Choosing A Broker - Your First Step To Forex Sucess
By Smith Chen
As the online Forex trading market becomes increasingly saturated and the choice of brokers becomes wider, the decision of which broker to run with becomes increasingly important for the trader. Although the majority of brokers provide the same basic trading platform, there can be a vast difference in what they offer their clients, both in terms of trading conditions as well as customer support. By simply visiting a company's homepage it may be hard to separate the second-rate firms from the professionals, therefore this article will examine the main parameters that should be taken into consideration before creating an account and depositing.
Account type The decision of which type of account to open will most likely depend on the amount of capital you have to invest. Most brokerages offer two main account types: a "Mini" ($100-$200 minimum deposit) and a "standard" account ($1,000-$2,000 minimum deposit). Mini accounts are best suited to new or amateur traders looking to gain market experience and confidence with a smaller investment, and offer higher leverage, which you'll need in order to make money with such a small amount of initial capital. "Standard" account holders can expect to enjoy a wider variety of leverage options, but will have to invest a greater sum of money for the privilege. Although not as commonly advertised, many brokers provide a premium service for large investors (perhaps $100,000 - $250,000+), including additional VIP services, such as a dedicated fund manager and tailor made conditions.
Common to nearly all online brokers is the offer of a demo account, which allows users to get a feel for the software and gain trading experience without the risk of market exposure. Such simulations are undoubtedly beneficial to potential clients wishing to test the waters, but caveat emptor: they are not always representative of real-market, real-platform conditions, despite claims of full functionality. Do not be afraid to question a brokerage on this matter - an honest, reliable broker will admit the downfalls of a demo account.
Software Considerations The foreign currency market can move at a fast pace and will often require you to make quick decisions and executions, regardless of where you happen to be. Depending on your level and frequency of trading as well as travel habits, it may be wise to choose a brokerage that offers a web-based Java trading platform, which requires no download and enables you to trade from any location worldwide.
Payment Options Look for brokers that allow you to pay with credit card, as this is the easiest option by far and does not involve the necessity of transferring funds from online e-account. Other payment options typically offered include wire transfer, which is equally as secure as credit card, but expect to wait a number of days for it to clear and to have access to your funds.
Support Perhaps one of the most crucial considerations and one that may potentially have a significant effect on your trading success is the issue of customer support. Whether you are a first time forex amateur or a FX vet, having the support and advice of a reliable, dedicated customer service team is undoubtedly invaluable, so it would prudent to do your homework on this one. The only way to gauge the quality of a support team is to contact them and see how they deal with your inquiries: are they fast, do they give reliable technical and market advice; do you get the sense that they know the industry well enough to advise others, or are they simply good sales people? This might not be so easy to find out, but as the only point of contact between yourself and the brokerage, it is important to do so. As with any business, pre-sale service might be more satisfactory than post-sale, so again, try to judge whether or not you are being helped or simply pitched.
Platform, Tools & Analysis In the present online market place it is rare to find a company which does not offer real-time tools such as charting and price updates, but predictably the quality and availability of such applications will vary from broker to broker. Ideally you should have access to a wide range of tools, enabling you to assess the market 24 hours a day, making your trading decisions accordingly, and in addition your broker should also provide you with daily market reports, prepared in-house by professional analysts. These reports should cover the basics: economic news relevant to the major currencies, technical movements and general commentary. The better known, more reputable analysts have their reports published on a number of the larger online forex portals and forums, which is an indication that their data is considered accurate and reliable, which in turn tells you a little more about the reliability of the brokerage itself. As previously mentioned, many trading platforms offer the same basic functions, but not all brokers cover all areas of the forex market, so before committing make sure your chosen platform will let you trade the currency pairs you require.
Spreads Spreads are an important factor to consider before investment and will certainly require some shopping around in order to find the best offer to suit your trading habits. The spread is the difference between the price at which currency can be bought and the price at which it can be sold at any given point in time. FX brokers don't charge "commissions", so this difference is how they make their money; therefore, the lower the spread, the lower the commission, and unlike stocks, currencies are not traded through a central exchange, so the spread may differ from broker to broker. Spreads differ according to account type, with mini accounts offering spreads between 1.5-2 times higher than those offered for Standard accounts, which in turn are higher than those offered to large volume traders with VIP status.
"Fixed" spreads remain the same day or night, and despite market conditions, and although they are usually somewhat wider than the narrowest of variable spreads, they can be safer over the long term by providing a slightly higher level of predictability and a slightly lower level of risk. "Variable" spreads change according to market conditions (which may initially be attractive during a calm period, but once the market becomes busy, they are likely to widen considerably, meaning that the market will then have to move significantly in your favor before a profit is turned). Leverage
Unless you intend to invest a six-figure sum of capital, the use of leverage will be essential in order to make decent profits in forex. Generally speaking, the sum of money made during a successful trade amounts to just fractions of a single cent per unit, so if you are buying lots worth just a few thousand dollars or less, your profits will be minimal. This is where leverage comes into play: in effect by "borrowing" your broker's funds temporarily you will be able to make larger trades, which, if all goes according to plan, will lead to larger profits. Obviously, this practice involves an inherent risk: if the market takes a turn for the worse you risk losing a substantial sum of money, depending on the amount of leverage taken. For this reason it is advisable to do some further reading on leverage and margins prior to using leverage, so that you are fully informed before exposing yourself to the open market. Under normal market conditions, some common currency pairs are generally less volatile, and may warrant a higher level of risk taking, while more exotic currencies may not be predictable enough and traders would be advised to use less leverage when getting involved with such pairs. Mini accounts provide the highest levels of leverage, with some brokers offering up to x 400.
Education While practicing on a demo account may help you improve somewhat and trading with real money might teach you some hard-learned lessons, the best way to improve your trading ability and provide yourself with a solid knowledge base is to educate yourself. To this effect, more and more online brokers are offering trading courses or tutorials, ranging from free five minute "introductions to forex" to curricula covering the smallest of details and costing thousands of dollars. Well established educational centers, such as the Online Trading Academy (OTA), with years of technical training experience are your best bet, providing solid instruction that will not only teach you the basics of the market, but also the technical side of the business (advanced technical analysis, charting, chart reading, Fibonacci calculations etc.). Some brokerages produce their own courses in conjunction with such trading centers, such as the course offered by Forexyard.com. Without educating oneself, the vast majority of built in market tools offered by trading platforms will be wasted on the amateur forex trader.
In summary, there are numerous factors to consider before choosing the right online forex broker, all of which should be researched to ensure that your trading account and broker will allow you to get the most from your investment. You must be aware that some brokers do not have your best interests at heart, but do not despair, as there are many reputable and reliable companies eager and capable of providing a professional service. As part of your research, be sure to visit the many online trader forums, where you can discuss any of the issues raised in this article with other traders, many of whom will already have been through the process of choosing a broker and will be able to advise you from their own experiences.
About the Author
Smith Chen is an author and internet marketing consultant.
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