What is forex?
The foreign exchange market, also called Forex (short for Foreign Exchange) is the largest market in the world. Contrary to stock markets, which have a precise geographical location, there is just one single exchange market. Currency transactions are made over the counter in Paris as well as in London, New York or Tokyo. Because of the time differences between different financial centres, the currency exchange market operates continuously, 24-hours-a-day, from Sunday evening to Friday evening. This way, it is always possible for an operator to buy euros, dollars or any other currency at any time.
What are the advantages of trading in forex?
The foreign exchange market presents several unique advantages that make it a particularly attractive market for any investors seeking to boost the performance of their financial asset portfolios.
- Smaller charges. The only charges applied are related to the “spread”, meaning the difference between the purchase price and the sales price.
- Earning opportunities in case of increases as well as decreases.
- A very liquid market, open 24-hours-a-day: with an average volume of almost 3,500 billion dollars per day, Forex is the most liquid market in the world.
- A safe market: Because of the significance of the volume exchanged and the non-centralized nature of Forex, there is almost no risk of harmful effects stemming from the internal organization of this market. An isolated player cannot control prices by itself over the long term.
- The use of accessible tools: Brokers provide trading platforms that are increasingly accessible and professional.
- The existence of mini-accounts: a good solution to test your capacity to manage fluctuations in the currency exchange market, as well as to define your own management rules.
- A significant leverage effect.
- A market accessible to everyone: Because its way of trading and the use of new-generation online platforms, Forex trading is really fun and intuitive.
How to choose a Forex broker
To choose a good broker, you need to consider several factors, namely:
Brokers fight a ferocious battle to offer their clients the tightest possible spreads, since they understand that this often represents a decisive element in the final decision of an individual investor. Spreads vary greatly between brokers and from one currency pair to another. They take into account the volatility of the cross handled and the remuneration margin of the market maker.
The spread considered most often is the one of the EUR/USD cross, the main pair handled by investors in Forex. It is rare to find serious brokers offering spreads lower than two pips on this pair. Therefore, be wary of promises of spreads of 1 pip or less since they often reveal great gaps in the guarantees of execution for your trades (non-instantaneous execution, increases in the range of the spread when the market turns more volatile, etc.) and in the safety of your deposits (no bank guarantees in case of bankruptcy).
Market maker or just a broker?
There are many ways to access the currency exchange market. Your broker will either be a market maker or use the platform and real-time prices of a market maker or a “no dealing desk” system. In itself, being a market maker or not is not necessarily a determining factor but if your broker is not a market maker this could prevent certain conflicts of interest.
The importance of your broker on the market
Because of the above, it is necessary to verify the importance of the market maker on the market. This is what will allow you to check the flow of the platform, its popularity among investors and, thus, the overall efficiency of the tool for your everyday trading.
Make sure that your broker provides you with solid bank guarantees. In October 2005, REFCO, the world leader in Forex at the time, took many of its clients down with it, with no compensation. However, markets are now better organized and regulated and market players are more solid.
The guarantee of spreads
When important financial figures are made public, prices can significantly evolve under the influence of speculation movements. Good opportunities for capital gains should then be seized. However, they could be reduced or even eliminated by a widening of spreads at that moment (this is known as slippage). Therefore, make sure that spreads are guaranteed by your broker, at least on major crosses, except for moments of very strong volatility.
The number of clients
It is always delicate to find out about a broker’s number of clients. However, this information can eventually allow you to verify their soundness. The only way of obtaining this information is to ask your broker directly.
Popularity in forums
It could prove interesting to browse through forums about Forex or on financial markets. There, you will always find testimonials by people who are already clients of certain brokers and you can then evaluate their degree of satisfaction.
Required minimum lot sizes
Generally speaking, there is no minimum transaction amount in Forex or, if it exists, it is very low. However, with certain brokers, you can only buy or sell currencies in lots of 50,000 or 100,000, which is not very flexible.
Support from your broker during your training
During your trial period, your broker will generally contact you by phone. This is an opportunity for you to ask all your questions and for your broker to teach you about the possibilities and the use of the platform, as well as to talk to you about the services and guarantees available to you. Generally, regular follow-up from your broker, free training to use the platform or the availability of sellers are positive signs about the seriousness of the broker.
The geographical location of your broker
It is important to know what country your broker is located in. If he is abroad, it is a good idea to establish a first contact by phone so you can make sure that there is at least one person who speaks your language.
Graphs and information in real time
Forex trading platforms are increasingly thorough. They allow you to trade currencies, study graphs with the help of technical indicators, discuss things directly with your broker, monitor updates continuously… you should look for many of these features during your trial period.