You can place bets on world currencies through forex (foreign exchange) brokerage accounts, buying or selling currency pairs that react to economic developments across the globe. The forex market operates 24/6, opening on Sunday afternoon in the U.S. and closing after stockbrokers close their deals on Friday afternoon. The volume of currency trading is huge, moving around $ 4 trillion a day, which is greater than the global stock or bond markets.
Forex traders take long and short selling positions in currency pairs, which calculate the exchange rate between two legal tender forms, such as the euro (EUR) and the US dollar (USD). A long position opens a trade that makes money when the exchange rate goes up; a short sale profits when it moves down. Unlike stocks, a broker does not borrow money or securities from a broker to open a short position, but may have to pay a rollover fee.
Brokers keep their money in an account that changes in value every night in reaction to daily profits and losses, and deals with fees that can include commissions, access to expert advice and withdrawal requests. Some brokers hide their fee tables within the legal jargon buried in the fine print on the website, which means potential customers need to do their homework before opening an account. To help you avoid unwanted surprises, here is an in-depth analysis of how to choose a forex Investment Broker.
How to Choose a Forex Broker
Choosing a forex investment broker requires you to first find out what type of investor you are and what your goals are when investing in currencies.
Each broker that offers foreign currency investments has advantages and disadvantages. Some of the most important things to consider are regulation, the level of security provided by these companies, and transaction fees. Security features vary from broker to broker. Some brokers have built-in security features, such as 2-step authentication, to keep accounts safe from hackers.
Many forex brokers are regulated. Brokers in the US are regulated by the National Futures Association (NFA) and the Commodity Futures Trading Commission (CFTC), and France, Germany, Switzerland, Austria, Canada and the United Kingdom also regulate foreign exchange brokers. Not all brokers are regulated, however, and traders should be wary of unregulated companies.
Brokers also differ in their platforms, have different minimum account values and required transaction fees. Before entering a trading platform, you can create a budget for your investment life. Find out how much you would like to invest, how much you are willing to pay for the fees and what your goals are. There are many factors to explore when choosing the right platform for you. Make sure to take as much into consideration as possible before getting involved.
Understanding Forex Currency Pairs
Before signing up for an account, it is important to know the fundamentals of forex trading, from currency pairs to pips and profits and more.
A currency pair compares the value of two currencies using a numerator / denominator ratio, with a base currency at the top and a quote currency at the bottom. In the EUR / USD currency pair, the most popular forex trading instrument in the world, EUR is the base currency and USD is the quote currency. A EUR / USD quote displays a proportion that roughly corresponds to what you will pay if you visit Paris and need to exchange dollars for euros. USD is equal to $ 1.00 in this calculation, so a quote “EUR / USD 1.23000” means that the euro is trading 23% higher than the US dollar.
Each proportion is quoted in two to five decimal places and also comes in an inverted version, which creates a new currency pair that moves in the opposite direction. To follow our example, EUR / USD measures the value of the euro against the US dollar, while USD / EUR measures the value of the US dollar against the euro. Therefore:
If EUR / USD = 1.25000 / 1.00 = 1.25000
So USD / EUR will be = 1.00 / 1.25000 = 0.80000
Historically, traders in different countries have taken long and short positions with their local currency at the bottom (the quote currency), but that changed after the popularity of forex skyrocketed earlier this decade. Now, most participants worldwide trade the highest volume currency pair. The most popular version also tends to have a narrower buy / sell spread, reducing trading costs.
Forex traders make money on long positions in EUR / USD when the ratio goes up and lose money when it goes down. On the other hand, traders make money on EUR / USD short positions when the ratio falls and lose money when it goes up. Although brokers can offer dozens of currency pairs, four main pairs attract huge commercial interest:
- EUR / USD – the euro and the US dollar
- USD / JPY – the US dollar and the Japanese yen
- GBP / USD – the British pound sterling and the US dollar
- USD / CHF – the US dollar and the Swiss franc
Pips and Profits
Forex quotes display two proportions, a higher selling price and a lower buying price. The last two decimals are often drawn in large letters, with the smallest price increase called pip (percentage in point). Profits and losses are calculated by the number of pips obtained or lost after the position is closed. All positions start with a small loss because traders need to buy at the sell price and sell at the buy price, with the distance between the two numbers called the spread.
This is a normal operating procedure because most Forex brokers do not charge commissions or fees for executing the trade, instead they rely on the buy / sell spread as their main source of revenue. Major currency pairs typically exhibit narrower spreads than smaller pairs, but many brokers now offer fixed spreads, which means that they will not expand and contract in response to market conditions, even if it is to your advantage.
Traders need to choose the lot size for their currency positions. Much indicates the smallest trading size available for the currency pair. $ 100,000 is considered a standard 100k lot when trading the US dollar and used to be the smallest position allowed at many foreign exchange brokers. This changed with the introduction of minilots at 10,000 units ($ 10,000 when trading in USD) and microlots at 1,000 units ($ 1,000 when trading in USD).
