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The number of traders who have entered the forex market in the last 12 months is staggering. Many have been attracted by the ability to make positive returns while the stock markets plummet. Others are attracted by a market which is open 24 hours a day. Either way, thousands of traders each day are signing up for an account with a forex trading broker. In this article we will examine factors which traders need to take into account when choosing a forex trading broker.
Over the past few years, there have been a number of unregulated forex trading brokers who have been closed by the regulators for defrauding account holders of their accounts. Therefore the most important aspect is to check with your forex trading broker that they are regulated by the relevant authority in the jurisdiction you are based. So, if you are in the UK, the relevant organsation is the Financial Services Authority, and in the US, the National Futures Association, and also the Securities and Exchange Commission.
A key consideration in choosing your forex trading broker is how much commission they will charge you to make a trade, or how wide the ‘spread’ is between the bid price and the ask price. Typically, the spread on major currency pairs will be between 2 and 4 pips. Spreads on currencies such as USD/CHF and EUR/GBP will be around three or four pips. Currency dealers with spreads wider than five pips for these currency pairs are best avoided.
Traders from stocks and options who move into forex trading will have a new concept to deal with, called leverage. Each forex trading broker will offer varying levels of leverage. Leverage can drastically increase your forex profits, however it can also magnify your losses. For example, if a broker offers 100 times leverage, this means that if you have a balance of $1000, you can trade with a notional $100,000.
Similarly, if you have a $500 balance in your forex trading account, and your forex trading broker offers leverage of 500, then you can trade with a notional amount of $250,000. The risk of using higher levels of leverage means that if your trade goes against you, then you could get wiped out very quickly.
In the forex market, currency prices move very quickly, at a fraction of a second, so it is vital that your forex trading broker can ensure that your trades are executed just as fast, and at the price that you require. Therefore, before you open a live trading account, you should trade with a demo account, and test how good the execution prices are, and whether they reflect the true prices in the forex market.
Another consideration to bear in mind is that you will need a forex trading broker who offers a comprehensive charting package along with the trading account. An increasing number of brokers offer MetaTrader charting with their platform. This enables the trader to take a trade directly off the charts, and ensures that the trader gets the best possible price.
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