Do you have confidence in the U.S. dollar? Many people don't, as government intervention meant to stem the economic bleeding of the financial crisis continues to devalue the currency. The dollar hit a four-and-a-half-month low against the euro last Friday, while at the same time, the Canadian dollar has moved up to new highs for the year.
In addition, the U.S. dollar has fallen about 6% against the yen since its near-term high on April 6. Fear that the printing of money will be the only way out of the current crisis has led to a mass exodus of the dollar.
We've seen this before, the relative strengthening and weakening of international currencies against each other - and we will see it again. Those of us that want to take advantage of this volatility have a relatively new asset class to choose from as part of our portfolios - forex.
Forex trading, or the off-exchange retail currency trading market, is a place that anyone can go to buy and sell currencies, to profit from their moves or to hedge against currency risk that may exist elsewhere in their portfolio. (To learn more about hedging strategies, read the answer to our frequently asked question, What is hedging as it relates to forex trading?)
Want to get started? Be sure to look around before settling on a broker.
There are a multitude of choices out there, when it comes to forex brokers. A quick search on Google for "forex brokers" gives almost 3 million results. Treat your choice as you would with any other major financial decision and look at the pros and cons of each firm. Some things to look for are:
- What are the commissions/spreads? Some brokers don't charge a commission, and are compensated by the spread in price between the bid and the ask. Others charge a commission and allow you to place trades within the bid and ask, essentially creating your own market.
Others still, will charge both - charging a higher commission to compensate for providing a tighter spread. Each has its own benefits, but also its own costs. Carefully consider which would fit into your trading style. Long term traders, may care less about the spread, as they are going for large moves, and the one to three pips lost in the spread may not make a large difference to their bottom line.
Make some trades on paper first, comparing what different trades would cost from different brokers, before settling with one.
- Does the broker allow you to adjust your leverage? High leverage can create high returns, but also large losses. Using leverage sensibly will keep you in the game. Many brokers offer leverage of 200:1 and up, which can destroy an account quickly if used constantly. High leverage can have its uses, but you should be able to use less if need be. Many experts say that 20:1 leverage should be plenty for most adequately-funded traders.
- How do you like the software? There are as many different trading applications as there are brokers - play around with a few to see what you like the best. Things to look for could be the extent of their technical analysis and charting tools, whether it includes a live data feed, how intuitive the order entry is, and how fast the software runs on your computer. Ease of use adds to speed, and speed is of utmost importance with Forex trading.
A wide expanse of tools, will add to the amount of different strategies you can try out. Another thing to look at is whether the software runs remotely through a web browser, or whether you have to download to you computer. Remote software means that you will always have the newest version, and you can make trades when you are away from home, but desktop software often runs faster. Play around with both by signing up for some demo accounts to see what you prefer. (For further reading on this, read What should I look for when choosing a forex trading platform?)
- Are they regulated? Because the foreign exchange market is widely unregulated, look for brokers that are registered with their local regulatory body. This would be the National Futures Association (NFA) in the U.S. This helps to ensure that the firm is adhering to certain requirements, and you are afforded additional protections.
By keeping these points in mind while demoing accounts from different brokers, you will be sure to find one that not only fits your needs, but will give you a greater sense of security, so that you can focus your efforts on more important things - like making great trades!
Want to learn more about getting started in the Forex markets? Read our Forex Market Primer.