How to Choose a Forex Broker
When it comes to getting started in forex trading, there are quite a few things that you have to consider. The first thing to do is to find and choose the right broker to help you in making your trades. Here are some things that you need to look for in making your choice:
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're comparing brokers, you'll 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 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'll 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 realtime charts, technical analysis tools, real-time news and data, and even support for the various trading systems. Before you commit to any one broker, you'll 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'll want to find a broker who will give you everything that you need to succeed.
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.
These aren't the only issues you should consider when choosing a broker. I'll cover some other important factors in a future article.
Peter Cullen runs the website Forex Trading Basics. This article is excerpted from his Special Report called "Your Guide to Successful Forex Trading." For more information, please visit http://www.Forex-Trading-Basics.com
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Trading foreign exchange on margin carries a high level of risk, and may not be suitable for all investors. The high degree of leverage can work against you as well as for you. Before deciding to invest in foreign exchange you should carefully consider your investment objectives, level of experience, and risk appetite. The possibility exists that you could sustain a loss of some or all of your initial investment and therefore you should not invest money that you cannot afford to lose. You should be aware of all the risks associated with foreign exchange trading, and seek advice from an independent financial advisor if you have any doubts