Currency Trading For Dummies

How good are trading executions? The key to evaluating the brokerage’s trading platform is the speed and reliability of your executions. Are you consistently able to trade at the price you’re trying for? If you’re trying to sell, and your trade request fails, and you’re offered a lower price, you’re probably being requoted. (Requoting effectively means you’re trading on a wider spread than you bargained for.) For stop-loss orders, the brokerage’s execution quality comes down to the amount of slippage experienced when prices gap following data or news announcements. You should expect some slippage on stop-loss order executions — the question is, “How much?”

How are orders filled? Ask exactly when and how your stop-loss or take-profit orders will be filled. Is a stop-loss sell order filled when the bid price matches the stop price, such as a selling stop at 10 triggered by a price quote of 10/13? Are stops guaranteed? If so, are there any exceptions to such guarantees? What’s the policy for filling limit orders? Does the market bid price need to match the price of the limit order to sell, for example?

Are dealing spreads fixed or variable? Trading spreads matter most depending on your trading style. If you’re a high-frequency, short-term trader, aim for the tightest spreads possible. If you’re more of a medium- or long-term trader making fewer overall trades, spreads should not be the deciding factor when selecting a broker.

Many forex brokers offer variable spreads to appeal to traders looking for the narrowest spreads. But remember, variable spreads can also get wider as well as tighter. Make sure you understand how wide spreads can go if they’re variable, because when the market’s really moving, you may not see the narrow spread you counted on.

If spreads are fixed, are there any exceptions to the fixed-spread policy? Dealing spreads are especially subject to variation around important data and event announcements, so you want to be sure about the firm’s trading policies at these times. Are there any restrictions on trading around news announcements? What about placing orders? Are you able to trade immediately after economic data is released, or are your trades subject to delayed processing by the broker’s trading desk? Are your orders subject to slippage following data/event announcements? Remember: Tight spreads are only as good as the execution that goes along with them.

Is the broker a market-maker? Some firms claim to operate a non-dealing desk (NDD) or another alternative to the dealing desk (market maker) model. Though these firms may tout the NDD model as superior to the market-making approach, you have to ask yourself, how is the firm making its money?

What is the commission structure? Most online forex brokerages provide trade executions without charging trade commissions, like in stock trading. Instead, the broker is compensated by the price spread between the bid and the offer. Some brokers have chosen a commission-based pricing structure coupled with narrower trading spreads. If the brokerage charges a per-trade commission, you need to factor that cost into your calculations to see if it’s really a better deal than a spread-based commission.

How much leverage does the firm offer? Too much of a good thing? In the case of leverage, yes. Firms offering excessively high leverage are not looking out for the best interest of their customers. A good guideline is that anything more than 200:1 is too high.

What trading resources are available? Evaluate all the tools and resources offered by the firm. What charting services do they offer? Do they offer discounts to independent charting services or newsletters? What newsfeeds are available? Do they provide live market commentary on a regular basis? What research does the firm provide? Are you able to access the trading platform through wireless devices? Are you able to receive rate alerts via e-mail or text message? Does the firm allow Application Programming Interface (API) trading? Does the platform offer robust reporting capabilities, including transaction detail, monthly statements, profit-and-loss (P&L) reports, and so on?

Is 24-hour customer support available? Forex is a 24-hour market, so 24-hour support is a must. Can you contact the firm by phone, e-mail, and chat? Are the firm’s representatives knowledgeable? The quality of support can vary drastically from firm to firm, so be sure to experience it firsthand before opening an account.

Is the firm regulated, with solid financials? In the United States, online currency brokerages are regulated by the National Futures Association (NFA), which is the self-regulatory body subject to Commodity Futures Trading Commission (CFTC) oversight. Visit the NFA’s Web site (www.nfa.futures.org) to confirm that the firm is a registered Futures Commission Merchant (FCM, the CFTC designation for brokerages). Among the registered firms, look for those with solid regulatory records and strong financials.

Who runs the firm? Management expertise is a key factor, because a trader’s end-user experience is dictated from the top and will be reflected in the firm’s dealing practices, execution quality, and so on. Review staff bios to evaluate the level of management and trading experience at the firm. If the brokerage doesn’t tell you who is running the show, it may be for a reason.

Bloomberg.com (www.bloomberg.com): A rich resource of both market data and analysis, where you can stay on top of breaking news and evolving market sentiment.

Reuters.com (www.reuters.com): One of the leading forex-market news providers, offering a highly international perspective on global events, which is frequently the defining factor in currency movements.

MarketWatch.com (www.marketwatch.com): Offers up-to-the-minute market updates and analysis along with a broad array of market data.

FXstreet.com (www.fxstreet.com): Focused on the individual currency trader. This site offers a variety of information, from reviews of the latest developments in online trading to multiple research contributions, from both retail and institutional sources.

Get to know the major economic data reports from all the major economies.

Understand the importance of expectations versus actual outcomes. Anticipate alternative outcomes to better gauge how the market is really reacting.

Stay aware of the pricing in and pricing out of market expectations that occurs in advance of data and events.

Factor incoming data and news into the major fundamental themes of interest-rate expectations, economic-growth prospects, inflation, and structural developments.

Be aware that technical and position-related themes can overwhelm the fundamentals.