The Basics of Forex Trading

In order to start trading in forex, one needs to open an account with a forex broker. Today, there are practically a zillion brokers and trading platforms available with various options and procedures. Typical questions for the novice trader are Who is the best broker for me? How can I open account with them? How do transactions take place? Essentially, a broker is a company or individual that mediates between buyers and sellers in return for which a brokerage is charged from the client.

Before choosing an account with a forex broker, investors would be well advised to do some research related to the broker’s reputation, fees, leverage and features of the platform that will be provided. Bear in mind some of the most important aspects of picking a broker:

1. 24 Hour Service

Since the forex is a 24 hour market, it implies that 24 hour technical and trading support is a must! Don’t get caught at the wrong end of the stick when a trade gets stuck and the broker is sleeping. Most Forex broking firms offer toll free numbers through which one can ask about their customer services.

2. Trading Platform

Online trading platform is the lifeline of forex trading. Traders can watch live quotes and trade from the comfort of their living room. Mostlym trading platforms are web application based. The specific features of a trading platform are critical. Some of the will offer basic capabilities while others will go a step further and offer some funky features such as Trade Simulation and Inside Viewer (easy-forex.com).

3. Trading Pairs

Forex is a pretty global ‘asset’, which means that most of the time, forex brokers will allow trading in the standard currency pairs, such as USD/GBP or USD/EUR. However, it always makes sense to seek information from the broker, regarding how many and which currency pairs can be traded. The 8 major currencies- USD, AUD, GBP, NZD, CHF, JPY, EUR, CAD are provided by every broker, since the liquidity is rather high. Some brokers may offer some not so well known currencies including INR, Peso, RMB, etc.

4. Transaction cost

Transaction costs differ from broker to broker. Transaction cost is low when the number of pips is low, as the cost is calculated in points in percentages (pip). Traders need to remember the basic of cost and profit, including ‘lower the transaction cost- higher the profit’.

5. Margin or Leverage

Leverage or margin is a sort of loan from the broker, which enables a trader to trade in much larger quantities than their original investment would allow. The forex market operates on margin money – a fraction of the total trade value is required to be maintained with the broker, in order to sustain a trade. The broker provides the leverage, which determines how much you can trade with, say with $100. For instance, if the leverage is 10X, one can trade upto a value of $1000. This is like a double edged sword, best used judiciously.

6. Lot Size

Lot size refers to standardized units of trading. Typcally, a lot size of 100,000 is ‘standard’, though it varies from broker to broker. A lot size of 10,000 is called a ‘Mini’ lot and that of 1000 is a ‘micro’ lot. Brokers will usually honor the standard lot size, but mini or micro may not always be available with all brokers. In addition, some brokers also provide the ability to decide your own lot size or fractional units.
Finally, please remember that forex trading requires a strong and reliable internet connection in order to execute trades expeditiously at the intended rate.