Online FOREX Currency Trading
Learn FOREX Currency Trading Online : Choosing a Broker
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Pips, Ticks, Lots
A pip is the smallest unit in which exchange rates are quoted. Most exchange rates consist of five significant figures. In the case of the GBP/USD one pip equals 0.0001 USD.
A tick is the smallest time interval for which prices are quoted. A tick doesn't correspond to a fixed chronological measure. At busy times for the majors there may be multiple ticks per second, whereas for lesser traded pairs a tick may occur only every few hours.
A lot is the smallest quantity of currency that a broker will buy or sell.
Margin / Leverage
FOREX traders "enjoy" huge levels of leverage compared to other investment markets. This means that for a relatively low stake, eg as little as $50, you can trade and enjoy the profits from far larger sums - eg $100,000 or more.
As in all aspects of life there is no such thing as a free lunch and high leverage means you can also quickly lose large sums of money, or have your position closed by your stop loss because a volatile market moved a few pips against you.
Margin is the amount you must have available in your account in order to execute a trade.
Should a trade move adversely without triggering a stop loss your broker may issue a margin call. This is essentially a demand to deposit more money. If you do not do so within the specified period your position will be closed and you will suffer any resulting loss.
The simplest order type is the market order, this order takes place at the current market price. In such a large and fast moving market this may not exactly match the quoted price.
A limit order gives the trader some protection from the volatility of the market. Essentially it is an instruction to buy/sell at a price no worse than that specified in the order, eg sell GBP/USD at 1.8990 will not be actioned unless/until the exchange rate is at or above 1.8990. A limit order may also include the duration for which it remains valid (eg good for day, GFD), or may be good till cancelled, GTC.
A stop order is used to limit losses and/or lock in profits. When the price hits a certain level it triggers the stop order. Note that when the stop level is reached the order becomes a market order so the order may not be executed at exactly the stated price. It is highly recommended that small traders use stop-losses with all orders to limit potential losses. Careful attention should be given to the placing of stops. These should ensure any losses remain within acceptable limits, but should not be so narrow as to be triggered by normal market volatility. The placement of stops should be a central feature of your trading strategy and should be well practiced in you broker's demo trading environment.
Order Cancels Other, OTO, orders are often used when the price is oscillating between support and resistance levels and the trader is unsure in which direction break-out will occur. Two orders are placed with limits above and below the support and resistance levels such that when break-out does occur one order will be triggered and the other will be cancelled.
Many small traders trade on an intra-day basis such that all positions are liquidated by the end of the trading day. Sometimes a trading strategy may call for the holding of longer term positions. Where positions remain open at the end of a trading day they are said to rollover. In such case interest on the position is payable or due depending on the difference between the national interest rates of the currencies concerned.
Choosing a Broker
Choosing a broker is one of the most imprtant decisions you will make in your onlin FOREX trading career.
Offering retail FOREX trading services is big business with numerous players. The small trader is spoilt for choice and should take some time evaluating the offerings of various brokers before making a selection.
Most brokers will offer free demo trading accounts. Take advantage of these to experience the broker's trading platform, speed of execution, spreads etc. In terms of platform look at both sophistication and ease of use.
Most brokers offer commission free trading, making a profit instead on the spread between the bid and ask price. Spreads are generally lower on the more commonly traded currency pairs. What spreads does the broker offer? Are these spreads constant, or do they vary according to time of day or market volatility?
Requotes occur when the broker quotes one price but then quotes another, or fills your order at a different price when you attempt to trade. Requotes almost invariably work against the trader. Before joining a broker check its policy on requotes.
Is the broker registered with the NFA (National Futures Association) in the U.S. (or an equivalent regulatory body in other countries?
Does the broker offer back-up telephone support in case of Internet connection failure?
Many FOREX Web sites provide discussion boards on which traders will discuss their experience of different brokers - good and bad. Keep up to date with these but retain a healthy skepticism as some postings will be made by those with a vested interest.
Once a broker is selected the arrangement does not have to be for life. The astute trader will always be on the lookout for a better deal and should not hesitate to change in the pursuit of profit.