Forex trading is similar to the equities market in that you require a trading account on which to execute your trades. Each of these accounts differs in the types of services it offers. To find the correct account and forex brokers, it is important that you do your research.
Opening an Account with Forex Brokers
Fees and Commissions
The fee calculation structure in forex is very different to trading on the equities market. There is no commission charged in this financial market. The main reason for this is that you do not deal through brokers, but rather directly with market makers. This does not imply that market makers do not charge for their services. They make money from the variance between the bid and ask prices of currencies. This spread between the prices is how the market makers earn their income. For example, if the bid and ask prices for a currency is quoted as 1.2100/50, your market maker earns the variance between these two figures which is 50 points.
Before you open an account, you should be aware that the spreads vary from one broker to the next. They may only differ by a few pips, but over time it can account for a substantial amount. You should confirm the spread charge before you open an account.
Leverage is the ability to control large capital amounts without having to put up a lot of your own funds. You should bear in mind that the higher the leverage, the higher your risk level. The leverage ratio differs from one account to another and from one forex broker to another. Most of the time you will be offered leverage of 50:1, but you could obtain ratios as high as 300:1. A ratio of 50:1 means that for every single dollar you have deposited into your account, you have the opportunity to control a trade of $50. This means that if you have a trading account balance of $1000, your forex broker will advance you an amount of $50000 to trade with. This means that the margin or your account balance does not have to be very high.
This is one of the main attractions of the forex market as you can achieve huge profits by making use of leverage. However, if a trade moves against you, you can make the same amount in losses and possibly lose your entire trading account balance in the process. You should consider the use of leverage very carefully.
Other Factors to Consider
There are many differences between forex brokers and the types of accounts on offer. This means that you should do comparisons of the available accounts and services before you commit to a single broker. Since you will be trading in a market with limited regulations it would be in your best interest to opt for a large reputable brokerage firm. This will offer you some security regarding the security of your funds and you could obtain better price quotes due to the firm’s capital liquidity.
You should open a demo account with the forex broker before you decide on a live trading account. This will give you the opportunity to test the systems and services on offer.
Get a free Forex PDF PLUS:
- 14 Video Lessons
- Free One-on-One Training
- A 5000$ Training Account
- In-House Daily Analysis
- Get FULL ACCESS