Most traders are eager to open an account with a forex broker as soon as they have learnt all about forex trading. However this is not a decision to be taken lightly. Even if you only intend trading with small stakes, you should still spend a significant amount of time choosing the right forex broker.
The wrong choice of forex broker could end up costing you money. The reason for this is because for a start there are lots of brokers out there that are not fully regulated. Therefore what this means is that if you deposit money into your account, you may not necessarily see this money again, regardless of whether you generate any profits or not. This is pretty rare but can happen if you go with an unregulated company, particularly one that’s based overseas in an offshore location.
Regarding actually trading forex, another problem you may face concerns spreads. Ideally you want to choose a broker that offers spreads of no more than 2 or 3 points on the major currency pairs and certainly no more than 4. If you are a long-term trader then these larger spreads won’t affect your profits too much, but if you are a short-term trader you will find that these large spreads can really eat into your profits.
For instance let me demonstrate this point by comparing 2 different brokers. Company A has spreads of 2 points and Company B has spreads of 4 points for a particular pair. Now if you were to have 5 winning trades of 10 points each (before accounting for the spreads) in a given day, you would have made 40 points profit trading with Company A and just 30 points with Company B.
So it’s fairly obvious that this is a significant difference, and in the long run these larger spreads can have a huge impact on your overall profits.
Finally another consequence of choosing the wrong broker is that you may quickly come to the conclusion that they do not offer some of the features that you need to be a successful trader. For instance you may open an account with a broker only to find that they offer only the most basic of charting software or that they are very unstable during the busiest times of the day, for example.
So the message I want to get across is that you should spend a great deal of time researching the various different forex brokers before you commit yourself to one in particular. If you don’t you may find yourself becoming upset with your current broker and having to switch to another one soon afterwards.
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