FX online trading has mushroomed in recent years, fuelled by advances
in computer and internet technology, and fed by the recession and the
natural desire of people to replace their lost income. With that
expansion has come an increase in the number of brokers offering fx
services, and inevitably there are some brokers out there that are not
as good as others. How can you avoid the bad ones? This article is here
to help you do just that, with the following questions to ask before
you sign up to any brokerage.
1. Are you an FCM (Futures Commission Merchant) broker or an ECN (Electronic Communication) broker?
The unfortunate truth is that FCM brokers very often have their own dealing rooms and often don't pass on their customers' trades to the actual fx market. They match one customer with another, or alternatively bet against them. They can use their ability to manipulate the prices on their system to put you at a disadvantage.
ECN brokers don't have their own dealing rooms. They pass on all trades to the market (as they should) and cannot bet against you. They simply collect the "spread", whether your trade is profitable or not. They also have no restrictions on trading or hedging, and tend to have the best prices and spreads.
2. Where are you registered and how much is your capital?
Your broker should be registered in the US, the UK, a major European country, Australia or Japan, with the appropriate regulating authority. In the UK it's the Financial Services Authority and in the USA it's both the US Commodity Futures Trading Commission and the National Futures Association. It's important to make sure that he is not registered in an offshore jurisdiction (you don't want problems if you decide to withdraw your money). In addition, ensure the company's capital is at least $7 million (USD), or £5 million (GBP). Any less and there's a danger it could go bust and take your money with it.
3. Can I trade with covered warrants and ETFs (Exchange Traded Funds) as well as spread bets?
Nearly all brokers will direct you towards trading fx with a spread betting account. This does have the advantage of having any profits classified as being tax free, but in the volatile fx market it's often better to trade with covered warrants and ETFs. These financial instruments are much less risky for you, but they're less profitable on the whole for your broker.
When you trade by spread betting, the broker makes his money through the "spread", i.e. the difference between the sale price and the buy price, So if the British pound (GBP) is trading at 1.5825 against the US dollar (USD) it may be quoted by your broker at 1.5824/1.5827, meaning you can buy the dollar at 1.5827 or sell it at 1.5824. The three point difference is known as the "spread" and is how the broker makes his money. You as a trader have to make up the spread of three points (the amount of the spread can vary from broker to broker and from currency to currency) to break even.
Covered warrants and ETFs carry a fixed broker's fee. They can be sold before maturity if you wish, or left to expire. If the trade is unsuccessful the warrant simply expires worthless, so you know in advance exactly what your risk is.
Astute forex traders will find out more about covered warrants and ETFs so they can trade them in preference to spread betting through a currency trading account. The secret is quite simple - find a successful financial trader who is willing to teach you how to trade profitably. Then just copy what he does.
1. Are you an FCM (Futures Commission Merchant) broker or an ECN (Electronic Communication) broker?
The unfortunate truth is that FCM brokers very often have their own dealing rooms and often don't pass on their customers' trades to the actual fx market. They match one customer with another, or alternatively bet against them. They can use their ability to manipulate the prices on their system to put you at a disadvantage.
ECN brokers don't have their own dealing rooms. They pass on all trades to the market (as they should) and cannot bet against you. They simply collect the "spread", whether your trade is profitable or not. They also have no restrictions on trading or hedging, and tend to have the best prices and spreads.
2. Where are you registered and how much is your capital?
Your broker should be registered in the US, the UK, a major European country, Australia or Japan, with the appropriate regulating authority. In the UK it's the Financial Services Authority and in the USA it's both the US Commodity Futures Trading Commission and the National Futures Association. It's important to make sure that he is not registered in an offshore jurisdiction (you don't want problems if you decide to withdraw your money). In addition, ensure the company's capital is at least $7 million (USD), or £5 million (GBP). Any less and there's a danger it could go bust and take your money with it.
3. Can I trade with covered warrants and ETFs (Exchange Traded Funds) as well as spread bets?
Nearly all brokers will direct you towards trading fx with a spread betting account. This does have the advantage of having any profits classified as being tax free, but in the volatile fx market it's often better to trade with covered warrants and ETFs. These financial instruments are much less risky for you, but they're less profitable on the whole for your broker.
When you trade by spread betting, the broker makes his money through the "spread", i.e. the difference between the sale price and the buy price, So if the British pound (GBP) is trading at 1.5825 against the US dollar (USD) it may be quoted by your broker at 1.5824/1.5827, meaning you can buy the dollar at 1.5827 or sell it at 1.5824. The three point difference is known as the "spread" and is how the broker makes his money. You as a trader have to make up the spread of three points (the amount of the spread can vary from broker to broker and from currency to currency) to break even.
Covered warrants and ETFs carry a fixed broker's fee. They can be sold before maturity if you wish, or left to expire. If the trade is unsuccessful the warrant simply expires worthless, so you know in advance exactly what your risk is.
Astute forex traders will find out more about covered warrants and ETFs so they can trade them in preference to spread betting through a currency trading account. The secret is quite simple - find a successful financial trader who is willing to teach you how to trade profitably. Then just copy what he does.
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