Best Forex Broker for Beginners
Once you’ve found a few brokers that seem promising, it’s time to look into what they offer clients in terms of expanding knowledge. This information is usually held under a “Partnerships” tab.
Continually learning and researching is one of the best benefits you can provide yourself with. Websites like EarlyBull provide you comparisons of brokers for every level, from beginner to professional. One of the most popular Forex brokers are XM.COM and Plus500.
Because they are so well connected, they can bring in market professionals to teach their clients about probability, identifying turning points and other such topics. These teach you the ins and outs along with highlighting common mistakes. The more of those you can avoid as you start playing the forex market, the better off you’ll be and the faster you’ll progress. Some even come with access to top of the line software for a limited time.
What should you look for in a good forex broker?
Clearly defined rules
First and foremost, make sure your prospective broker has in place clearly defined rules, services and programs to maintain the market’s integrity. These should shield the public from practices like abuse and fraud directly tied to the sales of options and futures. In addition, these should promote an open, stable and competitive market. For those in the United States, they must be registered with the Commodity Futures Trading Commission, or CFTC, as a Futures Commission Merchants and Retail Foreign Exchange Dealer. They must also hold a membership with the National Futures Association, or NFA. To determine legitimacy, usually this information is listed on the “About” page.
Location is very important
While it may be tempting to seek overseas locations if only because the internet allows for such freedom, this is not always a good idea. Keep in mind that the broker is regulated by the country they live in, not the one you do. This means should something go wrong, you will have few options if any to strike back at a foreign broker. Going local also opens up the door for educational expansion. Many provide traders with seminars teaching the basic and advanced concepts of forex trading.
Optional things to consider involve the year the broker became established and if they accept U.S. clients. Year is generally a good indicator of reliability and stability. The longer it has been around, the safer of an investment it is. As for U.S. acceptance, the Dodd-Frank Act that set into motion increased regulation has scared away many foreign forex brokers from accepting American clients. So long as the broker is registered with the CFTC and complies with the current leverage rules, they are legitimate places to do business. These leverage ratios, 50:1 for majors and 20:1 for minors, saves the firms and their clients from exceedingly high losses.
What kind of orders can you place with a forex broker?
How you place an order with a broker is entirely dependent on the type of order you intend to make. Understanding these is important to ensuring they are placed appropriately so that your entry and exit points are not skewed.
- Market orders are the most common. This is when you want an immediate execution of an order and market price. This can be used to either buy or sell to enter a new position or buy or sell to exit one you were currently in.
- Entry orders are not immediate. You simply denote at what price you wanted to sell or bid at and the currencies are either sold or bought if the number is reached, otherwise nothing happens.
- Stop orders only go into effect when a specified price occurs. This can be utilized for both entering and exiting. There are two subgenres known as buy-stop orders and sell-stop orders. The buy-stop order is when a currency pair is purchased at market price as soon as the market price reaches your defined price. The sell-stop, on the other hand, is when you sell a pair at a market price that matches your specifications. Whether you use one or both, the stop order is best for those that want to enter a market while trading breakouts and both limiting losses and protecting profits.
- The limit order is placed when you want to either enter or exit a position at a specific price or better. Like stop orders, there are two types of limits. Limit-buys refer to buying a currency pair when the market reaches your price or lower while limit-sells have you sell a pair at market price once that hits your desired number or higher. These orders are best for entering the market when you fade breakouts and when you want to set a profit objective.
The previous four are the main orders but there are three other ones that can be implemented should you see fit. Good for the day orders stay open until the end of the trading day. Your broker will be able to tell you when the cutoff time is. This is determine by where their main office is located. For instance, a company in New York will more than likely have a cutoff time of 5pm EST.
Good until cancelled stays active until you manually close it. These can be tricky as they are entirely up to you to keep an eye on. Your broker will not touch these no matter what happens in the market.
Finally, order cancels other is a combination order revolving around an “if/then” type of statement. If the market price hits a certain high or falls to a certain low, the currency is either bought or sold. As soon as this happens, the other orders tied to this statement are immediately cancelled. Basically, this is a lot like casting a net and hoping to catch some fish. The majority won’t get caught but there still are a few that will.
