Forex brokers act as the “go-between” on trades with the interbank, a network of international banks that make currency exchanges between one another. While they have a spread, the difference between a purchase price and a sales price, they may make more money than just from that type of commission.
Forex brokers are really dealers, meaning when you sell a specific currency, they may actually buy it and when you buy a currency, the dealer may be the seller. Ethical dealers hedge their own trades by using a banking partner to sell or buy contracts, so they would never experience losses or gains other than the spread. Unethical ones wouldn’t and simply expect you to lose money on the trade, as many people do. In reality, they are trading against you, hoping you’d lose for their own personal gain.
Because of this relationship, it’s important to find forex brokers that are ethical. The first thing to look for if you live in the US is membership in the NFA--- National Futures Association--- and registration with the CFTC---United States Commodity Futures Trading Commission. The CFTC is a governmental agency that provides regulation and the NFA is a self-regulatory group for the futures industry. Countries outside the US will have their own regulatory body registration. Choose a broker that is dually registered.
Check out their spread. Even though you may be in an account that advertises it doesn’t charge commissions for trades, it does still have a spread---the difference between the price they sell the currency and the price they buy it---and that spread may be considerably wider than others. The wider the spread, the more it costs you to trade. Also, check for the ease of withdrawing or adding money, as well as what the minimum deposit is.
Finding the broker that offers the best trading platform is also important. The trading platform that you can use easily can make the difference between a profit and a loss. Besides just looking good, it should offer tools that will help you make more informed trades, which include both fundamental information and charting tools. It should have more advanced programs to help you create and track your strategies, as well as options for automatic trading or alerts. Glitches in a platform can delay a trade, which can cost dearly in a fast moving market, or even cause you to close or open a position when you instead want to do the opposite.
You may be interested in specific currency pairs, make sure your brokerage house offers those pairs. Most forex brokers offer currency pairs that are most frequently traded; the Euro/US dollar, the US dollar/Japanese yen, the British pound/US dollar and the US dollar/Swiss franc. These are considered the majors. Even if they offer many, many different combinations, if they don’t have the pairing that you want, the broker doesn’t meet your needs.
Customer service at the brokerage site you use is also extremely important. Since forex trades internationally, it’s always business hours somewhere, so the market is open 24 hours a day. It’s important your customer service is too. You should be able to speak to a live person who can answer your questions whether they’re about the brokerage site, the leverage or even spreads. Solving problems quickly is important in the world of currency trading, so getting quick responsive service is extremely important.
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