You may be using a broker to make your currency deals for you, but how can you be sure your money will be handled as you expect? Check a few details with your broker to make the picture clear.
1. Bigger is sometimes better
You need to know how large a firm you are dealing with to assess its financial clout. FX markets are about volume, and the more trading an institution does the more it benefits from economies of scale when it comes to trade prices, the advantages of which get passed on to you, the client.
2. Opening hours
Forex markets run on a 24 hour basis. Does you firm offer 24 hour facilities? If not, you could be missing out on valuable market action.
3. How are rates quoted?
If your broker works through a dealing desk, he will be pricing and executing your trades himself. The result is usually fixed spreads, which tend to be above the average variable spread, however there may be limitations placed on trading while news is being released or major economic events are occurring. If these are key trading periods for you this could be a problem. On the other hand, your broker may not go through a dealing desk, relying instead on bank streaming for pricing and trades. This method is usually unaffected by restrictions during news or economic events.
4. Does your broker use Fractional Pip Pricing?
Traditionally FX brokers have rounded prices up and down to the fourth decimal place, or Pip. Modern brokers are starting to use Fractional Pip Pricing, which allows a tighter and more accurate spread by adding an extra decimal place or Pip.
5. Does your broker scalp the market?
Scalping means to place an order within a spread. However what makes profit for the client makes loss for the market maker, so not all brokers will use this strategy. Scalping can be profitable but carries a high risk.
6. Does your broker offer Positive Rollovers?
Interest gained or paid on FX trades held overnight are called rollover. Quantities vary on a daily basis and rely on fluctuating interest rates. If you sell a currency paying a higher interest rate than its pair, you are subject to a Negative Roll, where you have to pay that interest. A Positive Roll actually earns you interest from a currency purchase that pays a higher rate. Negative Rolls are standard, but Positive Roll are only available from certain brokers.
FX trading can be a risky business, so consider carefully your investment aims before choosing foreign exchange and only invest what you can afford to lose. Quiz your broker carefully before laying down any funds and if you are not happy with his responses, consider finding another broker.