Available Currency Pairs
The new trader should confirm that the prospective broker offers the seven major currencies (AUD, CAD, CHF, EUR, GBP, JPY, and USD). Certain cross currency pairs (a pair in which neither currency is USD) may not be available, since this entails extra risk.
Transaction Costs
As described earlier, transaction costs are calculated in terms of pips. The lower the number of pips required per trade by the broker, the greater the profit that the trader makes. Comparing pip spreads of a half dozen brokers or so will reveal different transaction costs. One arbitrary rule of thumb is that the bid/ask spread for EUR/USD (the most frequently traded currency pair) should never exceed three or four pips, and a two-pip transaction cost is highly preferable.
Margin Requirement
The lower the margin requirement (and hence the higher the leverage), the greater the potential for higher profits and losses. Margin percentages can vary from 1 percent to 10 percent.
Low margin requirements are great when your trades are good, but not so great when you are wrong. Be realistic about margins and remember that they swing both ways. In general, low margins are nice to have available, although you may not normally want to take full advantage of them.
Minimum Trading Size Requirement
The size of one lot may vary from broker to broker, spanning 1,000, 10,000, and 100,000 units. These brokers usually offer a mini-lot, which is one-tenth of a lot. Ideally, a broker offers fractional unit sizes (called odd lots) to allow the trader to select any unit size that he or she wants.
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Rollover Charges
Rollover charges are determined by the difference between U.S. interest rates and the interest rates in the corresponding country. The greater the interest rate differential between the two currencies in the currency pair, the greater the rollover charge will be. For example, if the British pound has the greatest dif- ferential with the U.S. dollar, then the rollover charge for holding British pound positions would be the most expensive. Conversely, if the Swiss franc were to have the smallest interest rate differential to the U.S. dollar, then overnight charges for USD/CHF would be the least expensive of the currency pairs. The whole rollover mechanism is discussed in detail in Chapter 8, on advanced topics.
Margin Account Interest Rate
Most brokers pay interest on a trader’s margin account. The interest rates nor- mally fluctuate with the prevailing national rates. At least the equity in your margin account will be accruing interest if you decide to take an extended break from trading.
Trading Hours
Nearly all brokers align their hours of operation to coincide with the hours of operation of the global FOREX market: 5:00 PM EST Sunday through 4:00 PM EST Friday. Confirm this when selecting a dealer.
Other Policies
Be certain to scrutinize a prospective broker’s “fine print” section to be fully aware of all the nuances that a specific broker may impose on a new trader.
There are several active forums and discussion groups on currency trading on the Internet. Spend a little time in these forums reviewing what others have experienced with certain brokers. Feel free to ask questions, too. Do not get addicted to the discussion groups and forums, however. Although they are a great way to occasionally find information and share information, they are, for the most part, a distraction to the serious trader. The authors check in with the top two or three boards about once a week for perhaps ten minutes each, maximum.
The premier board at this time is www.moneytec.com, but also worthy of mention is www.global-view.com.Both of these boards accept paid advertising.
Check in with these forums while doing your initial due diligence, thereafter on a periodic basis. Again, do not become addicted to them.
Broker Selection Process
• No broker/dealer is perfect. Having no centralized exchange makes the selection process very important; the total number of distinct plat- forms is now well over 100!
• Start with at least three prospects so you may do comparables and per- haps negotiate if you are opening a larger account (typically over
$25,000).
• Ask for references with whom you can speak on the telephone.
• Check the regulatory agencies in the country in which the broker resides if the broker/dealer is regulated.
• Go to the various FOREX discussion groups on the Internet. Look for information on that broker. Ask questions, too. But be careful—the person answering you may be the broker or one of the broker’s “repre- sentatives.”
• Requoting. This is the major complaint against online brokers. It occurs when the trading platform does not give you the quote you select on the screen, but something else, not as good—perhaps as much as 10 pips difference. You’re not likely to find an online broker who doesn’t requote occasionally, but beware brokers who requote often, especially when you are winning!
Requoting is a very much discussed topic today in the FOREX com- munity. Because there is no centralized exchange it is going to happen from time to time. When reviewing the requoting of a broker/dealer it is important to ask 1) How often does it occur?and 2) When does it occur?
If requoting happens in fast-moving markets, it’s probably the nature of the beast. If it happens whenever you have a big winning trade, beware.
• Review all of the broker’s paperwork (typically downloadable from the broker’s site). Compare it to others for wording, terms, and so on.
• Send a list of email questions to each of your initial prospects—this is to get answers and to test for responsiveness.
• Call the broker’s telephone number to see if voice contact is reliable.
The authors would not personally deal with a broker who does not offer a voice backup or customer service support line.
• Compare especially: account minimums, costs (pip spreads), the handling of account withdrawals (time period), and margin. Pips vary from cur- rency pair to currency pair, the most popular having the lowest spread;
two pips for the EUR/USD pair is not uncommon. Some dealers may charge a small “lot fee” that can add up quickly, so be sure to ask if a dealer has such a fee and what it is. Get hard copy printouts of everything.
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Finding the right broker/dealer is a critical part of the process. It is not easy and requires some real work on your part. Do not pick the first one that looks good to you. Keep looking. Do not be necessarily put off by persistent sales representatives but be sure to shun high-pressure sales tactics.