Forex Walkthrough

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Level 2 Markets - Forex Brokers

Whenever you devote money to trading, it is important to take it seriously. When getting into the forex (FX) market for the first time, it basically means starting from square one. But don't worry, you don't have to be left in the dark when it comes to learning to trade currencies; unlike with some of the other markets, there is a variety of free learning tools and resources available to light the way. For example, you can become FX-savvy with the help of a variety of virtual demo accounts, mentoring services, online courses, print and online resources, signal services and charts. With so much to choose from, the question you're most likely to ask is, "Where do I start?" Here we cover the preliminary steps you need to take to find your footing in the FX market.

Finding a Broker
Your first step is to pick a market maker with which to trade. Some are larger than the others, some have tighter spreads while some offer additional bells and whistles. Each market maker has its own advantages and disadvantages, but here are some of the key questions to ask when doing your due diligence:

  • Where is the FX market maker incorporated? Is it in a country such as the U.S. or the U.K., or is it offshore?
  • Is the FX market maker regulated? If so, in how many countries?
  • How large is the market maker? How much excess capital does it have? How many employees?
  • Does the market maker have 24-hour telephone support?

In order to ensure that your money is safe and that you have a jurisdiction to appeal to in the event of a bankruptcy, you should seek out a large market maker that is regulated in at least one or two major countries (ie. USA, Britain, Canada). Furthermore, the larger the market maker, the more resources it can put toward making sure that its trading platforms and servers remain stable and do not crash when the market becomes very active. Third, you want a market maker with a larger employee base so when placing trades over the phone you don't have to worry about getting a busy signal. Bottom line, you want to find someone legitimate to trade with and avoid a bucket shop. (For related reading, see Understanding Dishonest Broker Tactics.)

Checking Their Stats
In the U.S., all registered futures commission merchants (FCMs) are required to meet strict financial guidelines, including capital adequacy requirements, and are required to submit monthly financial reports to regulators. You can visit the website of the Commodity Futures Trading Commission (an independent agency of the U.S. government) to access the latest financial statements of all registered FCMs in the U.S.

Another advantage of dealing with a registered FCM is greater transparency of their business practices. The National Futures Association keeps records of all formal proceedings against FCMs, and traders can find out if the firm has had any serious problems with clients or regulators by checking the NFA's Background Affiliation Status Information Center (BASIC) online.

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