The vast majority of Forex traders will use a broker to handle their transactions and so it is vitally important to understand just what a Forex broker is and what he can do for you.
In general terms a broker is an individual who buys and sells on your behalf on the basis of decisions that you, the trader, make and which you pass to the broker as orders to trade. The broker then earns money in a variety of different ways by setting a fee, or a range of fees, for his services.
In the case of Forex trading a broker needs to be associated with a large financial institution, such as a bank or insurance company, in order to provide the funds necessary for margin trading. The broker must also be registered and, in the United States, this means being registered as a Futures Commission Merchant (FCM) with the Commodity Futures Trading Commission (CFTC) as protection against both abusive trade practices and fraud.
Before you can start trading you will need to set up an account with a broker and may well find the number of brokers who offer their services online to be somewhat overwhelming. Choosing a broker will require a bit of research on your part, but the time spent doing this research will give you an insight into the services that are available and fees that are being charged by a variety of brokers.
As with most businesses there is no better form of advertising than word-of-mouth advertising and so it is often a good idea to talk to friends and colleagues to see who they are using and to find out if they have any complaints or difficulties in using a particular broker.
If this isn't an option then you could try selecting a few online brokers and contacting their help desks to see how quickly they respond to your enquiry and whether or not you get a satisfactory answer to your questions. Bear in mind, however, that pre-sales service is often better than after sales service, as can be seen with many online businesses and not simply for Forex trading.
One very important factor is to find a broker who executes orders quickly and with minimum slippage. All online brokers should offer automatic order execution and should have a clearly stated policy about slippage. They should be able to tell you exactly how much slippage you can expect to encounter in both normal trading and in fast-moving markets.
Next you need to find out just what fees the broker will charge. Most importantly, what spread does he work on? Also, is this spread fixed or variable according to the type of account? Are all accounts subject to the same spread or are there, for example, wider spreads on mini forex accounts? Are there any other charges?
Be a little bit careful here. In general, smaller spreads mean more profit for the trader, but there can often be a trade-off between the smaller spread and the service which you receive. Look at the overall picture before deciding to use a particular broker.
Margin accounts are the basis of Forex trading and so you must be happy that you understand the broker's margin terms before opening an account. You need to know just what the requirements are for margin trading and how the margin is calculated. Does the margin change, for example, according to the currency traded and is it the same on every day of the week? Is there a difference in the margin for mini and standard accounts?
Trading software is also extremely important for the online Forex trader. Get a feel for the software that is available by testing out demonstration accounts with a few online brokers. You are looking for reliability and the ability to perform well in fast-moving markets and any software should offer automatic trading and ideally incorporate special features such as trailing stops and trading from the chart. Some features may only be available at an extra cost, so make sure that you understand just what your trading needs are and how much the broker will charge to meet them.
There are of course other things that you will need to know such as the broker's policy regarding minimum account balances, interest payments on account balances, which currencies can be traded and whether or not non-standard sized lots can be traded. You should also find out whether or not clients' funds are insured and the extent of any insurance coverage.
By : Donald Saunders - http://forexonlinetradingsystem.info/
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