Picking a Forex Trading Broker

Picking a Forex Trading Broker

When Picking a Forex Trading Broker, you should test each one’s platform in demo mode before advancing onto a live account so that you can obtain a feel for the service provided.

Forex brokers introduce buyers and sellers to each other and charge a fee or commission for their services. They earn money by charging their clients a spread which is the difference between the buying and selling price of a currency pair. Spreads have a serious impact on your forex returns because wider ones force you to pay more when you buy, and return less profit when you sell as a result.

Pips (Percentage in Points) are the smallest price unit of a forex currency. Spreads are measured in pips and the slightest variances can make a big difference. Forex Brokers are normally linked to large banks or lending institutions because they need to borrow significant amounts of capital or leverage.

The best Forex Brokers are registered with the Futures Commission Merchant FCM) and regulated by the Commodity Futures Trading Commission (CFTC). Forex Brokers offer many different trading platforms for their clients with features such as real-time charts, technical analysis tools, real-time news, support, technical and fundamental commentaries, economic calendars and other research tools.

Many offer free trials to help with your selection. Leverage is expressed as a ratio, between total capital available to actual capital, and is the amount of money a broker will lend you for trading.

For example, a ratio of 100:1 means your broker would lend you $100 for every $1 of actual capital. Some brokers can offer as much as 250:1. If you have limited capital then you will require a broker offering high leverage. If capital is not a problem, any broker with a wide variety of leverage options should do.

The Forex Markets are accessible through a number of pricing levels. The Inter-Bank Market provides the highest level of access but is reserved for big players such as Central Banks, Corporations, Hedge Funds and any other financial institutions that deal with very large currency transactions.

With the rise of online trading, the Retail Forex Market allowed Retail Brokers to connect smaller players, such as you and me, to its trading platforms. As this market lacks the stringent regulations supported by higher levels, unscrupulous brokers have the opportunity to increase their profits by manipulating your trades unethically. Basically, there are two types of Brokers which are those with dealer desks called Market Makers and those that employ Electronic Communication Networks (ECN). Each has pros and cons.

Market Makers are the most common type of broker functioning as intermediaries to the inter-bank market as opposed to providing direct access. They do this by trading large blocks of currency on the inter-bank market and then providing smaller units to retail traders. This can mean that when you open a trade, you are doing so in direct competition with your broker who wins your money if you lose.

This, of course, is a major conflict of interest. As Market Makers control their own pool of currency, they can dictate the price feed (bid/ask) that you can assess. Unscrupulous brokers may spike prices to trigger your stops as well as manipulating your spreads as you are about to action a new trade. Brokers can manipulate the price spread to wide levels because they generate a portion of their profits from its width.

Electronic Communication Networks (ECN) offer direct access to the Inter-bank Market connecting to multiple banking sources that offer competitive price quotes. They offer real-time quotes from a number of large banks and provide more competitive prices and spreads because of this multi-sourcing.

In addition, the ECN broker is not competing against its own clients and therefore has no vested interest in the trade results. ECNs offer you real-time quotes from a number of large banks but the prices will not be as stable as those offered by a Market Maker. ECNs provide more competitive prices and spreads because of multi-sourcing. In addition, the ECN broker is not competing against its own clients and therefore have no vested interest in the trade results.

As such, there is less reason for this type of broker to apply unethical price manipulation tactics. When choosing a Forex Broker, there are many other considerations to take into account. So take your time and choose wisely.

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