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Choosing The Right Online Brokerage Firm

Apr 4, 2008
Currency trading is one of the more interesting investments that a small (personal) investor can make at this point in time; the basic principle, like all trading positions, is to buy low and sell high, and currency trading is all about playing the spread in thousandths of a cent, between the exchange rates at different parts of the day. There are a lot of technical details muddying the water, but ultimately, your aim is to scope out a currency exchange rate, buy at one point in time, and sell at another.

A typical margin in a foreign exchange rate is expressed in hundredths of a penny. For example, a forex trade that we committed recently was to buy Euros at $1.41425, and sold them at $1.41200. Yes, we bought and sold Euros trying to make a profit of three quarters of a US cent on the transaction. Our transaction was run through an online brokerage account, and we would like to talk a bit about what things to look for in a Forex brokerage firm.

First and foremost, when you set up an account, you are paying for a service. Your service relationship is set with expectations. You need to know what to expect and when. Therefore, how quickly and easily you can get ahold of your representative is important.

Look for brokerages that offer personalized service. You should be able to reach your representative quickly and easily when the market turns volatile. You should have an established relationship with one or two representatives at the firm, not be routed to a call center and getting the next available operator.

Foreign exchange trading moves quickly if you are going into a day-trading strategy. For small investors, we do not actually recommend a day-trading run, because while the profits are higher in a day-trading strategy, the risks are as well, and day-trading requires almost constant access to your buy-sell window.

Now, you can get accounts with stop-loss and profit-now techniques, where if a trade goes beyond certain parameters, you are cashed out on your bet as quickly as is possible, but the speed of the transaction is what is important in day trading. For longer term positional trading, the risks are much less, but you are also not committed to watching numbers on a screen for 10 hours a day. Whichever strategy you take, your forex broker should be aware of it, and should structure their buy and sell advice for it.

Your online trading account is going to cost you fees per transaction or a monthly access fee. Forex brokerages make their bread and butter off of those fees. Do not begrudge your broker the money they use to make a living off of but do not be blindly trusting either. Your broker is going to suggest trades that make them money as well as you, and you need to be aware of the fee structure and what they are getting out of each piece of advice before signing up with the account. This ties into the above advice of get a broker who supports your strategy.

Online trading is predominantly a numbers game, it is all numbers. It is also a game of trend spotting, whether drilled down (watching the London close, or the Tokyo open), or sitting long term (watching bank exchange rates and the news). Whatever the trade margin is, you will want to make sure that your information is timely and fast, and that your transactions are timely and fast; if you have to make a call (or send an instant message), you are competing with all the other clients your broker has to get your trade in under the wire.

The alternative is automated trading programs. Automated trading programs are an essential tool for day trading and less so for position trading, but the key here is how quickly you get updates on your information (transparency) and how quickly you can make changes to your position (velocity).

Lastly, you should look at details like minimum balance required in the account, and how much access you have to your funds. As in all investing, read the fine print, and be aware of where the person selling you the service makes their money so you can make an informed decision. Online brokerages are trying to make a win-win situation, but for that to happen, you need to be well informed.
About the Author
Matt blogs at http://onlinebrokerage.wordpress.com/ and invites you to find more information on Online Trading and Market Analysis .
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