How to Choose the best Forex Broker
Margin Requirements and Leverage
Another thing that you should check in a Forex broker-dealer is leverage options and the margin call policy.
Foreign exchange traders, specially aspiring traders with limited capital, tend to like higher leverages and sometimes choose a broker based only on this feature. However, traders should remember that although higher leverage can lead to higher profits, it also increases the level of risk. Understand that leverage is like a loan. It might be just as beneficial as detrimental to your capital. Low margin requirements (meaning high leverage) are great when you make profits, but not so great when you loose.
Some brokers offer fixed leverage levels, while others adjust their leverage based on the currency that is being traded and may also have special policies for carrying a trade over the weekend. For example, less leverage (and therefore less risk) may be preferable if you trade highly volatile (exotic) currency pairs.
Leverage is, expressed as a ratio between total capital available to actual capital, is the amount of money a broker will lend you for trading. For example, a ratio of 100:1 means you can trade $1000 for every $10 of capital deposited in your account. Many brokerages offer as much as 200:1.
Traders should also take into account their broker's margin call policy. Some companies follow the FIFO (first in first out) method to close trades when margin requirements are not met by current equity, others follow the LIFO (last in first out) procedure, and some simply close all the trades. Depending on one's preferences, this is an issue that should be clearly identified before opening an account.
Maximum leverage levels are more of a concern for aggressive traders who like to use the highest possible leverage, whereas a moderate or conservative trader would be happy with the average leverage levels.
Most brokers pay interest on a trader's margin account. The interest rates normally fluctuate with the prevailing central bank's interest rates of the countries whose currencies you are trading. This is an interest which the margin capital in your account accrues. Ask your broker if there is a minimum margin requirement that allows you to accrue the interest.
Finding the right broker-dealers is a critical part of the process to become a trader and requires some real work on your part. Many of the mentioned criteria will be very relative until you define your trading profile and methodology. Therefore, don't forget to come back to this chapter as you progress in modeling your trader's profile.
Just to summarize: investigate, interrogate and cross-examine a series of Forex brokers before you jump in! Test broker's platform with demo accounts and make sure to scrutinize their terms and conditions to be fully aware of all the nuances that a specific broker may impose on your trading.
Here is a checklist you can use in your due diligence:
* How well capitalized is the broker/dealer?
* Is the company registered, and where? Get the firm's registration ID number and look it up at the above mentioned websites.
* How long has it been in business?
* Who manages the firm and how much experience does this person have?
* Does the firm have partner companies?
* Which and how many banks does the firm have relationships with?
* What is their capitalization level?
* What kind of platform does it offer- web based or client software?
* What is their margin policy?
* What rollover policy does the broker have?
* Does the firm guarantee stop loss execution?
* Does it have the order types that you need for your trading?
* Can you speak to the dealing desk if they have one?
* Do they guarantee liquidity also for big order sizes?
Margin Requirements and LeverageAnother thing that you should check in a Forex broker-dealer is leverage options and the margin call policy.
Foreign exchange traders, specially aspiring traders with limited capital, tend to like higher leverages and sometimes choose a broker based only on this feature. However, traders should remember that although higher leverage can lead to higher profits, it also increases the level of risk. Understand that leverage is like a loan. It might be just as beneficial as detrimental to your capital. Low margin requirements (meaning high leverage) are great when you make profits, but not so great when you loose.
Some brokers offer fixed leverage levels, while others adjust their leverage based on the currency that is being traded and may also have special policies for carrying a trade over the weekend. For example, less leverage (and therefore less risk) may be preferable if you trade highly volatile (exotic) currency pairs.
Leverage is, expressed as a ratio between total capital available to actual capital, is the amount of money a broker will lend you for trading. For example, a ratio of 100:1 means you can trade $1000 for every $10 of capital deposited in your account. Many brokerages offer as much as 200:1.
Traders should also take into account their broker's margin call policy. Some companies follow the FIFO (first in first out) method to close trades when margin requirements are not met by current equity, others follow the LIFO (last in first out) procedure, and some simply close all the trades. Depending on one's preferences, this is an issue that should be clearly identified before opening an account.
Maximum leverage levels are more of a concern for aggressive traders who like to use the highest possible leverage, whereas a moderate or conservative trader would be happy with the average leverage levels.
Most brokers pay interest on a trader's margin account. The interest rates normally fluctuate with the prevailing central bank's interest rates of the countries whose currencies you are trading. This is an interest which the margin capital in your account accrues. Ask your broker if there is a minimum margin requirement that allows you to accrue the interest.
Finding the right broker-dealers is a critical part of the process to become a trader and requires some real work on your part. Many of the mentioned criteria will be very relative until you define your trading profile and methodology. Therefore, don't forget to come back to this chapter as you progress in modeling your trader's profile.
Just to summarize: investigate, interrogate and cross-examine a series of Forex brokers before you jump in! Test broker's platform with demo accounts and make sure to scrutinize their terms and conditions to be fully aware of all the nuances that a specific broker may impose on your trading.
Here is a checklist you can use in your due diligence:
* How well capitalized is the broker/dealer?
* Is the company registered, and where? Get the firm's registration ID number and look it up at the above mentioned websites.
* How long has it been in business?
* Who manages the firm and how much experience does this person have?
* Does the firm have partner companies?
* Which and how many banks does the firm have relationships with?
* What is their capitalization level?
* What kind of platform does it offer- web based or client software?
* What is their margin policy?
* What rollover policy does the broker have?
* Does the firm guarantee stop loss execution?
* Does it have the order types that you need for your trading?
* Can you speak to the dealing desk if they have one?
* Do they guarantee liquidity also for big order sizes?
Fxstreet.com
"Does lower leverage mean lower risk of a margin call? Generally speaking yes, but there are cases when an excessive low leverage can be detrimental to your trading. We will cover a case study in the practice chapter at the end of this Unit."
'Not many traders consider the rollover and interests payed and charged by the broker into their trading performances. If you take this factor into account, you can add substantial profits to your trading revenues, by choosing the right instruments and platforms.' ...Learn Fx4 Previous
"Does lower leverage mean lower risk of a margin call? Generally speaking yes, but there are cases when an excessive low leverage can be detrimental to your trading. We will cover a case study in the practice chapter at the end of this Unit."
'Not many traders consider the rollover and interests payed and charged by the broker into their trading performances. If you take this factor into account, you can add substantial profits to your trading revenues, by choosing the right instruments and platforms.' ...Learn Fx4 Previous