The larger the size of the unit, the less seeds are needed to make a profit or loss. You can see how this works in the following example, where both trades make the same profit.
- One standard EUR / USD pip = 0.00001
- You “earn” 1 pip when you buy $ 100,000 EUR / USD at 1.23000 and sell at 1.23001
- (0.00001 / 1.23000) x 100,000 = $ 8.10 per pip x 1 pip = $ 8.10 profit
- You “earn” 10 pips when you buy $ 10,000 EUR / USD at 1.23000 and sell at 1.23010
- (0.00001 / 1.23000) x 10,000 = 81 cents per pip x 10 pips = $ 8.10 profit
Of course, the sword cuts both ways because a long or short deal with a large unit moving against you will generate losses more quickly than a deal with a small unit. This means that it is important to study your new search in detail before entering real money and develop risk management skills that include correct position sizing, retention periods and stop loss techniques. Free pip calculators, widely available on the Internet, can help tremendously in this task.
What is “margin”?
New forex accounts are opened as margin accounts, allowing customers to buy or sell currency pairs with a total trading size much larger than the money used to fund the account. United States brokers typically allow individuals to open accounts from $ 100 to $ 500, offering a margin of up to 50: 1 , providing significant leverage – which is another way of saying that the size of your trade will be larger than the current account balance.
A $ 500 account at a 50: 1 margin broker, for example, allows the foreign exchange dealer to place long and short bets of up to $ 25,000, or 2.5 times the size of the mini lot. Leverage can be risky, with the power to settle accounts overnight, but a high margin makes sense because currencies tend to move slowly in quiet times and carry little risk of default, meaning the dollar or euro will probably not reach zero. Even so, exchange rate volatility may rise to historic levels during periods of crisis, such as the pound sterling and the euro’s swings in 2016, after the British voted to leave the European Union.
Unlike stock brokers, foreign exchange brokers do not charge interest for using the margin, but positions held overnight will incur rollover credits or debts , determined by the relationship between interest rates in the currencies that make up the pair . The total trade value determines the credit or debit in this calculation, not just the part that exceeds the account balance. At the simplest level, the dealer will be paid at night when he maintains a long position in the currency with the highest interest rates and will pay every night when he maintains a long position in the currency that yields the lowest interest. Reverse this calculation when selling short.
Tips for Choosing an Investment Broker
Do not be in a hurry when looking for a reliable forex investment broker to make sure that your money and trades will be handled properly. All U.S. foreign exchange brokers must register with the National Futures Association (NFA), a self-regulated government agency that aims to provide transparency. Visit the NFA website to verify the broker’s compliance and look for complaints or disciplinary actions that may affect your final decision.
The security of your funds and private information is more important than any other consideration when you open a forex account, because brokers can be hacked or go bankrupt. Unlike securities brokers, whose client funds are protected by the Securities Investor Protection Corporation (SIPC) if the broker is closed, US forex brokers do not offer account protection. Worse, a Forex Investment Broker can recover more than your account balance through a lawsuit if it does not offer negative balance protection, which promises that you will not be asked to receive more money than your account balance. counts if a position fails.
Regulatory capital requirements increased substantially after the 2008 financial crisis, but that did not prevent a wave of bankruptcies in 2015, when the Swiss franc collapsed overnight. Many accounts fell into negative balances in minutes, possibly incurring additional liabilities, while those that survived lost everything when the broker closed. The lesson to take home from this horrible situation: potential customers should stay with the most reputable brokers, preferably linked to a large bank or known financial institution.
A indústria cambial dos EUA usa as categorias de “corretor de introdução” e “marca branca” para comercializar seus serviços e desenvolver seus negócios. O corretor de apresentação denota uma operação menor que encaminha os clientes a um grande corretor em troca de descontos ou outros incentivos. Na etiqueta branca, a pequena empresa renomeia a plataforma de negociação da grande corretora, permitindo que a grande operação execute negociações em segundo plano. Ambas as práticas podem aumentar os custos operacionais, encorajando essas empresas a ampliar os spreads de compra / venda e aumentar as taxas.
Before giving any money to a broker, review your financing and withdrawal procedures. Some require long waiting periods before you can negotiate when depositing in checks or wire transfers, while others will charge hefty fees when you withdraw funds or close your account. Closing accounts, in particular, can be stressful when a broker forces you to fill out long forms, respond to surveys or speak to a representative trying to change your mind. It can also take up to a week or more to recover your money from less reliable transactions.
Customer service should provide easy access to help and operations desks via chat, phone and email. Look for 24/6 coverage, which means that you can contact the broker anytime between Sunday afternoon and Friday afternoon in the United States. Before funding the account, test the broker’s speed in answering your questions by opening the chat interface and calling the phone number to see how long you have to wait for a response from a customer representative.
