Broker Criteria # 9 | Leverage and margin call

Staring To On Line Trading, Choose The Broker
9. Leverage and margin call policies
Foreign exchange traders 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. Also, take into account that there are brokers that offer fixed leverage levels, but some 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.

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.

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.

Broker Criteria #7 - 8 | Account Types & added-value services

7. Account Types
Many brokers offer two or more types of accounts. These can be very small mini-accounts and even smaller micro-accounts, or standard accounts, depending on the lots traded. A lot consisting of 100,000 units is called a standard lot; a lot consisting of 10,000 units is called a mini lot; and a lot consisting of 1,000 units is called a micro lot. Some brokers even offer fractional unit sizes which allow you to establish your own position size.

The micro and mini-accounts allow you to trade with a very low minimum of capital, while the standard accounts often require a higher minimum initial capital, varying from broker to broker.
As you see, the account types differ from each other according to the minimum trading size requirements. Choosing a specific account type should be relative to your amount of capital. This concept may seem a bit nebulous if you are just starting out, but rest assured it will be made clear once you start learning about leverage and money management.

8. Is the broker offering any added-value services?
Easy access to real-time charts, news and economic data is a must for any trader. However, a trader must think of these and any other added-value service as part of the broker's package rather than as the most important feature on which to base a decision.
This is a point a trader of any nature should address correctly to make sure the firm complies with the basic standards of providing real-time charts, news and economic events.

Broker Criteria # 6 | Costs

on line trading? choose the broker
6. Costs: Fee And Commission Structures

The Forex market, unlike other exchange driven markets, has a unique feature that many market makers use to entice traders to trade: they promise no exchange fees or regulatory fees, no data fees and, best of all, no commissions. In the previous chapter we have already mentioned that this advantage has to be well understood, because when it comes to evaluating costs, it much depends on your trading numbers such as frequency, ratios and other performance related statistics.

Basically, there are three commission structures used by Forex brokers: a fixed spread, a variable spread and/or a commission charge based on a percentage of the spread. Just a quick reminder: spread, usually calculated in pips, is the difference between buying and selling price.

So, which is the best choice?

On the one hand, you may think that the fixed spread is the right choice, because then you know exactly what to expect. On the other hand, you might think you are getting a good deal paying a variable but smaller spread.

First of all, consider that the best deal you can get is choosing a reputable broker who is well capitalized, has strong relationships with the large foreign exchange banks and can provide the liquidity you need to trade well. Second, you need to calculate the impact of all possible fee structures on your trading model to know which one is more favorable to you.

Some Forex brokers don't charge a commission, so the spread is how they make money. The lower the number of pips required per trade by the broker is, the greater the hypothetical profit that the trader makes is. Comparing pip spreads of half dozen brokers will reveal different transaction costs.

In the case of a broker who offers a variable spread, you can expect a spread that will, at times, be as low as 1 pip or as high as 7 pips on the most major pairs, depending on the level of market volatility. While market makers provide two-way pricing to customers throughout the day, these prices can be quoted on a fixed basis, meaning that they do not move throughout the day. But they can also use a dynamic spread system, which means the prices change as the liquidity in certain pairs change.

While market makers provide two-way pricing to customers throughout the day, these prices can be quoted on a fixed basis, meaning that they do not move throughout the day. But they can also use a dynamic spread system, which means the prices change as the liquidity in certain pairs change.

A lack of liquidity in the markets or very volatile market conditions can force the broker to apply a slippage on the pricing. Slippage, also called "requote", occurs when your trade is executed away from the price you were offered, when you end up paying more pips than the average spread. This is perhaps a cost that you don't want to bear if you are trading very short term or if you trade the news.

Asking your broker how they handle news times and if they have any devise to protect you from experimenting slippage is probably a good idea. You can decide to trade with fixed spreads, even if they are a little higher in average but receive, in exchange, an instant fill of your trades at the desired prices.

Some brokers even offer you the choice of either a fixed spread or a variable one.

Other brokers, like ECN brokers, may also charge a small commission, usually in the order of two-tenths of one pip. Whether you should pay a small commission depends on what else the broker is offering. For example, the broker may pass your orders on to a large market makers conglomerate. You might choose a broker with such an arrangement, if you look for very tight spreads only larger investors can otherwise get.