Forex 101 L4 - FXN Trading

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Forex 101 Lesson 4

How to choose a Forex Broker Forex Broker is the intermediary that facilitates your trading. Although traders prefer to remove the middle-man, a broker forms an important part of trading. In this article we will help you choose forex broker. While most traders tend to take the idea of choosing a forex broker very lightly, its consequences can be very harsh at a later point in time. As the saying goes, better be safe than sorry; it is worth paying attention to while choosing a forex broker. After all, it is only with a forex broker that traders (retail traders such as you and me) can trade with. In this article you will learn about some important points to remember while selecting a forex broker and towards the end you should have enough knowledge and confidence to help you pick the right forex broker for you. We cover the following topics in this article Forex broker basics How to compare brokers How to start trading

Forex Broker Basics A broker, as mentioned is a middle-man who accepts your order and matches it against other buyers and sellers. In retail forex trading, a forex broker is essential as they match thousands of orders thus adding to the overall transaction value. If you were you avoid a forex broker, you would need to have capital in amounts of millions to be able to trade directly with the buyers and sellers.

Forex Broker Types Forex brokers can be made up of two primary categories Market makers STP or NDD (DMA) brokers

Market Makers These types of brokers are known as counter-party brokers. In other words, they trade against their customers (traders). So when you buy, the broker takes an opposite sell position against you and vice versa. Sometimes, the market maker can also match your order against another of their clients. The bottom-line being that with a market maker type of broker, most of the trades are done in-house or with the broker’s dealing desk.

STP or NDD Brokers The second kind of brokers acts as a true intermediary. They do not take any counter- party positions but merely pass your orders (or trades) to either their liquidity providers or to other traders. They do not interfere in your trades as they charge a commission or fee for the service they provide. While there can be a lot of debate as to which of the two is better, remember that most market maker type of brokers have low account opening requirements; whereas an NDD type of forex broker usually requires a minimum deposit of 500 or in most cases above 1000. Commissions and Spreads Besides the above classification, brokers can also be classified further based on other criteria such as commissions and spreads. They fall into the following three categories: Fixed Spreads Variable Spreads Commissions only

Fixed Spread Brokers do not charge any commission but instead markup a couple of pips on the actual price. For example, if EURUSD is currently trading at 1.31423, your fixed spreads broker will show you a quote of 1.31429; thus adding a markup of 6pips. The problem with such type of brokers is that in order for you to profit, your trade must move 6 pips in profit to cover the broker’s spreads. For scalpers, this can be a problem.

Variable Spread Brokers are similar to a fixed spread broker (they do not charge any commissions) but charge a spread that changes (variable) with market conditions such as market liquidity and volatility. During periods of high liquidity, variable spread broker’s spreads can narrow down to even 0 pips (ex: EURUSD during the London and US market overlap time). While variable spread brokers might seem ideal, note that spreads can vary during off market hours. For example, the same EURUSD could see as much as 6 pips or even more during early Australian (Pacific) trading session.

Commissions only broker on the other hand do not markup the spreads. However, the spreads can vary. If the broker has a large liquidity network (i.e: banks and other market participants who can offer better bid/ask prices) the spreads can narrow down to 0.5 pips for example.

How to Compare Brokers When selecting a forex broker, it is always advisable to compare a couple of brokers to get a better view of things. In this section you will learn about the important criteria to look into while selecting or comparing forex brokers.

Is the forex broker regulated and licensed by a recognized financial capital markets authority? And more important, is the broker recognized by a financial regulator in your jurisdiction. The reason this is important, especially the second part is that a financial regulator ensures that the broker complies with the law and can intervene to protect the customers (traders) interests.

What type of accounts does the broker offer? Most forex brokers offer different account types catering to the different trader profiles. Typically brokers offer a micro account (deposits up to 100), a standard account (deposits up to 3000 – 5000) and VIP accounts for higher depositing customers. While this might seem trivial to check on, some brokers also offer different trading conditions for each of the account types. Leverage is an important aspect that changes based on the account types. It is therefore best to check on the account types to see the value you are getting for your business

What are the trading conditions offered by the broker? Does the broker offer spreads only or commission only? What are the typical spreads for major currency pairs, what are the swaps, does the broker allow scalping or news trading? What are the minimum contract sizes offered by the broker, how many currency pairs, CFD’s does the broker offer to trade? These are just some of the questions to ask and check with the broker. Most often traders skip this part only to realize it later on that their profits were withheld because of scalping or news trading.

What are the banking methods offered by the broker? What kind of banking methods (deposits and withdrawals) does the broker offer and do any of the methods meet your criteria. Also be sure to check on the minimum deposit requirements and any fees that are charged for deposit and withdrawals.

What bonus structure does the broker offer? If you are interested in claiming a bonus, be sure to read before hand on the bonus terms and conditions. Most forex bonuses require a minimum trading volume to be met. Some brokers might even withhold your withdrawals unless the volume is met. Therefore if you will be claiming a bonus, be very sure to read all the fine print.

What do others say about the broker? Broker reviews play an important part while selecting a forex broker. Most traders are sure to voice their opinion about a broker, especially if the broker tries to scam their customers. Reviews can be found on forex websites as well on forums and could provide a bigger perspective when taking the above factors into consideration. However, do read the reviews with a pinch of salt. Most traders do not read or research into the broker before hand and thus tend to complain. Try not to be one of them and do your homework accordingly.

How good is the broker’s customer support? Last but not the least, check up on the different ways you can contact your broker. Phone support (preferably toll- free), email and live chat as well as the support operating times. In fact you can check on this before hand by asking questions to support to test them on their knowledge, both about the financial instruments offered as well on other matters such as account verification, banking and so on.

How to start trading Considering that you have done your due diligence on the forex brokers and you have decided to open a trading account with them, always test the waters by making a small deposit (perhaps 100 – 500) and trade normally. During the course of the month, you will obviously be interacting with the broker and thus be able to gauge if the broker is indeed true to what they mention on their website. After a couple of months, you can slowly fund your account with larger deposits as you grow to trust your broker. A forex broker is unavoidable and there are many brokers out there who bring the rest of the business a bad name. By spending time doing due diligence about a broker and starting slow (with small deposits) you will be able to not only discover more things about the broker but also build a mutual business relationship.

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