If you've already made the decision to go ahead
and start trading forex, the first step you need to take is to choose
the right forex broker. Currency brokers vary more than the U.S.
Investment houses, so you really need to do your homework before
making a decision. This is very important because your broker is
almost like your business partner. They need to not only treat you
fairly, but also execute when called upon. Here are some of the
most important aspects to consider when picking your broker:
Low Spreads. Always look for
a broker that offers low spreads (which are measured in pips). The
spread is the difference between how much you can buy or sell a
currency at a specific point in time. It's very similar to the bid
and ask prices in the stock market. Since you don't pay a commission
to a forex broker, they make their income through the spread. You
don't get anything in return for paying the spread, so you'll save
money on each trade if you pick a broker with low spreads.
Amount of Leverage Offered.
Leverage is essential to making big money in forex. When you're
making a profitable trade, the amount of “increase”
in what you're holding amounts to just fractions of a penny per
unit. So if you're not investing tens or hundreds of thousands of
dollars, your total gain is minimal. To make a stock market comparison,
assume that you buy $5,000 worth of a stock for $20. A few hours
pass, and you sell it for $20 1/8. Total gain? A barely noticeable
$31.25. Now lets say you were able to borrow your brokers money,
and buy $500,000 worth of the same stock. Your gain would now be
$3,125, which is much more substantial. An equity broker would never
give you that much margin, but you can find some forex brokers who
will offer as much as 100:1, which means that you can borrow up
to 100 times the amount of your own capital invested. Obviously,
this can be risky because you can lose money as well. Do your homework
on how margin and margin calls work before using it, but understand
that it is the fastest way to big money.
Reputation of the Firm. All
forex brokers should be registered with the Futures Commission Merchant
and the Commodity Futures Trading Commission. You should verify
that your potential forex broker is in fact registered before giving
them any money. Also, because of the massive amount of capital required
in the foreign currency market, brokers are usually owned or operated
by large banking institutions. Verify their financial stability
to ensure the safety of your investments.
Account Types Available. Small
investors should look for brokers that offer mini accounts. A mini
account usually offers a high amount of leverage (otherwise it would
take decades of successful trading to grow $300 into anything significant).
Every broker should have standard accounts which need $2000 to start
the account with and offers more leverage options. The third type
of account is a premium account, which will offer access to more
powerful tools, services, and research. The amount of capital needed
for a premium account will vary based on institution.
Quality of Tools and Research.
Just as in online stock trading accounts, the quality and availability
of tools and research will vary greatly between brokers. Most will
have real time charts, news, & data, along with technical analysis
tools. Some will have expert analysts writing articles and reports.
You can look these analysts up on Google to see how credible they
are. Also look for technical trading tools, economic indicators,
and good customer support. I suggest starting a demo account at
several brokers to get a feel for their platforms and see what type
of system is most comfortable to you.
Choosing a forex broker is a very important decision,
so take your time and do your due diligence. If you end up with
a good one, you'll have everything you need to succeed and will
be able to focus solely on trading the forex.
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