Forex transactions are charged based on the spread. The spread, which is measured in ‘pips’, is the difference between the prices at which a currency is bought and sold. One pip is the smallest increment in a currency. For instance, if you are trading in Euros and United States dollars (EUR/USD), a go from 0.6004 to .6005 is one pip. If you are trading United States Dollars for Japanese Yen (USD/JPY) a go from 112.43 to 112.44 is one pip.
You can compare Forex brokers based on the spread they charge. Most dealers issue live or delayed prices on their sites. But be aware, that you need to check to see if the spread is fixed or variable. When the market is cool the variable spreads are small, but when the market gets more volatile Forex brokers may increase the spread. The result of this scenario is that a trader’s transaction cost are smaller in a less volatile market conditions.
Because of the large amounts of money involved in trading on the Forex markets most Forex brokers are associated with large banks or lending institutions. The brokers must register with the ‘Futures Commission Merchant’. Forex brokers are regulated by the “Commodity Futures Trading Commission.
The newest development is online Forex brokers who offer trading facilities to traders using sophisticated technology. These facilities allow anyone with a PC and internet connection to trade in the Forex market.
Commission fees: Most Forex brokers don’t charge commissions. Their income comes from their activities as currency dealers and they earn from buying, selling, interest on deposits, converting and holding currencies, and rollover fees.
Many people are attracted by the fact that Forex brokers don’t charge commissions. The Forex broker earns his money from the spread. For instance the broker will sell at 1.1990 but will sell at 1.1985. The .0005 difference is where the Forex broker makes a profit.
Support System: you need a broker that offers 24 hour support because you could be dealing with someone on the other side of the world with a 12 hour difference in time zones. If something goes incorrect you need to be assured the phone will be answered. Also you need to make sure you can close positions over the phone in case your computer or Internet connection crashes at a crucial moment.
The Final Word: Be sure to do your homework and check out your company. Because Forex brokers are synchronized doesn’t mean they are equal. Make sure the company has the reserves to survive a market crash so that you have the ability to withdraw your money if necessary. If a broker is evasive when questioned about their qualifications, their reserves, and any of the transaction costs involved look elsewhere.
Take some time before selecting a Forex broker. Check several out and compare, get a sample account to make sure you can live with their technique before you send the broker your opening balance. This will also give you an opportunity to familiarize yourself with the broker’s trading platform before trading using real money.
