Trading is probably the hardest job anyone can do. I know I am not the first person to say that, but if you have been trading for a while, you probably have agreed with that long before I have mentioned it. However, if you are new to trading, you better do some serious homework first. Getting a decent broker certainly is part of that homework.
Basically, there are two types of FOREX brokers out there. The ones that call themselves Market Makers and the ones referred to as ECN brokers (ECN stands for Electronic Communication Network).
If you are new to trading, you will most likely use Market Makers because they will let clients open an account and trade with as little as $25, or even $1 for that matter. Account opening with them is so easy and fast that you can usually start trading within hours. However, you have to know that Market Makers trade in a way against you – they take opposite side of your transaction, meaning that when you buy, they sell, and vice versa. This is not necessarily a bad thing, but you have to be aware of the mechanics behind your broker.
Market Makers do not charge you commission per trade, like equity or futures brokers do, but rather they make money on a difference between bid and asked price, meaning spreads. So when you shop, pay close attention to that. For example, I hate to use a broker that has over 2 pips spread during normal trading hours on EUR/USD pair. Usually, if the broker does not say that the spread is fixed, that means it will increase drastically during times of high volatility when big news hits the market. I have seen a broker raise his spread to 5-6 times his normal rates. But those occurrences are rare, maybe only few times a month. Still you should be aware of it so you do not get surprised when it happens.
ECN brokers on the other hand usually require accounts of at least $2-$3,000 with an average of about $10,000. With them you will pay a commission, but their spreads are very small, usually 1 pip and less as they do not normally take the opposite side of the trade. Down the line if you prove to be a good trader that can systematically make money in the markets, you can graduate and open an account with one of them. The amount of money saved on spreads will more than compensate for the commissions paid to the broker.
Anyway, when you find a broker that looks good on paper, be sure to test drive him by opening a demo account first. Any decent broker will let you do that. That way you will learn to move around the broker’s trading platform with ease and speed. However, do not expect that your real time executions will be as good as they are through the demo account. They rarely are.
Well, I hope this insert was helpful. In the future I plan to share more info on brokers and trading in general, and tell you about the mistakes I made in my 18 years of trading. Maybe that way, you won’t have to repeat them.
You Might Want To Check These Out:
- Review of Oanda
- 10 Things To Consider When Choosing A Forex Broker
- Forex Broker Frauds – Shocking Facts
- Forex Broker Rating – FX Broker Reviews and Ratings
- Interactive Broker Review
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