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Currency Trading Broker

Choosing Your Broker: As I am sure you know, the currency market iscurrency trading forex with anna largely unregulated, providing plenty of opportunities for the unethical, and traps for the unwary. Knowing the right questions to ask is generally half the battle, and this is vital when choosing your currency trading broker and currency trading platform. Hopefully this section will point you in the right direction and help you avoid making some of the more common mistakes! One of the other issues you will need to consider very carefully is the trading platform you are proposing to use, and whilst many of the brokers will offer their own particular software, in my view there is only one platform that you should use, and that is MT4 Metatrader 4. The reasons are many and varied, but above all this platform offers the greatest range of expert advisors which can be bought off the shelf, or designed to your own requirements. In addition. MT4 has the most sophisticated yet simple stop loss management system of any forex trading platform I have ever used - moving your stop loss up and down is simply child's play and is done visually on screen, so you can see exactly where your orders will be triggered. If you would like to test your trading with a free demo of the Metatrader MT4 platform, then simply click on the following link and try it for yourself -  download free metatrader MT4 now.  I cannot recommend it too highly and it is the platform I use myself for all my currency trading and commodity trading.

Currency Trading Brokers

So, you've decided to start trading, and need to open an account with a currency broker - which is the best broker for you? There are sixteen questions you must ask before sending your hard earned cash to someone you don't know. In these two sentences there is already an error - a broker is a generic term and does not explain the different types. It's the same as saying Hoover when you mean vacuum cleaner ( although in this case the consequences are more serious)

Currency Trading Broker : Sixteen Questions To Ask Before Opening Your Currency Trading Account.

  1. What is the net capital of the company
  2. Is the company regulated
  3. Is the company a dealer or a broker
  4. What are the leverage and margin rules
  5. What are the costs of trading
  6. Does the company offer telephone support
  7. How easy is the platform to use
  8. Is the trading platform reliable
  9. What is the charting like
  10. How long has the company been in business
  11. What reputation does it have in the forums
  12. Trading style and order types
  13. Micro, mini and regular account spreads
  14. Interest on the account
  15. Hedge trades allowed
  16. Rollover

1. Net Capital: Let me start with question one by taking the US as the model, since many currency brokers are located there. In the last few months, the NFA which is the regulatory body ( National Futures Association) has decided to raise the minimum capital requirements for currency exchange trading brokerage companies to $5 million dollars in the near future, plus a percentage of customers funds. In effect this will raise the current minimum from $1m to around $7m. Of the current plethora of companies, there are only fourteen companies in the US that fulfil this requirement at present. It is unclear what will happen to those who fail to meet this minimum, but bankruptcy is one option which would happen without warning. Whether clients would receive any of their funds back is debateable. I should also point out that the NFA considered raising the minimum to $20 million which would have reduced this list to four! If you currently have an account with a US broker, and would like a list of the those with a 5m plus net capital, please just drop me a line via Ask Anna and I will email you the list.

2. Regulation: All countries will vary in both their regulatory authorities and also the controls, procedures and compensation available to retail investors and traders. The following countries all have dedicated regulatory bodies, and you will need to check according to where the brokerage is based. Make sure the brokerage is not based offshore with some form of onshore registration address. The countries are as follows :

For the US, make sure the company is both NFA and CFTC registered ( Commodity and Future Trading Commission)  or ( FCM see below).  In the UK it is the FSA ( Financial Services Authority ) .

3. FCM Dealing Broker or ECN Broker: The retail currency market ( i.e. you and me) represent a tiny part of the global currency market. The Interbank foreign exchange, where real money changes hands, accounts for approximately 80-85% of all currency transactions. The currency trading market is completely de-centralised, with no central exchanges such as the NYSE or the LSE. Trades are therefore completed OTC, over the counter, which is in effect a trade between two individuals ( i.e. bank to bank). The world's largest is Deutsche bank, who account for approximately 38% of all currency exchange trading transactions worldwide. As there is no central exchange the banks become the market makers, setting rates and making a market for the currency pairs. Clearly these companies are not going to be interested in small orders from retail traders, which is where the retail broker steps in - having said that Deutsche bank have recently opened a retail currency trading division which has no doubt annoyed many of the smaller brokers.

