The advent of the internet and the onset of the recession has led to a greatly increased level of interest in FX online trading. New brokerage web sites are springing up all the time and it's difficult to decide which one to opt for. This article sets out 3 questions you must ask your broker before you open an account.
1. Are you an FCM (Futures Commission Merchant) broker or an ECN (Electronic Communication) broker?
The reason for this question is this. 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. With all their facilities and the ability to manipulate the prices on their system you can guess who stands the better chance of winning the trade.
ECN brokers don't have their own dealing rooms, but pass on all trades to the market, as they should. They therefore cannot bet against you, but 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?
Make sure that your broker is not registered in an offshore jurisdiction (you don't want problems if you decide to withdraw your money). He 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. 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?
Most brokers will direct you without even asking towards spread betting because that is the most profitable kind of account for them. But there are other methods of trading fx which can, once you master them (which is not difficult), be far more profitable for you.
When you make a spread bet on a currency pairing, for example the British pound and the US dollar (GBP/USD), there will be a "spread" that you have to overcome before you get into profit. This is how the broker makes his money (if he's not actively betting against you, as often happens).
So, for example, as I write, the GBP/USD pair are trading at 1.5107. If your broker has a 3 point spread he may set his sell/buy prices at 1.5706/1.5709, so you can go long (buy) at 1.5709, but the price would have to move up 3 points to 1.5710 (i.e. 1.5709/1.5712 at your broker) before you would be at "break even" point. The same applies in reverse if you chose to sell, or go short. You are always at a disadvantage compared to the market or your broker.
This, coupled with absurdly low "stop loss" levels, makes it almost inevitable that the new trader will lose all his money before long. The low amount of capital required by most brokers to open an account, which is pushed as being generous on their part, enabling the "ordinary Joe" to "open a currency trading account and start profiting", actually works against you.
If you have only a small amount of capital in your account then, unless you are going to risk nearly all of it on each trade (in which case you are doomed to lose all your money even more quickly than normal) you are going to have to trade with tight stop loss levels.
In the volatile fx market, where prices move erratically and seldom go up or down in a straight line, this is crazy. The few successful traders in this market employ large stop loss levels, even on trades they are very sure about. This enables them to ride the volatility of the market.
The only practical solution to this anomaly is to avoid spread betting altogether, and use instead covered warrants and Exchange Traded Funds. Hence this question. You may, however, have to go further than your broker in order to learn how to trade these instruments. But the information is there, if you look.
We made 70 per cent on gold in less than a week. You can join us in trades like this athttp://www.onlinefinancialtrading.com Article Source: http://EzineArticles.com/?expert=Philip_Gegan |
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