The 15 Questions you should ask your Broker.
There are many Forex Brokers, but not all were created equal. When it comes to your money, you want to be certain that your Broker meets your expectations. It is your right to ask as many questions as you need to feel comfortable about your venture and if you don’t get the answers your want, you should consider finding another Broker.
Why Size Does Matter
Size matters. Because the Forex market is an over-the-counter market with no centralized exchange, not everyone receives access to the same prices or quality of execution. Institutions with the largest trade volume and the most solid financials have access to better prices and execution. The bigger the broker, the better they are able to pass on the benefits of size, better prices, and better execution to you.
Who Executes Your Orders?
Not all Forex Brokers quote rates the same way. Below are two possible options:
- Dealing Desk means that your Forex Broker creates the pricing and executes your orders. The spread is usually fixed, which means that traditionally, the spreads are higher than average variable spreads. Check for restrictions on placing orders during news or economic events; for many traders, this is a key time to trade.
- No Dealing Desk usually means that multiple banks stream competing prices through your Forex Broker, so your orders are executed by the banks themselves. This means that there are usually no restrictions on trading news or economic events, but you should check with your broker.
Most major currency pairs are quoted to four decimal places, so a pip would typically equal .0001 or one basis point. Forex Brokers generally round the price up or down to the nearest pip; but some now offer Fractional Pip-Pricing. It ads an additional decimal place, so spreads are usually tighter and more accurate.
Many traders favor short-term scalping strategies, which involves placing orders inside the spread. For scalping to be profitable for the client, the market maker must lose, so some Forex Brokers disallow the strategy. This strategy involves a high level of risk.
Rollover is interest earned or paid on Forex positions held overnight. It varies depending on the difference in interest rates between a currency pair and fluctuates day to day with the movement of prices. A Negative Roll is when you sell a currency that pays higher interest rate, so you pay interest. A Positive Roll is when you buy a currency that pays higher interest rate, so you can earn interest. Negative Rolls are routine, but not all Forex Brokers offer positive rolls.
The “Carry Trade” is a popular Forex strategy which benefits from Positive Rolls and the high leverage available in the Forex market. For example, if you buy the USD/JPY, you can earn a positive roll. You are essentially borrowing the Japanese yen at a low interest rate cost to buy the US dollar with a high interest rate earning. Remember that leverage can dramatically amplify your losses, so beware of this technique, as it carries a high level of risk.
Hedging lets you simultaneously hold BUY and SELL positions in the same currency pair. The most effective way to trade a market if you are uncertain about its direction is to find concrete support and resistance levels. This allows you to pinpoint levels where significant price action will take place.
Hedged positions do not necessarily limit risk as traders can find themselves losing on both sides of the trade. While this strategy tends to work temporarily in range markets, it does not work well in trending markets. Placing stop-loss orders on your positions to mitigate your risk is strongly recommended.
The National Futures Association, a self-regulatory organization in the US, adopted a new Compliance Rule 2-43 in 2009 that prohibits customers of Forex Dealer Members to open a “hedged” position in the same account. This rule may not apply to Forex Dealers outside of the US.
Forex trading works 24 hours a day. Does your Forex Broker? When you ask them questions, do they answer them clearly and honestly or do they give you the run-around? If your Forex Broker can’t answer the 15 questions below, you may want to look for one who can.
15 Questions You Should Ask Your Forex Broker
The following 15 questions are based on the above information and relate to basic information that your Forex Broker should answer without hesitation.
- How long have you been a Forex Broker?
- In what financial condition is your company? Will you show me your balance sheet?
- Do you have good relationships with reputable banks?
- Who is quoting the rates, my broker, a bank, or multiple banks?
- Are the spreads fixed of variable?
- How tight are the spreads?
- Do you offer Fractional Pip Pricing?
- Are there any trading restrictions?
- Can I place orders inside the Spread?
- Can I earn interest on positive rolls?
- Can I earn positive rolls at all margin levels?
- Are rollover rates displayed prominently? Where?
- Does the trading platform allow me to hedge?
- Can I lose more money than I put into my account?
- What is the quality and availability of customer service?
Be aware that trading foreign exchange on margin carries a high level of risk, and may not be suitable for all investors. The high degree of leverage can work against you as well as for you. Before deciding to invest in foreign exchange you should carefully consider your investment objectives, level of experience, and risk appetite. The possibility exists that you could sustain a loss of some or all of your initial investment and therefore you should not invest money that you cannot afford to lose. You should be aware of all the risks associated with foreign exchange trading, and seek advice from an independent financial advisor if you have any doubts.