Forex Walkthrough

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Introduction - Brokers

The forex (FX) market has many similarities to the stock market, but there are some key differences.

Choosing a Broker
There are many forex brokers to choose from, just as in any other market. Here are some things to look for:

Look for low spreads
The spread, calculated in pips, is the difference between the price at which a currency can be purchased and the price at which it can be sold at any given point in time. Forex brokers don't charge a commission, so this difference is how they make money. In comparing brokers, you will find that the difference in spreads in forex is as great as the difference in commissions in the stock arena. (To learn more, check out How To Pay Your Forex Broker.)

Make sure your broker is backed by a quality institution
Unlike stock brokers, forex brokers are usually tied to large banks or lending institutions because of the large amounts of capital required to provide the necessary leverage for their customers (more on leverage in a moment). Also, forex brokers should be registered with the Futures Commission Merchant (FCM) and regulated by the Commodity Futures Trading Commission (CFTC). You can find this and other financial information and statistics about a forex brokerage on its website or on the website of its parent company.

Find a broker who will give you what you need to succeed
Forex brokers offer many different trading platforms for their clients - just like brokers in other markets. These trading platforms often feature real-time charts, tools to analyze these charts, real-time news and data, and even support for trading systems themselves. Before committing to any broker, be sure to request free trials to test different trading platforms. Find a broker who will give you what you need to succeed!

Get the right account type
Many brokers offer two or more types of accounts. The smallest account is known as a mini account and requires you to trade with a minimum of, say, $250, offering a high amount of leverage (which you need in order to make money with so little down). The standard account lets you trade at a variety of different leverages, but it requires a minimum initial investment of around $2,000. Finally, premium accounts, which often require significant amounts of capital, let you use different amounts of leverage and often offer additional tools and services. Make sure the broker you choose has the right leverage, tools, and services relative to the amount of money you are prepared to invest. (For more, see Forex Basics: Setting Up An Account.)

Things to Avoid
Sniping or Hunting
Sniping and hunting - or prematurely buying or selling near preset points - are shady acts committed by brokers to increase profits. Obviously, no broker admits to committing these acts. Unfortunately, the only way to determine which brokers do this is to talk to fellow traders; there is no blacklist or organization that reports such activity. Talk to others in person or visit online discussion forums to find out who is an honest broker. (For another broker tactic that can cut into your profits, read Price Shading In The Forex Markets.)

Strict Margin Rules
When you are trading with borrowed money, your broker has a say in how much risk you take. As such, your broker can buy or sell at its discretion, which can be a bad thing for you. Let's say you have a margin account, and your position takes a dive before rebounding to all-time highs. Well, even if you have enough cash to cover, some brokers will liquidate your position on a margin call at that low. This action on their part can cost you dearly.

Talk to others in person or visit online discussion forums to find honest brokers. Signing up for a forex account is much the same as getting an equity account. The only major difference is that, for forex accounts, you are required to sign a margin agreement. This agreement states that you are trading with borrowed money, and, as such, the brokerage has the right to interfere with your trades to protect its interests. Once you sign up, simply fund your account, and you'll be ready to trade!

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