Now in simple terms there are two types of broker :

The FCM ( Futures Commission Merchant) dealing currency broker is a market maker with a dealing room who sets his own prices to the benefit of the company. Any currency trading broker who has a dealing desk at some point will trade against you and create a conflict of interest. The reason is very simple. In some cases your orders are hedged or covered, but in most cases the currency dealing broker will hold your order on his book and trade against you directly. The order never reaches the Interbank market. Orders are matched against one another, so a client who is long will be matched with a client who is short. Alternatively they take the opposite position themselves.!! In addition, currency dealing brokers will have more opportunity to slip spreads, which generally occurs during news announcements, to their advantage and to your disadvantage. Common sense would suggest that this is far from ideal. It happens regularly, and whilst you could argue that it is an urban myth, where big money is at stake in an unregulated market, the way is always open for the unscrupulous, immoral and greedy. This is aside from any issues regarding financial stability of the company itself. So, when you are looking for a company to handle your trades, ask them one question - do they have a dealing desk?  Does all this matter - in long term trading probably not since a few pips here and there are hardly relevant and with wide stops it is unlikely they could move prices that far. In short term trading it certainly does matter as a few pips and widening spreads may be the difference between a successful trade and stops being taken out. A dealing broker is characterised with a simple trading platform, free charts and no commissions, with the downside of trading against your positions, possible stop triggering to take out your trades, and slippage on spreads.

The second type is an ECN ( Electronic Communication Broker ) . They will have no dealing desk and all trades will be routed electronically to the best prices available in the market. There is no opportunity for trading against you and is akin to trading on SETS in the stock market. An ECN broker generally has a more complex platform, with no free charts and may charge small commissions, but will provide better prices and spreads, and will not compete against you. I will leave you to take your pick, but would urge you to do some digging first and ask them some questions before signing on the dotted line.

4. Leverage & Margin Rules: Before you open your account, check out the currency trading margin and leverage rules very carefully. If you do not understand what these terms mean I suggest you find out fast as they are the cornerstone of this market and the reason most people fail. Firstly, if the company offers anything above 1:100 ignore them, as they are clearly there for one reason and one reason only - to help you lose. As a novice trader I would suggest you start with a leverage of 1:1, no it is not a misprint - ONE to ONE - no I am not joking. Just to be sure here it is again - 1:1 - With a leverage of one to one, if you only have a few hundred dollars to open an account at least you won't be wiped out on day one!! If you traded  100 USD in the market and there was a 100 pip movement you would make or lose 1USD. A tiny amount, but you will start to learn how easy it is to lose in this market if you fail to use proper money management techniques to preserve you capital, made worse by companies offering ludicrous leverage to new traders. I came across one today offering 1:700. This is what happens in an unregulated market, as yet more new traders become cannon fodder! Most professional traders only use 1:20 leverage with 1:50 as a maximum - why - because they know the dangers - retail investors do not, and so they become yet another sad statistic. So please, please, just start small - do not be tempted into absurdly high leverage so that you can make a fast return. The only thing you will do fast is lose all your money.

Now all companies will have different rules on how they manage margin accounts, and when they will put in a margin call - failure to deliver the required margin on time will result in your positions being closed without notice. Some companies will protect you from further loss by closing out positions before all your capital has gone, others will not, so read the small print and find one that has a clear and understandable policy. 

5. Costs of Trading: Before you open your account, make sure you are clear on the trading costs. For dealing brokers this will generally be zero, but check the spread offered as they may be higher than others in the market. Check also for any costs for orders particularly for stop loss, and guaranteed stop loss orders. See also rollover costs.

6. Telephone Support: Not a big issue but certainly worth checking - internet connection can and does go down, and if you are stuck with no communication to open or close trades this could be an issue. You should always have a mobile handy in case the trading platform goes offline at a critical point. If the company has no phone customer service you have no chance of trading.

7. Ease of Use: In general you will find dealing brokers offer very simple platforms ( they want to encourage you to trade with them ) whilst ECN brokers do not ( much of their traffic is from professional traders) Most companies offer demo accounts. One word of warning - please find companies that offer accounts that do not time out after 30 days - if you have difficulty finding one drop me a line and I will email the details.

8. Trading Platform Reliability: Ask the company to provide figures for the downtime of their platform - if they can't provide these figures go elsewhere!

9. Charts: Charts will form the basis of your trading, and should cover time periods from 1 minute to 1 month. Some free charting packages are awful. In my view, once you have started,  you are better off paying for a good charting package rather than the free ones which are offered by the dealing brokers. If you go for an ECN broker, then you will probably need to pay for them anyway.

