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Selecting a Forex Broker

Before selecting an Internet or online FOREX broker, the new investor should closely examine the services that each candidate dealer offers and the policies that it mandates.

Since the passage of the Commodity Futures Modernization Act of 2000, the FTC's Division of Enforcement has filed 41 FOREX cases in eleven states: 14 in Florida; 10 in California; 6 in New York; 3 in Georgia; 2 in Utah; and one each in Michigan, North Carolina, Ohio, Oregon, Texas, and Washington. The defendants in these actions defrauded approximately 3,400 retail investors.

These scam artists advertised continually on radio and television. They promised unrealistic profits on very modest investments. They offered bid/ask spreads in excess of 30 pips while charging a $200 commission per trade. The novice trader must be aware of Off-Exchange Currency Dealers (derogatorily called "bucket shops"). When selecting a prospective FOREX broker, find out with which regulatory agencies each dealer is registered, if any. The FOREX market is billed as an "unregulated" market, and essentially it is. Regulation is typically reactive, occurring only after the damage has been done.

There are numerous safe and reputable FOREX brokers from which to choose; consider your specific needs and likes/dislikes before making a selection.

Broker Services

Online Trading Platform

Nearly all FOREX brokers allow their clients to conduct trading over the Internet in a clear and comprehensible fashion. The backbone of any trading platform is, of course, the order entry process. Examine the dealer's screen layout: It should include a bar chart of the currency pair being monitored, an account summary showing the trader's current account balance with realized and unrealized profit and loss, margin available, and any margin locked in active positions. A list of currently held positions should also be displayed on the same page, or at least be readily accessible.

Paper Trading

Numerous dealers provide a "paper trading" service that allows the beginning trader to become acclimated to the real market and "test" a given trading strategy without risk. These brokers provide a free demo account in which the investor places orders in a real-time environment but no money exchanges hands. These trades exist only on paper and are not executed by the broker.

After a week or two of paper trading, the new trader can then assess his or her potential for profit or loss in the "real" market and proceed accordingly.

For those of you wishing to use CromwellFX's fully automated forex trading system you will need to sign up for an account with our official partner broker eToro. eToro also offer paper trading by means of a $100,000 virtual / demo account.


Some dealers offer very small "mini-accounts" for as little as $100, although we feel even a mini-account should have at least a $1000 balance. Micro-accounts are a great way to get started and test your basic trading expertise and acumen. Even trading with very small amounts is much more telling than paper trading. But the broker you use for a micro-account may not be the one you want to use for "real" trading.

Online Assistance

Though not a requisite, some brokers offer education services and training courses for the first-time trader. Also the trading platform should have a robust Help directory on its main menu Web page. Additionally, each candidate broker should list an email address for customer service queries.

News Services

Before beginning a new trading session, the experienced trader will normally peruse the news articles that his or her broker has posted to a news articles Web page. Though this service is not requisite, it is very informative and may affect the trader's choices for which currency pairs and which positions to take for that session.

Chat Rooms & Social Feeds

Many dealers sponsor open chat rooms for their member clients that focus on currency trading. Many of the questions that a new trader has are frequently answered in chat rooms. Be cautious of unsolicited trade tips in these chat rooms and on the discussion boards- or from anywhere, for that matter.

Other Services

Other services are up to the whim of the individual trader, such as multilingual platforms, advanced charting, technical and fundamental analysis add-ins, and various accounting system options. It is also wise to see with which regulatory agencies the candidate broker is registered (CFTC, NFA, and so on). In addition, examining a broker's FAQ Web page will guide the new trader through the services and options available.

Broker Policies

Available Currency Pairs

The new trader should confirm that the prospective broker offers the seven major currencies (AUD, CAD, CHE, EUR, GBP, JPY, and USD). Certain cross currency pairs (a pair in which neither currency is USD) may not be available, since this entails extra risk.

Transaction Costs

As described earlier, transaction costs are calculated in terms of pips. The lower the number of pips required per trade by the broker, the greater the profit that the trader makes. Comparing pip spreads of a half dozen brokers or so will reveal different transaction costs. One arbitrary rule of thumb is that the bid/ask spread for EU/USD (the most frequently traded currency pair) should never exceed three or four pips, and a two-pip transaction cost is highly preferable.

Margin Requirement

The lower the margin requirement (and hence the higher the leverage), the greater the potential for higher profits and losses. Margin percentages can vary from 1 percent to 10 percent. Low margin requirements are great when your trades are good, but not so great when you are wrong. Be realistic about margins and remember that they swing both ways. In general, low margins are nice to have available, although you may not normally want to take full advantage of them.

Minimum Trading Size Requirement

The size of one lot may vary from broker to broker, spanning 1,000, 10,000, and 100,000 units. These brokers usually offer a mini-lot, which is one-tenth of a lot. Ideally, a broker offers fractional unit sizes (called odd lots) to allow the trader to select any unit size that he or she wants.

Rollover Charges

Rollover charges are determined by the difference between U.S. interest rates and the interest rates in the corresponding country. The greater the interest rate differential between the two currencies in the currency pair, the greater the rollover charge will be. For example, if the British pound has the greatest differential with the U.S. dollar, then the rollover charge for holding British pound positions would be the most expensive. Conversely, if the Swiss franc were to have the smallest interest rate differential to the U.S. dollar, then overnight charges for USD/CHF would be the least expensive of the currency pairs.

Margin Account Interest Rate

Most brokers pay interest on a trader's margin account. The interest rates normally fluctuate with the prevailing national rates. At least the equity in your margin account will be accruing interest if you decide to take an extended break from trading.

Trading Hours

Nearly all brokers align their hours of operation to coincide with the hours of operation of the global FOREX market

Other Policies

Be certain to scrutinize a prospective broker's "fine print" section to be fully aware of all the nuances that a specific broker may impose on a new trader. There are several active forums and discussion groups on currency trading on the Internet. Spend a little time in these forums reviewing what others have experienced with certain brokers. Feel free to ask questions, too. Do not get addicted to the discussion groups and forums, however. Although they are a great way to occasionally find information and share information, they are, for the most part, a distraction to the serious trader.

It is still critical that traders investigate the integrity of prospective brokers as well as their services, costs, and trading platforms. Some traders jump from one dealer to another in the blink of an eye. Don't do it; rather, investigate thoroughly beforehand.

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