The number of currency dealers who have entered the foreign exchange market in recent months is phenomenal. Many have tested the market and have liked the ability to make huge returns while the stock market continnues to crash. Others are attracted by an exchange which is open day and night, 5 days a week - it is a market whichnever closes. Either way, thousands of traders each day are signing up for an account with a forex trading broker. In this article we will examine factors which invetsors need to take into account when choosing a forex trading broker.
Over the past couple of years, more than one unregulated forex trading broker has been shut down by authorities for trying to defraud clients of their funds. One of the most important things to check with your forex trading broker is that they are regulated by the appropriate authorities. So, if you are in the UK, the relevant authority is the Financial Services Authority, and in the US, it is the National Futures Association.
A key consideration in choosing your forex trading broker is how much commission they will charge you to make a trade, or how wide the 'spread' is between the bid price and the ask price. Typically, the spread on major currency pairs will be between 2 and 4 pips. Spreads on currencies such as EUR/USD and JPY/USD will be around 2 or 3 pips. Brokers with spreads wider than 4 or 5 pips for these major currency pairs should be avoided.
Traders from stocks and options who move into forex trading will have a new concept to deal with, called leverage. Each forex trading broker will offer varying levels of leverage. Leverage can drastically increase your forex profits, however it can also magnify your losses. For example, if a broker offers 100 times leverage, this means that if you have a balance of $1000, you can trade with a notional $100,000.
Similarly, if you have a $10,000 balance in your currency trading account, and your forex trading broker offers leverage of four hundred, then you can trade with a notional amount of $4,000,000. The risk of using a lot of leverage means that if your trade is an unprofitable one, then you could get wiped out very quickly, and end up broke.
In the forex market, currency prices move very quickly, at a fraction of a second, so it is vital that your forex trading broker can ensure that your trades are executed just as fast, and at the price that you require. Therefore, before you open a live trading account, you should trade with a demo account, and test how good the execution prices are, and whether they reflect the true prices in the forex market.
Another consideration to bear in mind is that you will need a forex trading broker who offers a comprehensive charting package along with the trading account. An increasing number of brokers offer MetaTrader charting with their platform. This enables the trader to take a trade directly off the charts, and ensures that the trader gets the best possible price.
Over the past couple of years, more than one unregulated forex trading broker has been shut down by authorities for trying to defraud clients of their funds. One of the most important things to check with your forex trading broker is that they are regulated by the appropriate authorities. So, if you are in the UK, the relevant authority is the Financial Services Authority, and in the US, it is the National Futures Association.
A key consideration in choosing your forex trading broker is how much commission they will charge you to make a trade, or how wide the 'spread' is between the bid price and the ask price. Typically, the spread on major currency pairs will be between 2 and 4 pips. Spreads on currencies such as EUR/USD and JPY/USD will be around 2 or 3 pips. Brokers with spreads wider than 4 or 5 pips for these major currency pairs should be avoided.
Traders from stocks and options who move into forex trading will have a new concept to deal with, called leverage. Each forex trading broker will offer varying levels of leverage. Leverage can drastically increase your forex profits, however it can also magnify your losses. For example, if a broker offers 100 times leverage, this means that if you have a balance of $1000, you can trade with a notional $100,000.
Similarly, if you have a $10,000 balance in your currency trading account, and your forex trading broker offers leverage of four hundred, then you can trade with a notional amount of $4,000,000. The risk of using a lot of leverage means that if your trade is an unprofitable one, then you could get wiped out very quickly, and end up broke.
In the forex market, currency prices move very quickly, at a fraction of a second, so it is vital that your forex trading broker can ensure that your trades are executed just as fast, and at the price that you require. Therefore, before you open a live trading account, you should trade with a demo account, and test how good the execution prices are, and whether they reflect the true prices in the forex market.
Another consideration to bear in mind is that you will need a forex trading broker who offers a comprehensive charting package along with the trading account. An increasing number of brokers offer MetaTrader charting with their platform. This enables the trader to take a trade directly off the charts, and ensures that the trader gets the best possible price.
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For more information about forex trading and how to find a suitable forex trading broker go to Forex Village, a leading forex trading foreign currency and education website.
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