No two forex brokers are alike. As individual as your forex needs, so are the brokers. It is essential that you consider the following points before settling on a broker. Feel free to ask them as many questions as you want. If you aren’t satisfied with their answers don’t feel pressured into settling. Just like a second opinion for health matters, get as many opinions as you need before selecting your forex broker.
You may be tempted into settling for a small institution, believing you’ll be rewarded with one-on-one, face-to-face care. Think again. Institutions with larger trade volume and secure financials will access better prices and execution. This is a direct result of the forex market’s over-the-counter nature as it has no centralised exchange. If you settle for a bigger broker you may be able to reap the advantages of size, better prices and better execution.
Dealing Desk: yes or no?
Carefully consider how the different brokers execute your orders before settling. Forex brokers quote rates through a range of methods. The two most popular options are either a dealing desk approach or no dealing desk approach. A dealing desk approach entails the broker creating the pricing for you and executing your orders on your behalf. Normally the spread (we’ll get to that next) is fixed meaning that the spreads are higher than average variable spreads. Be sure to review the restrictions on placing orders during economic, social or political change as this is the key time to trade. In contrast to the dealing desk approach, the no dealing desk approach entails multiple banks streaming competitive prices through your broker. Therefore your orders will be executed by the actual banks. Through a no dealing desk approach there is normally no retractions on trading during economic, social and political change.
Spreads: Fractional pip pricing and scalping the market
A currency’s spread refers to the amount of pips between the bidding and asking price. The pip is simply the smallest movement between a currency pair. How brokers approach spreads should help inform your decision. Brokers, such as Markets.com, use the spread to make money on the forex trade that runs through their network. Scalping the market is the term used for when traders prefer shortterm scalping strategies. Scalping entails taking advantage of the changes between a currency pair over a relatively short time period. Here, orders are placed inside the spread and in order for this approach to be beneficial for you; your broker needs to lose. Many forex brokers veto this approach as it involves high risk levels.
Rollover: Negative versus positive.
Simply put, rollover refers to the interest lost or gained on forex positions overnight. Rollover is influenced by the different interest rates between a currency pair. Rollovers are fickle and fluctuate daily. When a currency is sold that pays a higher interest rate interest is automatically paid. This is called a negative roll. The opposite, a positive roll, is when a currency is bought that yields a higher interest rate.
Therefore you earn interest. The carry trade is a forex strategy that employs the positive rollover technique. For example, USD/JPY where your broker could use the Yen’s low interest rate to buy US dollars with its high interest rate. This technique is profitable but entails a high risk level owing to the amount of leverage. Negative rolls are common place, whereas some forex brokers will not offer positive rolls.
Hedging: a contested approach
Hedging allows a broker to hold buy and sell positions within the same currency pair at the same time. This may sound profitable in theory but be warned: a hedged position does not automatically limit your risk. A trader could be in a losing position on both sides of the trade. An American self-regulatory organisation, The National Futures Association, recently announced that they would follow the “Compliance Rule 2-43” which bans forex brokers from opening a hedged position within the same account for their customers. Hedging is a contested approach and should be considered with caution.