Essential Broker Services for Beginning Forex Traders
Unless you are a bank or large financial institution, you will need a broker to trade currencies. In fact, all individual traders need a broker to trade in the Forex market. This is a critical step to take before you can begin trading currencies. This is not difficult since there are so many brokers in the Forex market.
Yet all brokers are not the same. You will need to find a broker that meets your specific needs as a trader. This could be where the difficulty is found because not all brokers offer the same services or have the same policies. And this can affect your ability to trade effectively.
Five Essential Broker Services
The following list contains the basic services that a beginning Forex trader will need from a broker. Be sure to confirm with every prospective broker that these services are offered. If they are not, you should find another broker.
- Available Currency Pairs
You will need a broker with whom you can trade the seven major currencies: AUD, CAD, CHF, EUR, GBP, JPY, and USD. Of course, you might choose not to trade all of these currencies, but the major currencies should be offered by the prospective broker.
The currency pairs available for trading can directly affect your ability to enter the trades of your choice. If the broker does not offer this basic service, move on to another prospective broker. Dont wait for the broker to include more currency pairs on its trading platform.
- Low Transaction Costs
Transaction costs are calculated by the number of pips. The best way to determine the transaction costs is to look at the pip spread (or the difference between the bid and ask price). A good rule of thumb is to check the EUR/USD spread. It should not exceed five pips. If it does, you should question the broker about the higher transaction costs or simply choose another broker.
The transaction costs can directly affect your profit so take this service very seriously.
- Margin Requirement
Although you may want to avoid using the margin, you will most likely need to use the margin in currency trading. Like the transaction costs, the margin requirement should be low. If your margin requirement is low, you have a greater potential for higher profits. Margin requirements should not exceed ten percent.
Still, traders should be cautious when using margin and avoid using too much margin or leverage. This is one of the biggest mistakes that traders make. Use margin prudently and be sure to choose a broker that keeps margin requirements to a minimum.
- Minimum Trading Size Requirement
Many brokers offer different types of accounts. The two basic types of accounts are standard and mini. In a standard account, the trader uses lots of 100,000 units. In the mini account, lots are usually ten percent of the standard account size. An interesting note, though, is that the margin available for the mini account is 200:1, which is twice the available margin of the standard account. However, this high amount of leverage should only be used by experienced traders.
The two accounts carry different levels of risk and potential for profits. A mini account is appropriate for a beginning Forex trader because, while the profit potential is lower, the amount of risk is lower as well. In fact, a trader can open a mini account with $300 though $2,000 is recommended as the minimum amount. Standard accounts are usually for more experienced traders who will fund their accounts with $10,000 or more.
- Trading Hours
Most brokers will align their trading hours with the hours of the global Forex market. These hours run from 5:00 PM ET on Sunday to 4:00 PM ET on Friday.
Confirm these hours before choosing a prospective broker. If the broker does not follow these hours, choose another broker.
Choose Three Good Prospects
Many brokers will offer these basic services. A beginning trader should select three good prospective brokers and compare them very closely for everything from the five broker basics (above) to the appearance of their trading platform.
Taking the time to find a broker with whom you are comfortable is essential to your Forex trading career. You will spend a lot of time with your broker (or using the trading platform of your online broker) so you must demand the services you need to trade successfully and feel comfortable with the broker. There are many Forex brokers so take your time to weed through the bunch and find the right one.
With the rising number of brokers in the market, the number and quality of services has increased. But the number of unscrupulous brokers has also increased. The Commodity Futures Trading Commission has compiled a list of signs that a person or company may be engaging in fraudulent activity.
Beyond checking for the brokers basic services, a new trader also has to check that the broker is legitimate and offers the services promised. These simple steps can help to protect your money and account.