How to Choose An Online Forex Brokerage Firm
A Forex broker is an individual or firm that acts as an intermediary between buyer and seller in a foreign currency transaction. There are many considerations you should look at when choosing an online Forex broker.
1. Low spreads
In Forex Trading the spread is the difference between the bid and ask price of any given currency pair. Thus it is the difference between how much you can buy or sell a currency at a specific point in time. All other things being equal, smaller spreads translate into larger profits for the Forex trader. Currencies are not traded through a central exchange like futures and stocks, so the spread can be different depending on the broker you use. Look for brokers that offer spreads of just 3 pips for major currency pairs. Since most forex brokers publish live or delayed prices on their websites, you can compare spreads. Also check to see if the spread is fixed or variable. A fixed spread will always be the same regardless of time or conditions. However some brokers use a variable spread, which might be small in a slow market, but get much wider in a fast moving market. Check to see if mini accounts are subject to wider spreads and if there are any other charges. spreads can vary based on what currencies are being traded. Currencies that have lower demand may be traded with higher spreads.
2. Low minimum account openings
The ability to open a mini trading account with only $200 is a nice feature, especially for new forex traders.
3. Speed of execution of your orders
You want instant execution of your orders at the quoted price when you submitted your order. Don't settle with a firm that allows for large price slippage or doesn't deliver at the price they quoted at execution. This is especially important when trading frequently for small profits. All online brokers should offer automatic execution and have clear policies regarding slippage. They should be able to tell you how much slippage can be expected in both normal and fast-moving markets.
4. Free charting and technical analysis
You want a firm that gives you access to the best charting and technical analysis available to active traders. Also make sure that it is easy to use and performs well in fast-moving markets. Most brokers will have real time charts, news, data, as well as economic indicators and technical analysis tools. Some will have expert analysts writing articles and reports. The software should offer automatic trading and may have special features such as trailing stops and trading from the chart. Some features may only be available at an extra cost, so be sure you understand what your trading needs are and how much the broker charges to provide them.
5. High Leverage
It is good to have the option of high leverage, so that you have the ability to trade a large amount with a small margin deposit. Leverage is essential to making big money in forex. Currency changes in fractions of a penny per unit, which would provide minimal gain in a short term trade without either a huge investment or high leverage. Many firms offer 100:1 leverage and some offer 200:1 or even 400:1 leverage.
6. Broker reputation and backing
Forex brokers are regulated, but that doesn't mean they all have equal financial stability and backing. If the market collapses, you want to know that they've got the reserves to cope with it and will still be around when you decide to withdraw your cash. If a broker is elusive when it comes to questions about their parentage and financial backing, then steer clear. It is also good to make sure they are properly registered wtih the Futures Commission Merchant (FCM) and Commodity Futures Trading Commission (CFTC) for protection against fraud and abusive trade practices.
6. Support
Since Forex is a 24 hour market, your broker should offer 24 hour support. At least make sure your broker has good support at the times when you do your trading. If something goes wrong (e.g. lost internet connection at a critical time) you may need to conduct your transaction by phone. Contact them to see how quickly they respond to enquiries and whether or not they answer questions to your satisfaction.
7. Margin
Margin is the ratio of the amount of money used in a trade to the required security deposit needed by your broker. Compare the margin terms of the brokers you are considering before setting up an account, including margin requirements, how margin is calculated, and if it changes based on the currency traded or the type of account (mini or standard). Also find out the broker's policy regarding minimum account balances.
Always get a demo account first to make sure you're happy with the way everything works before sending off your money to fund the account. Doing a little homework on potential brokers before you open an account is well worth the effort.
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