October 29, 2010

8 Aspects To Look At When Deciding On A Forex Broker

Looking for a suitable Forex broker can be a difficult process. Whilst there is no shortage of brokers, choosing one from the many that are available can be a complex decision. Take a look at the following 8 points to ensure that the broker you choose is the one that is most suitable for your individual trading needs.

1. Make sure your potential broker has the currency pairs available that you would like to trade. You should confirm that the prospective broker offers, as a bare minimum, the seven major currencies: Australian Dollar (AUD), Canadian Dollar (CAD), Swiss Franc (CHF), Euro (EUR), British Pound (GBP), Japanese Yen (JPY), and US Dollar (USD). You may also want to confirm that your broker offers other currencies, too, in case you decide to try out advanced trading strategies in the future.

2. Look for a broker with low transaction costs. The costs of a transaction are calculated in pips. The lower the number of pips required per trade by the broker, the greater the profit that the trader makes. Comparing pip spreads of different brokers will reveal different transaction costs, for example, the bid/ask spread for EUR/USD is usually 3 pips, but if you can find 2 pips, that is better as you will receive a greater amount from the trade.

3. Find a Forex broker that has margin requirements that you are comfortable with. The lower the margin requirement (meaning the higher the leverage), the greater the potential for higher profits and losses. Low margin requirements may sound great and they are when your trades are good, but they can be detrimental when you are wrong. Be realistic about margins and remember that they swing both ways.

4. Try to find a broker with a favourable margin account interest rate. Most brokers pay interest on a traders margin account, which normally fluctuates with the prevailing national rates. If you decide to take an extended break from trading, the money in your margin account will accrue interest. Keep in mind that most brokers do not allow you to accrue interest unless your margin requirement is at least 2 percent (50:1).

5. Be sure to verify your brokers minimum trading size requirement. The size of one lot may differ from broker to broker, spanning 1,000, 10,000, and 100,000 units. A standard lot consists of 100,000 units, whilst a lot consisting of 10,000 units is called a mini and a lot consisting of 1,000 units is known as a micro lot. You may want a broker who offers micro or mini lots if you do not have a large amount of capital to invest initially.

6. Beware of rollover charges. The interest rate of the country of the base currency and the interest rates of the other country determine your rollover charges. The greater the interest rate differential between the two currencies in the currency pair, the greater the rollover charge will be. For instance, when trading GBP/USD, if the British pound has the greater interest differential with the US dollar, then the rollover charge for holding British pound positions would be the most expensive.

7. Make sure your prospective broker offers the proper trading hours. Most brokers align their hours of operation to coincide with the hours of operation of the global Forex market, which is 10.00pm GMT Sunday through to 9.00pm GMT Friday. If you find a broker that is not available 24 hours a day, 5.5 days a week, do not give them a second thought.

8. Finally, be sure to scrutinize a prospective brokers terms and conditions to be fully aware of all of the rules and potential fees that a specific broker may impose on a new trader. Finding the right broker is critical for becoming a successful Forex trader and it is not easy and requires some real work on your part. Do not pick the first one that looks good to you, as with time and research, you can find the perfect Forex broker for you.

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