forex you need to open an account with a forex broker. The global nature of forex markets means that you have a wide choice of forex brokers to choose from, right across the world.

The forex trading business runs differently to equity broking, where trades are made through a clearing house and stock exchange and where money is made from fees for every trade, often referred to as the “brokerage”.

The Spread

Forex brokers make their money from the difference between their quotes of the ask price, the price their customer buys at, and the bid price, the price their customer sell at. This is called the spread and is measured in “points” or “PIPs”, the smallest measurement for a change in the price of a forex. For example, a one “point” or “PIP” change in the USD is 0.0001X the USD amount. Naturally, a wider spread results in more revenue for the broking firm.

Forex Brokers  Reputation & Capital Backing

To choose the right forex broker, you should start with considering its reputation and what trading services it offers. Doing your research thoroughly will take time, but as with trading itself, will save and make you money in the future. There is a wealth of information on-line and in magazines. It is important to be sure of the credibility of your information sources. Internet forums used by other forex traders can be very helpful in cutting through the claims of each company. By listening to people, forums and magazines that you trust, you can build a list of quality firms to choose form.  

It is important to be aware of unscrupulous firms as well as those operating in countries where regulations are weak. The USA, UK, Hong Kong & Australia are example of countries with very strong regulatory environments.

In the USA, a forex broker is required to have a minimum of 20 million dollars, to ensure the protection of their client’s funds. To find out the capital backing of US broking firms, go to www.cftc.gov/marketreports/financialdataforfcms/index.htm. A large firm with a high capitalization ,with hundreds of staff, is more likely to be able to protect your funds in a time of crisis and provide you with services such as 24hr phone support.

Trading Accounts

Depending on how much you have to invest and how much you intend to invest in each trade, you will get an account with a minimum equity requirement. This is the amount of funds you must have in the account in order to trade. A reputable forex broker will generally recommend that you trade 1-5% of your total capital in any trade. For example, an account with a minimum trade of $1000 dollars could have a minimum capital requirement of $34,000.

Leverage

Many forex traders increase their potential for profit by engaging in leverage. This is where they borrow from their forex broker to increase the amount they’re trading. This method of trading also exposes a trader to a higher potential loss. Brokers may offer leverage of 100 to 1 or 250 to 1, where you can borrow up to 100 or 250 dollars for every dollar you deposit with the forex broker.

Trading Tools

Some forex brokers include valuable trading tools with some of their accounts that would otherwise cost you to subscribe to. These include real time data from the markets, charting tools and access to industry leading financial media, commentary and analysis.

Avoiding Scams

Unfortunately, there will always be a minority of unethical brokers trying to scam their customers.

A bucket shop does not always enter trades into the general market by finding an opposing position. Instead, they take the opposing position, relying on the fact that most forex traders lose. Not only do they get the spread, they also keep their clients losing trade. Because that trade exists only on their internal systems, they can distort the market by widening in the spread. In a country with poor regulations, brokers could simply prevent trades from getting closed, to ensure that they don’t lose.

Most trading platforms will allow you to put in “stops”; when a currency hits a pre-determined price, your trade is sold out. This is a helpful tool to minimize losses. However, an unscrupulous broker can see your stop and move the price to that point, sell out your trade, make a quick profit and then return the price to the previous position.

To avoid this and other pitfalls, do your research, make sure your broker is credible and get the account and trading platform that suits your needs.

Good luck!


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With a solid background in financial markets, our goal is to provide both novice and experienced traders with neutral and unbiased information on specific financial segments, including Brokers, Fund managers, Real-time quotes & charts, Courses, Books, Software Providers, Educational & ...

DISCLAIMER:
Trading Futures and Options on Futures and Cash Forex transactions involves substantial risk of loss and may not be suitable for all investors. You should carefully consider whether trading is suitable for you in light of your circumstances, knowledge, and financial resources. You may lose all or more of your initial investment. Opinions, market data, and recommendations are subject to change at any time.

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