Choosing a Forex Broker
Common practice among the forex broker community is to charge the customer on what is known as a “spread” when they trade currency. This is how the broker makes their money unless they are one of the few left that still charge a commission on the trade. The “spread” is the difference between what is known as the asked price and the paid price when trading forex. This refers to the price at which a particular currency is bought or sold at any given time. When selecting a forex broker, you should also be sure to check if the spread offered is fixed or variable, and find out if you are able to find trades that outperform what is required to be a spread.
When trading the forex markets, there are two types that you should be aware of when you are selecting a forex broker. There is the interbank market and the individual or retail market. Very few forex investors can trade on the interbank market since the smallest trade allowed is one million U.S. dollars. The individual or retail market is the smaller part of forex trading requiring only 500 U.S. dollars. When selecting a broker it is also important to understand that there are two types. There are brokers called ECN brokers and then there are market makers. ECN stands for electronic communications network and are the recommended forex broker. The reason for this is that the market makers have a vested interest in seeing an investor lose money when foreign currency trading. It is simple to understand. Basically the ECN broker matches buyers and sellers by putting orders through their communications network. The market maker takes the opposite position on every trade that you make in order to provide liquidity to potential traders.
When selecting a forex broker it is important to find out the information below.
1) Is the broker regulated and what organization are they registered with? This will tell you how you are protected as a customer.
2) What business model do they operate and how fast is their order execution when conducting foreign exchange trading?
3) How reliable and user friendly is their trading platform? How many currency pairs can you trade when using their forex trading system and how reliable is the forex software used?
4) Are client funds insured against fraud when using a certain forex broker?
5) What do other forex traders say about the brokerage firm? How are they with customer service?
6) Is there a minimum account opening balance? Can you earn interest on any unused equity on your account?
7) What are the requirements for earning rollover interest? Is there a minimum margin requirement to do this?
When selecting a forex broker there is a lot of information that you must know. Make sure that the person is right for you and do not pick a broker who promises no risk. There are those brokerage firms who will try to sell you that promise, but that does not exist.