10. Company History: Ask the company to provide details of how long it has been in business, and visit some of the forums for general news and reviews about the particular company. Bear in mind though that many of the comments will be from traders who feel hard done by, for one reason or another, so do take any comments with a pinch of salt. If the company has its own forum this is well worth checking and asking the forum for any comments. Explain you are a new trader and would welcome comments - if asked in the correct thread of the forum you should get some helpful comments.

11. Trading Reputation: Again check the forums - traders will very quickly tell you whether this is a reputable company. Try to find independent reviews of brokerage companies against which to cross check these comments.

12. Trading Style & Order Types: This is very important and often overlooked until it is too late. Many companies will not allow traders to scalp, and some will expect you to execute a minimum number of trades per month. In addition, many companies do not like long term trades either, so please read the small print or ask the company before you sign up, to explain the type of trading they allow and if there are any restrictions or required minimum numbers of trades. Simple stuff, but easily forgotten until it's too late!

13. Trading Reputation: Check what types of account are available. Most companies will offer micro demo accounts, and mini trading accounts, but some will only provide mini demo accounts and standard lot size trading accounts ( 10 x mini ) so be careful and again make sure you read the small print. One final point - you would think that the spreads on different accounts offered by the same company would be the same - why would they differ? - well I can assure you they do - there is only ONE company that I know of that offers the same spreads and pips across all three accounts of micro, mini and standard - that ECN broker is EFX Group.

14. Interest On The Account: Well why not - after all it's your money. Most brokers do not pay any interest on the balance in your account, but the good ones do - so ask - but you will find more that don't pay than do. Personally if you trade with a large balance in the account as I do, then I like to see a bit of interest clicking up - even if it is only a few dollars a day.

15. Hedging Trades In The Account: Now this is important so pay attention! - some accounts do not allow you to hedge on the same pair. In other words you are not allowed to have a long trade and a short trade in the same pair. In these accounts, if you have a long trade open, and then open a short trade in the same pair, the position will automatically close out, as this is how you close trades anyway ( by reversing the opening trade to close ) - does this matter? - yes if you want to use hedging trades as I have explained elsewhere. Now assume you have a hedge trade open already of 2 GBP/USD long and 1 EUR/USD long. You decide that you would like to sell a EUR/USD forgetting you have this hedge trade in place - what happens? The sell order on the EUR/USD will close out the long EUR/USD, effectively closing out the hedging leg of another trade. The reason these companies don't like you to have this facility is that it allows you to take advantage of changes in direction without having to close out an open position. For example, you decide the EUR/USD is moving down long term , so you sell, but some time later you see a short term change in direction which is an opportunity to buy - you would not be able to do this in one of these accounts. If you think about it from the companie's point of view, they want you to lose, and not have the opportunity to change your mind half way through the trade!

16. Rollover: Remember in forex you are trading a contract - you are not actually buying or selling anything. Trades are simply speculative and are simple computer entries on a screen. It is assumed that you have no desire to exercise the contract and take physical delivery of the currency, so all open contracts are rolled over automatically at 5.00 p.m New York EST after each 24 hour period. At this point interest in the trade is calculated and will either be negative or positive - if it is a carry trade it will be positive, otherwise it will be negative. All this will happen automatically - you do not have to do anything as it is assumed that if the position is open, you want to roll it over into the next day's trading. Now in some accounts you will find transaction accounting very confusing when you close a position. I was recently invited to the launch of a new platform and it even confused the presenter! - In most accounts when you close a trade the profit or loss is immediately accounted for, and the balance updated immediately. With this platform it was not - the reason being settlement dates. Now if you remember in the stock market we have settlement dates with are normally T + 2 days after the trade has been closed. With these sorts of forex accounts the trades are logged in your account but are not settled in the account immediately. It can be very confusing when looking at the account as these trades will appear to still be 'open' when in fact they are closed. Personally I find this very confusing, and the chances are so will you, so check this out in your demo account and make sure that the accounting principles that operate here, are also the same in the real account!

OK, so let's try to summarise the main points for you into the perfect broker!

ECN Broker FCM Dealing Broker
Will never deal again against you May deal against you
More complex trading platform Very simple trading platform
Best execution spreads and prices Fixed spreads - fees built in
All trading styles allowed Scalping discouraged
No restrictions on order types May restrict some stop orders
Universal accounts with same rates Different margin rates per account
Hedging generally permitted Hedging often not permitted
Trading rarely restricted Trading often restricted in volatile markets

If this seems too much like hard work too find the best currency trading broker, then you probably won't make it trading this market. Now let's look at the US dollar index which will give you a view on market sentiment, much the same as the VIX does in stock trading. In currency trading it is based on currency options.


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