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How To Find A Forex Broker That Won`t Rob You Blind

Aug 17, 2007
It`s not always easy to know what to look for in a forex broker, especially in any market, much less a market as complex as currency. But, if you want to trade in the market you need a good firm to work with. While it might be tempting to simply ask the brokers what they can do for you, you can`t always depend on them to give you a straight answer. So instead, I`ve put together a few things to consider when choosing your forex broker.

You will want a forex broker that has low spreads. The spread, which is calculated in pips, is the difference between the price at which a currency can be bought and the price at which it can be sold at any specific point in time. Since forex brokers don`t charge a commission, this difference is how they make money. Low spreads will save you money.

Along with this, you should be looking for a forex broker attached to a reputable institution. Unlike equity brokers, they are usually attached to large banks or lending institutions. The firm should also be registered with the Futures Commission Merchant (FCM) as well as regulated by the Commodity Futures Trading Commission (CFTC).

Once you`ve narrowed your choices down to brokers that won`t cost you too much, and that are reputable, consider the trading tools that they are offering you. Forex brokers have many different trading platforms for their clients, just like brokers in other markets. These often show real time charts, technical analysis tools, real time news and data, and may even offer support for the various trading systems.

Before you commit to any one company, request free trials of their tools. Brokers generally provide technical as well as fundamental commentaries, economic calendars, and other research to help you make good trades. Shop around until you find a forex broker who will give you everything that you need to succeed.

The next item that you will need to evaluate carefully is the number of leverage options your potential partner has. Leverage is a necessity in forex trading because the price deviations in the currencies are set at fractions of a cent. Leverage is expressed as a ratio between the total capital that is available to be traded and your actual capital. For example, when you have a ratio of 100:1, your forex broker will lend you $100 for every $1 of actual capital you have. Many brokerage firms will offer you as much as 250:1. If you have low levels of capital you will need a brokerage with high levels of leverage to make reasonable profits.

If capital is not a problem, any forex broker that has a wide variety of leverage options would be a good choice for you. A variety of options will let you vary the amount of risk you choose to take. For example, less leverage (and therefore less risk) may be preferable if you are dealing with highly volatile (exotic) currency pairs.

Along with different levels of leverage, look for brokers that offer different types of accounts. Many brokers will offer you two or more types. The smallest account is known as a mini account and it requires you to trade with a minimum of around $300. The mini account also generally offers a high amount of leverage.

The standard account allows you to trade at a variety of different leverages, but it requires minimum initial capital of $2,000. And finally, there are premium accounts, which often require significant amounts of capital. They also generally have different levels of leverage available to the traders who use them, and often offer additional tools and services. You will need to make sure that the partner you choose has the right leverage, tools, and services for the amount of capital that you are able to work with.

A brokerage firm that meets all of these needs should be a good forex broker for you, but you still need to be certain that they are honest. Dishonest brokers can be prone to prematurely buying or selling near preset points (commonly referred to as sniping and hunting) or may indulge in other habits that will cost you money.

Obviously, no brokerage firm admits to doing things like these, but there are ways to know if they have. The best ways to find out more about your potential forex broker is to talk to fellow traders. There is no list or organization that reports dishonest activity, but a visit to online discussion forums, or a simple conversation will often reveal who is an honest forex broker.

You should also watch to see if a brokerage firm has strict margin rules. Since you are trading with borrowed money, your forex broker has a say in how much risk you are able to take. You agree to this when you sign a margin agreement for your account. This means your firm can buy or sell at his discretion, to cover the brokerage firm's interests, which could have repercussions for you.

Say you have a margin account, and your position takes a headlong nosedive before it begins to rebound to all time highs. Even if you have enough cash to cover it, some brokers will liquidate your position on a margin call at that low point. This action on their part can cost you dearly. You can only find out whether the firm is prone to this kind of activity by talking to other traders. Being informed on all aspects of a forex broker before you make the decision to trade with them will allow you to start trading the forex market with confidence.
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