What types of accounts do forex brokers offer?
Of the three major types, standard, mini and managed, each one comes with their own set of rules and stipulations that determine what will work best with your investment style.
For the most part, standard accounts are the most common and are designed for the professional trader with a fair amount of experience. With leverage generally around 100:1, you can begin trading with as little as a $1,000 investment. Even still, many brokers have higher limit requirements equaling to as much as $10,000. Because these accounts bring in the most upfront money, they get all of the best the brokers have to offer. From more support options to perks, standard accounts are treated well. In addition, since pips are worth $10 per one, you have great earning potential. Merely going up 100 pips will net you $1,000. Unfortunately, this also puts you at risk for higher loss.
As the name suggests, those with mini accounts trade at much smaller increments than those with standard accounts. Since the lots are 10 times smaller, the mini is ideal for beginners or those that want to trade small amounts. Many brokers that have standard accounts offer mini accounts as a way to attract even more investors. They are extremely low risk which gives you the flexibility to play around with the system without worrying about losing a lot of money in the process. Many accounts can be opened for as little as $250. The flip side of this, of course, is that the reward is very low. Each pip is only $1, meaning that to earn $1,000 as seen in the example above, you’d have to go up 1,000 pips.
Before moving on the third account type, it’s important to mention the micro account. Not really a big choice, it is even smaller than the mini with each pip totaling $0.10. Those wanting to learn foreign currency exchange are suggested this type since accounts can be open at $25 and the risk is virtually negligible.
Managed trading accounts are accounts where the capital belongs to you even though the buy and sell decisions are all made by professionals. Even so, you are the one who sets the goals. These are further broken into two subcategories. Pooled funds are very much like mutual funds in that money from many investors are pooled into one account and divided out based on investment level. Because of its high risk and reward ratio, those looking for the highest returns will choose this option.
The other, individual accounts, is when each account is handled individually. The best reason to choose this option is because of the professional guidance. Having someone else manage the little details is great when you don’t have the time. Unfortunately, these are the most expensive. Many require a minimum of $2,000 for a pooled and $10,000 for an individual on top of various maintenance and commission fees. It also strips away your ability to act on a good buy or sell opportunity should you see one.
What else is important?
Should I look into the leverage and margin call policies?
The simple answer is, “yes.” The more you know about the forex broker, the better you’ll be prepared to choose. The leverage is simply how high you can go based on how much your down payment is. For instance, a 50:1 leverage means that if you pay $2,000 upfront, you can trade as though you had $100,000. In practice, this gives you the power to make and lose more than you could. Because of this, many American institutions have strict guidelines determining leverage limits. Foreign brokers have variable policies but going out of your legal jurisdiction may not be worth the increased leverage. Leverage is also not fixed. Some change it based on the currency pairs. This usually isn’t a big factor for newer traders but can be a deal breaker for the more experienced.
Margin calls deal with not having enough money to support your open trades. Say that you have $20 total in the account. $10 of that is invested while $10 remains to keep the trade open. If the $10 invested should be affected negatively and grow to $10.01 or higher, your trade will be closed automatically because you no longer possess the means to support it. There are a few ways companies deal with this. FIFO, or first in first out, means only trades whose margin requirements are not met by equity are closed. If they do not choose this route, they then either do LIFO, or last in first out, or simply close all of the trades. Either way, this is a very important point of discussion to be had with all potential forex brokers. You’ll want to make sure that should a mistake happen, you’re not completely locked out of your account. Look for brokers with warning systems set in place.
Is the broker capitalized?
Your money is not something you should play around with. When you enter into the forex market, it is an investment and any mistakes can cost you dearly. When looking through brokers, be sure to look for high capitalization. The more they have, the better their credit relationships with places like banks, resulting in far better pricing for you. A broker that claims they trade through the interbank market is not enough. This place is unregulated and extremely volatile whereas one that is a part of a regulatory authority has a minimum capitalization level. This means the broker has had to have paid upward of $20 million to a bank or lending institution. The figure alone proves the size and stability of the company itself. Be very wary of those that do not publish this information or dodge questions related to it. Many even suggest that unless the broker has at least five good ties to prominent institutions, they should not be trusted.