Forex trading platforms
Currency pairs are priced through the interbank market, a communication system used by major banks and financial institutions, but without a central exchange such as the NASDAQ or the New York Stock Exchange. Forex brokers are inspired by these transactions, but are not obliged to offer customers the best offer or interbank order and can intentionally display wider spreads at less favorable prices, increasing profits when they complete these trades through the system.
Potential clients can check for conflicts of interest by reviewing the trading execution procedures on the broker’s website. Specifically, find out if the broker has a trading desk that makes a market, taking over the other side of the client’s trading. A more reliable broker will publish quotes directly from the interbank system through a wholesale liquidity provider or electronic communications network (ECN) that handles real buy and sell transactions. These are outsourced companies with direct connections to the professional system.
Forex traders open and close positions through the broker’s trading software, which should include a combination of independent, web-based and mobile platforms. Metatrader has emerged as the industry standard for standalone software in recent years, providing a robust set of features that includes real-time quotes, price charts, news, surveys and customizable watch lists.
Web-based trading offers an alternative to standalone software, but it generally has fewer resources, requiring account holders to access other resources to complete their trading strategies. Mobile apps provide the most convenience, but less bells and whistles in a reduced design that generally allows one or two clicks to be negotiated. It is best to use the fully featured standalone software whenever possible, saving the mobile experience for when you are away from your operating table.
Most Forex brokers offer demo accounts that allow potential customers to view the independent web interface and mobile platforms, allowing them to trade Forex pairs with virtual money. This software displays the same quotes, charts and watch lists as the real system, so it is an invaluable resource for examining the quality of the broker’s buy / sell prices. Be wary if the broker does not offer a demo account, as it may be using an inferior or outdated platform.
Put several of these accounts side by side with real-time quotes from a major financial website and you will quickly discover which foreign exchange brokers are offering the best buy and sell prices under normal market conditions. If possible, take a second look right after a Federal Reserve rate decision or other market movement event to see how currency pairs move in highly volatile conditions.
Order entry types
The trading execution screen in the demo account offers a lot of useful information. Look for a variety of types of trade entry and stop orders, as well as security provisions that can include guaranteed Stop Losses and closing orders for all orders. Many of these order routing methods are designed to protect the trader against excessive slippage, which denotes the difference between the expected and the actual execution price.
The following order types should be the minimum requirement for any broker you choose:
Market order – the order will be executed immediately at the best available price. This can incur excessive slippage in fast-moving markets, running cents or dollars out of the buy or sell price listed at the time of entry
Stop Order – sends a conditional buy or sell order that becomes a market order at the chosen entry price
Limited order – sends a conditional purchase or sale order that can only be filled with the entry price or better
Stop-Limit Order – sends a conditional buy or sell order with two prices, stop and limit. The order becomes a limited order at the chosen stop price, filling only up to the limit price. The order will be automatically canceled if the quote goes through the limit price without being filled
Guaranteed Stop Loss – sends an order whose compliance is guaranteed within the requested parameters, as long as the quote goes through that price
Close all – sends an order to close all open positions at the best available prices. This can incur excessive slippage in rapidly changing market conditions
Does Forex Broker offer training and trading tools?
Renowned brokers offer a variety of resources for clients to make smarter decisions and improve their trading skills. Look for an educational section on the website with several webinars and tutorials on the fundamentals of foreign exchange markets, popular currency pairs and market forces that generate buying or selling pressure. These materials should include detailed information on how central banks affect foreign exchange markets when interest rates rise or fall and how traders can prepare for these periodic events.
The educational section should also provide instructions on the broker’s trading platforms, currency pairs and market order types. Look for videos, manuals, or other tutorials that show you how to build custom watch lists, set up technical charts, and display easy-to-read quote screens. These instructional materials should also explain how to access news and surveys directly from platforms so that you don’t have to browse the Internet for information.
Extensive research and economic analysis tools should highlight the currency pairs that can offer the best short-term profit opportunities. This section should offer free third-party comments and insights from industry experts, as well as real-time news and live webinars. Look for surveys that span the world, not just local markets, and provide a comprehensive daily economic calendar that lists all the economic launches that move the market around the world.
Social commerce has gained tremendous popularity in recent years and is now available at most reputable brokers. This feature allows account holders to interact with each other through a social hub, sharing trading ideas, strategies and insights. Some social centers have taken this concept a step further by offering a copy exchange interface that allows you to mimic other customers’ buying and selling decisions.
The best social centers will feature some sort of rating system that allows customers to access the most prolific members with ease. These contacts can be extremely useful in customizing trading platforms, which generally feature API interfaces that allow third-party add-ons. It is even more useful when the broker provides a comprehensive complementary library, with contributions that make managing trades easier.
Don’t be in a hurry when looking for a forex broker because a wrong decision can be costly. The best brokers will offer robust resources, low trading costs and access to the global interbank system. They will also handle your money with care, even if you open a small account in the hope of turning it into a small fortune through your trading skills.
Open a demo account at the broker of the month:
- Open a new instrument
- Selected instruments
- Multiple window view
- Currently viewed instrument
- Chart Type
- Time interval
- Graphic tools