How to Evaluate Forex Brokers:
The next step required to take your trading to the next level is finding the appropriate broker that fits your needs, develop your own business plan, and start executing trades on a platform that compliments your trading strategies.
The topics covered in this lesson are the following:
- Searching for a Broker – What to Look For
- Forex Research Tools & Information
- Creating a Business Plan – ProfitProtectionSystem™
- Dangers of Leverage – Your Friend or Foe
- Types of Accounts – What Account Fits You
Learning Goal: What to Look for in a Broker & What Types of Accounts Brokers Offer
Getting Started In The Exciting World Of Forex Trading
Learning to trade Forex is not difficult however, there are definitely a few items you must be aware of and instructions to follow in order to avoid the “Darkside” of Forex. Before beginning any trading, you need to locate and develop a relationship with a broker to execute the trades. Just as with doctors, lawyers and other professions, there are a multitude of Forex brokers from which you can select.
To help you choose the right broker, here are some factors to consider:
- Minimal Spreads – Brokers earn their income from what is called a spread. The spread is simply the difference between the buy and sell price of a currency at a particular point in time. As you locate and investigate brokers, you should inquire as to the spreads they charge. The lower the spread, the less it will cost you to trade in Forex. We can not stress enough how important it is to test demo accounts with multiple brokers, before opening a Live account. It is in your best interest to choose a Forex broker offering low spreads.
- Compliance and Reputation – Traditional stock trading brokers generally operate through their own brokerage houses. Forex brokers, however, are most often affiliated with a large bank or other financial institution. This is due to the substantial sums of capital required. In addition, you should confirm that the Forex broker you choose is properly licensed, registered and has a good reputation. Forex brokers should be registered as a Futures Commission Merchant (FCM). In addition, they are regulated by the Commodity Futures Trading Commission(CFTC). You can locate and verify the registration as well as other facts and background information at the CFTC website http://www.cftc.gov . Without a doubt, you want to retain and trade through a broker who is affiliated with a reputable bank or financial institution.
- Research Tools and Information – Like traditional stock and commodity brokers, Forex brokers maintain various types of websites, trading platforms and underlying research and information portals. The sites should provide you with real time information, current charts, technical information and other relevant data. A good Forex trader will also sustain the ability to trade on different systems. As with any major financial endeavor of this type, ask for a free demo account so you can evaluate the Forex broker’s various trading platforms. Forex brokers should offer a wide array of information, schedules, tools and other support functions.
- Variety of Leverage Options – To succeed in Forex trading you must master how to trade with Leverage. Many FxNewbies™ and FxMechanics™ fail to respect the leverage and end up getting themselves in trouble. You are using more than your actual capital borrowed from the broker to make the trades, which is how you Leverage larger amounts for your trades than you actually have in cash. A wide majority of brokers will allow you to leverage up to a 50 to 1 ratio. This is why FxST has created our state of the art ProfitProtectionSystem™, allowing us to manage our trading exactly like a business. Members can download the PPS™ off our website after logging in.
Dangers of Leverage – Your Friend or Enemy
You need to be careful, however, because the leverage is directly related to risk. The higher the ratio, the more you are effectively borrowing from the broker. While you can earn more profit from the trades, you can also lose more if the price fluctuation is not in your favor. This risk reward evaluation is based on your own capital amounts and your tolerance level for profits and losses on the trades. A general trading rule is, never risk more than you expect to make.
If you are flush with capital, leveraging a higher amount is not as much of a concern. Nevertheless, brokers offer a large number of leveraging ratios and you will certainly find one or more to fit your desires and financial constraints. Even if you have a good amount of capital and can accept a certain amount of risk, you may not want to leverage a high amount if the market becomes volatile during major economic news releases.
Types of Accounts – What Account Fits YOU
You will need to open an account with a broker to execute trades. There are a variety of accounts which you can maintain:
- Micro Account – The smallest account available in Forex. It has a low minimum opening balance requirement of approximately $250.00, depending on the broker.
- Mini Account – The minimum account balance is approximately $1,000.
- Standard Account – This type of account provides a multitude of various leverage ratios. It has a higher minimum balance to open of approximately $10,000.00.
- Institutional Account -These require substantially higher minimums to open and a minimum net worth to get started. The minimum deposit requirements vary depending on your broker. On average the required initial deposit is $25,000 to $50,000 or more.
As you evaluate and pick a broker, find one that has the right mix of accounts, leverage, information and services for your requirements and financial circumstances.