You’ve probably seen many advertisements for Forex brokers as you’ve investigated currency trading online. Some of their gimmicks range from informative to ridiculous; however, these advertisements serve a purpose, as you will eventually need to sort through them and open an account with a reputable Forex broker in order to start trading.
Generally speaking, a Forex broker will help execute currency trades for you in a similar manner to a stockbroker. You will decide which currency pairs you would like to purchase or sell and then conduct the transaction through the broker. Brokers earn money by charging a commission or a fee for their services and/or through the bid/ask spread.
In order not to feel overwhelmed by the number of Forex brokers available on the internet, you will need to do a fair amount of research. We intend to help you establish criteria for your decisions and what you should expect from a broker. Once you pick a broker, you can open an account and start trading!
Is Online Trading for You?
Forex trading is typically not conducted in an off track betting-like venue where you walk up to a cashier and exchange money underneath a plate of bulletproof glass. Instead, the majority of transactions are carried out online through a broker’s trading platform.
The question you need to ask yourself is whether you feel comfortable trading currency online. If not, there are brokers who will execute trades for you over the phone (and some, gasp!, in person). However, trading online offers several benefits including 24/7 availability, research tools, real time quotes, and quick execution of trades.
Our advice is geared towards online trading since, well, we’re a Web site, and additionally, because we like the advantages online trading offers. Most of the advice in this article will also help you if you choose to trade using a traditional broker.
Not all Platforms are Created Equally
The trading software offered by Forex brokers is one of the most important factors for your decision on which broker to use. This software (also referred to as a trading platform) will enable you to research currency pairs and place orders.
Most brokers will allow you to open a demo account (more on that later), so that you can test drive their services before signing up and executing real trades. There are several things you should consider when examining a broker’s software:
- Ease of Use: Is the software intuitive and easy for you to use? A system could offer many features, but if you can’t find or figure out how to use them then they are worthless.
- Account Information: A good system should display your balance, available margin, and your gains/losses. This will enable you to manage and track your trades efficiently.
- Real-Time Quotes: One of the main advantages of trading online is the capability to view real-time quotes. You don’t have to worry about delays and guess at what price your order will actually be placed.
- Instant Execution: Along with real-time quotes should be the instant execution of a requested trade. Many systems will offer a point-and-click interface to easily place trades. It is important that your broker’s system doesn’t re-quote the currency pair when you place an order.
- Technical Analysis Tools: Most online Forex brokers will offer some sort of charting and analysis software. Make sure that the tools offered suit your needs and can be used effectively.
One last thing to mention when discussing online trading is the necessity of a broadband or high-speed connection. It’s time to say goodbye to the days of dial-up once and for all (old AOL CDs make great coasters). Plus, if you’ve got enough money to comfortably trade currency, then you’ve got enough to afford high-speed internet.
Please Read The Fine Print
You may be able to get away with not reading the endless pages of a mortgage agreement –is that how you ended up in an exorbitant interest-only ARM– but make sure you research all of your new broker’s policies before signing up. The policies associated with each broker will dictate the type of trades you are able to execute.
Some of the key things to look for are available currency pairs, commissions, typical bid/ask spreads, interest rates on margin accounts, and trading hours. Make sure your broker offers at least the major currency pairs, is up front with the fees which will be applied (including spreads), and is available during the hours you want to trade.
A few additional policies to review are a broker’s margin and minimum trading size requirements. Higher margin requirements will result in greater leverage and trading size requirements may vary –the important thing to consider is whether or not you will be able to use the margin offered and have the ability to trade using the lot sizes offered.
Make sure to read all of the rules and regulations for a given broker carefully before deciding. It is also important to compare brokers’ policies –one broker may offer higher margin accounts, but another may have lower transaction costs.
Service With A Smile
“Thank you for waiting, please stay on the line and a customer service representative will be with you shortly.” Sound familiar? Does hearing this phrase make you cringe? Forex trading is a complicated undertaking and sooner or later you will need to call a broker, so it’s important they offer a quality customer service department.
Make sure the broker offers 24-hour service and a competent staff. A good way to test them is to call or send an e-mail with some test questions (you can even let them know you are investigating the broker) and see how they respond.
A good customer service department will not keep you waiting for long periods of time when you call in, they will respond quickly to e-mails, and they will most importantly answer your question. It is also a good idea to try to find other traders who have had experience with a particular broker and see what they think –this can be accomplished via forums, broker reviews, etc.
Who Can You Trust?
The Forex market is usually considered an unregulated market since there is not a central governing body; however, many countries have formed their own agencies to help regulate currency trading activities of brokers who reside within their jurisdiction.
The Commodity Futures Trading Commission (CFTC) has been formed to help protect investors in the United States, and it is important to check if your broker is registered with them as a Futures Commission Merchant (FCM).
An easy way to investigate your broker is with the National Futures Association’s (NFA) Background Affiliation Status Information Center (BASIC). This is a valuable resource to help you evaluate your potential broker based on their willingness to register with an official organization and subject themselves to their oversight.
The NFA Web site offers valuable resources for potential investors and should be visited in your journey to become an experienced Forex trader. If you do not wish to use a U.S. broker, try to identify similar organizations within your country of choice.
Types of Forex Accounts
All right! Once you have selected the perfect broker, it is time to actually open an account. There are three main types of account options for you to choose from: Demo, Mini/Micro, and Normal.
A “demo” or trial account is designed for you to test drive a broker and practice your Forex trading. It is STRONGLY recommended that you open a demo account before you even consider opening a real account.
This is a great option for new and experienced Forex traders. You can execute trades as if they were real and make sure you are comfortable with the online tools offered and the manner in which you can place orders. Additionally, you can practice Forex trading with fake money before using any real money (kind of like Monopoly, except you are using high-tech online software instead of a pewter shoe).
After you’ve played with a demo account, you can choose to open either a mini/micro or normal account. A mini/micro account is a small account in terms of the initial investment required to open an account. Hopefully, you’ll be able to grow this account where you are and then be able to open a normal or standard account.
A normal or standard account is the traditional account of experienced Forex traders. The initial investment requirements are usually larger, but they typically offer several benefits over a mini/micro account.
Several advantages of a normal account are higher leverage, better margin requirements, and lower margin account interest rates. Normal accounts should only be opened once you have significant experience in Forex trading.
Once you’ve picked a broker and decided which type of account to open with them, you are ready to begin. The exact procedures for opening an account online will vary from broker to broker, and they are usually intuitive since the broker wants to make it as easy as possible to open an account.