Forex Broker Comparison

By: EconomyWatch   Date: 27 July 2009

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EconomyWatch

The core Content Team our economy, industry, investing and personal finance reference articles.

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Forex broker comparison is a fundamental step prior to beginning trading with any forex broker. While comparing forex brokers, a beginner may come across various popular jargon used in this industry and this is a good opportunity to understand what they mean.

 

Areas of Forex Broker Comparison
 

Since you would be investing your time and money into this activity, it is best to check the credibility and background of the firm you will be doing business with. Besides some quintessential inquiries, you may compare forex brokers on the following grounds:

  • Pip spread: A pip is the smallest price increment in a currency. For instance, for the EUR/USD pair, a change from .9020 to .9021 is one pip, while for the USD/JPY pair, a move from 133.29 to 133.30 is one pip. The pip spread is the difference between the selling price and the buying price. The larger the spread, the more you end up paying a broker. Therefore, look for brokers who offer you the lowest pip spreads.

  • Minimum deposit required to start trading: Some brokers allow you to open an account with as low as $50. A low deposit requirement means that one can start learning to trade in the real world at a low risk.

  • Commissions charged by the brokers.

  • Minimum trade size: The lower the minimum trade size requirement, the better it is for beginners. A high minimum trade size increases the investment and, hence, the risk.

  • Affiliations with reputed banks or financial institutions.

  • The amount of leverage: Many brokers offer leverage of up to 400:1. Leverage means the amount of loan that brokers are willing to extend to you on your investment. So, with leverage of 100:1, you can buy forex units for $100,000 with a deposit of merely $1,000.

  • Tools offered to track your account. Look for comprehensive and simple live charts, analytical tools and customer service.

  • Protection against negative balance: When using leverage, losses could go beyond the actual deposit. To avoid this, some brokers offer negative balance protection. Herein, all open positions are closed at current market prices if the account balance reaches a predetermined level. It is important to check the amount of protection that brokers offer by getting in touch with some traders using the service.

  • Demo account: Brokers providing this facility help beginners to learn about forex trading. Practicing ‘paper trade’ enables them to understand the fundamentals of trade.

Once you have compared the major brokers, make sure to check for their registration with the Futures Commission Merchant (FCM) and Commodity Futures Trading Commission (CFTC). Try free online demonstrations and interactive sessions before you make the final selection.


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