What to Look for in a Forex Broker
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The forex market is a great place for individual investors, large

and small, to engage in thrilling, fast-paced and potentially

profitable trades. But you can't participate in forex currency

trading if you don't first have a forex brokerage account. While

most stock-market brokerages allow you to also trade bonds, mutual

funds, and other financial instruments, forex brokerage accounts

are typically standalone entities. Here is what you need to know

about opening a brokerage account.

Leverageair max

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One of the major benefits of trading currencies is the tremendous

amount of leverage even small-time traders are allowed. Typical

leverage is 100:1, meaning for every $1 in your brokerage account,

you can control up to $100 in currencies. A thousand dollars would

thus allow you to control $100,000 worth of currency, so if the

currency went up by 1% -- $1,000 -- you would actually double your

money! But if the currency went down by just 1%, you would lose

all $1,000 of your investment. What would happen if the currency

went down by 2%? Well, theoretically, you would lose $1,000 above

and beyond your initial investment, but in reality, a brokerage

firm will usually step in and prevent this kind of loss.

Your main decision is what level of leverage to apply for.

Leverage is given based on credit-worthiness, so if your credit

report is pretty poor, you might want to pursue just 50:1 leverage

-- which still gives you a lot of room to profit but limits your

risk. Alternatively, if you have true nerves of steel and a real

knack for forex trading, you may be able to apply for as great as

250:1 leverage!
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Spreads

The good news is that there are no commissions charged on forex

trades. The bad news is that, like stocks, forex currency pairs do

have a bid/ask spread -- meaning a market maker will pay less for

a currency than he is willing to sell it for. These spreads are

extremely small, usually less than 0.05 cents, but the wider the

spread, the more costly trading will be over the long run.

Not every brokerage has the same spreads, so it is important to

review the typical distance between the bid and ask prices before

selecting a broker.

Other Considerations

First and foremost among all other considerations are the currency

pairs that a given brokerage deals in. For example, if you want to

perform a Japanese yen for Swiss franc trade, you will need to

find a brokerage that offers that currency pair. Virtually every

forex brokerage deals in the main currency pairs -- the U.S.

dollar vs. each of the following currencies: The Euro, the British

pound, the Australian dollar, the New Zealand dollar, the Canadian

dollar, the Swiss franc, and the Japanese yen -- but not all

brokers deal in every possible "cross currency" pair (i.e.

currency pairs that do not involve the U.S. dollar).
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Finally, it's important to deal with a reputable broker. Currency

trading is far less regulated than most other financial markets,

and there are a lot of fly-by-night companies in the business. Be

sure to investigate the company before sending them a check for a

few thousand dollars -- it will be time well spent.

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