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Choosing Forex Broker - Guidelines and Myths
Written by: PaxForex analytics dept - Tuesday, 19 September 2017 0 comments
The explosive growth of forex trading over the past decade continues to attract new traders every single day. There are several good reasons for this trend as the capital requirements are the lowest in the global financial world which means that even small deposits have a chance to grow over time and the decentralization of the market in general together with the availability to trade essentially 24 hours per day for five days a week are two of the key drivers of growth. Traders usually trade with leverage which is another great benefit once learned how to implement properly.
For traders who are thinking about entering the ever-growing forex market, the initial information and sheer size may be intimidating at first. It is essential that a considerable amount of time is invested into basic education before opening and account. This ensures that a solid foundation is present which reduces risk and allows a new trader to open an account looking forward to the benefits of it rather than being focused on other facts which will have no impact on the trade once understood.
There is plenty of material online as well as off-line and it is up to the traders to decide which school of thought to follow, but regardless if the trader is a technical trader, fundamental trader or a combination of both a forex trading account is a requirement. It gives the traders access to the markets, allows the traders to execute trades and manage the portfolio. For this purposes a forex broker is a must and will become the silent partner of the forex trader. Choosing Forex Broker - Guidelines and Myths is a great starting point before roaming the internet and deciding on where to open an account.
We will start with three guidelines which should be followed in order to prevent surprises and to maximize the potential of any forex portfolio. One of the biggest impacts a trader will feel over time comes from spreads on currency pairs. The spread is the difference between the bid price, the price at which a currency pair is sold, and between the ask price, the price at which a currency pair is bought. The smaller the difference between bid and ask price, the better for the trader. The reason for this is that once a trade is entered, a traders is faced with a loss due to the difference. Prices move fast so the loss can turn into a profit in a matter of a second, but some strategies are build on small price movements which makes a tight spread even more important.
Speed of execution is another key aspect of trading. Typically a trade should be filled within no more than 1.0 second after entering the trade. Often it is
executed in half that time or less. A fast execution translates into the liquidity of the forex broker. Those who are able to fill orders fast have access to a greater liquidity pool while those who require longer should be avoided. There can be times during high volatility events where the trade execution may take a bit longer, but those are exceptions and should happen less than once out of one hundred trades. The reason for fast execution times is the due to the fast price movement in currency pairs, especially in the most liquid pairs.
The amount of assets offered by a forex broker is also very important. A successful trading strategy works on all currency pairs and sometimes there may be a lack of movement in a particular pair due to various reasons. The more currency pairs are offered the greater the possibility for a strategy to find a profitable trade. It also allows for greater diversification of the portfolio as traders should not be focused on a single currency pair. Diversification is a key risk management control and will help protect the trader from losses.
As the headline suggests, there are also several myths when it comes to selecting a forex broker and we will touch on two of the most important ones. Possibly the biggest myth is that a regulated broker is a requirement. Some of the best brokers remain unregulated which allows them to operate a better brokerage overall. On the other hand some of the most regulated brokers, especially in the US, have defrauded their traders and stole money. Of the regulated brokers, many select a country with lax regulation so they can claim they are regulated. So when looking at a broker, ignore regulation and look at what will improve your trading. Try the broker and build a relationship over time, that is the only way to determine if you are trading with a solid broker or not.
Another big myth is that the use of leverage will result in losses. This is incorrect as leverage does not result in a trader facing losses, the lack of risk management does. Using leverage is a great way to maximize profits, but it needs to be used properly. Every traders needs to determine how much each trade is allowed to be wrong before closing it. So if a traders decided the maximum loss on a trade will be $50, then using leverage or deciding against it does not impact the loss which will be capped at $50. Learn about the myths and follow a few simple guidelines and choosing forex broker mistakes will be avoided.