December 19, 2009

10 Points To The Best Currency Trading Broker (Part 2)

Here in the final part of our two part article on finding the best currency trading broker, we look at another 5 important points to take into account when you are considering brokers.

1. Regulation

Look for a broker who is a member of at least one of the main regulatory bodies in their country. You cannot take this for granted because the forex market is generally not regulated by law. If you go with a completely unregulated broker there is probably nothing to stop them disappearing from the internet with all of your funds. Bodies such as the Commodity Futures Trading Commission (CFTC) and the National Futures Association (NFA) in the USA provide a certain amount of protection to users if the broker should suddenly fail. There are similar associations in other countries.

2. Spread

The spread is the difference between the bid and ask prices for any currency pair, and this is the broker's edge, which is the way that most brokers make their money. The amount of the spread varies according to the broker and the currency pair, but you can expect to pay 1 to 3 pips on most of the majors. Check the spread for the main pairs that you plan to trade.

Some brokers offer a low spread but then charge fees or commission in addition. This can be advantageous for some traders, usually those who tend to make a small number of long running trades.

3. Lot Size

There are standard lot sizes which are 100,000 units of currency for a standard lot, 10,000 for a mini lot and 1,000 for a micro. However you can find variations on these from some brokers who will offer a wider choice or even fractional lots where you can make up your own lot size. Of course, you will be trading on margins so you do not need to have this amount of money in your account. See the next point.

4. Leverage

Leverage and margin requirements can be very different with different brokers. This is what gives you the power to control large sums and make (or lose) a lot of money with only a small investment. 100 times leverage is often seen as standard but 200 is possible. Some traders prefer to work with 50 times, giving lower risk.

5. Business Model

Last but not least, the broker's business model can have a big effect on how your trades are handled. Most brokers do not have their own dealing desk but access the market through a network. You may see this referred to as an ECN or electronic communications network.

More recently, what is known as market makers have sprung up in the forex trading world. These are not brokers in the strict sense of the word. They will find a match for your trade through a network broker or sometimes they will match your trade themselves. This puts them on the other side of your trade and means that they lose if you gain … not an ideal position from your point of view, when they hold your funds. So if you go with a forex market maker be sure to check user feedback.

In fact, it is always advisable to check feedback from genuine users before signing up with a broker. Look in independent forums and try to find several points of view. Do not pay too much attention to any one individual, who may be biased in their feedback, and look for reports from users who are at the same level as you. This will help to ensure that you find the best currency trading broker for your funds.

10 Points To The Best Currency Trading Broker (Part 2)

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