Published: 16 May 12 10:46 CET | Print version
When choosing a forex broker it is important to ensure your broker is secure and transparent and that you understand the cost of trading with them. Below are a few suggestions as to what to look for in a broker in order to be confident that your broker is safe and secure.
It is important that your forex broker offers segregated accounts because this means that the customers’ money is kept in a different account to the accounts used to run the day-to-day business of the broker. In other words, your money is safe in case something happens to the company, such as if it goes bankrupt.
Deposits and withdrawals
Some forex companies charge fees to their clients for making deposits and withdrawals. Check whether you are being charged fees and how much they are. It is common for brokers and market makers to use wire transfers to execute client withdrawals. How long it takes to receive your money is dependent on the banks which are executing your withdrawal – both the broker’s bank and your personal bank. Some countries and banks are more efficient at processing these transactions, but even if your broker processes your withdrawal immediately after your request is made it can take a few days before your money appears in your personal bank account.
How do market makers charge?
When trading forex the market maker does not charge a commission. The spread is the way it makes its money. The spread represents the difference between what the market maker gives to buy from a trader and what it takes to sell to a trader.
For example: If the euro-dollar pair bid/ask rate is 1.3105/1.3108, this represents a three pip spread. The trader can buy (EUR) at $1.3108 but can sell EUR at $1.3105. If traders buy or sell and there is no change in the exchange rate then a relatively small loss appears which is the spread, or in other words the cost of trading.
As a trader, you should check for tight, fixed spreads. It’s important to ensure your broker does not widen or tighten its spreads during volatile or illiquid trading conditions. This is comforting and transparent for traders who like to know their spreads are consistent and will not encounter unexpected trading costs.
What is slippage?
Slippage is the difference between the price a trader expects to be filled at, and the price they are actually filled at. Slippage may be due to an ineffective broker, volatile markets or liquidity. Whatever the cause, it leads to higher than expected transaction costs.
Ask who pays these costs. Ideally look for a broker which guarantees orders (eg limit orders, take profit and most importantly stop loss), as this means the broker will accept the cost of slippage on behalf of its traders.
Regulation and compliance
Do not deal with a broker or market maker that is not registered and regulated. Check their website for details of registration and engage with them about their compliance. This should be detailed and transparent. Check out their company values and ethos.
Any investor should know what costs are involved. Insist on transparency. If it is not forthcoming, do your research and find a new broker.
Risk warning: Forex commodities and CFDs (OTC Trading) are leveraged products that carry a substantial risk of loss up to your invested capital and may not be suitable for everyone. Please ensure that you understand fully the risks involved and do not invest money you cannot afford to lose. The information provided is for informative purposes only, and can under no circumstances be considered as a recommendation to engage in any trade.
Easy Forex Trading Ltd is regulated by the Cyprus Securities and Exchange Commission (CySEC) (License Number 079/07).
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