The forex market though similar to the equity market has a number of differences. Being aware of those differences will help you get started in the business of trading in the forex market. However, most important is that you select a good forex broker.
Selecting a good forex broker- Just like there are several brokers in the equity, real estate, mortgage business etc., there are many brokers in the forex market also. You need to be careful that you choose the right broker. Some things that you should look for and would help indicate the right broker are:
Low spreads- Spread is the difference between the purchase price of a currency pair and the price at which it can be sold at some specific point in time. It is the difference that the broker will charge for selling the currency to you and the price that he will pay if he buys the currency from you. You have to pay this difference only once. The broker will add this to the price of the currency and keep it with him. This difference/spread is his earning in the deal. Forex brokers do not charge a commission and this difference is the way they make their money for the transactions they conduct. Looking into spreads to make a comparison of forex brokers you will find that it is much like the difference found in commissions charged by share brokers in the equity market. You can save money in forex trading with lower spreads.
Spread is calculated in pips. A pip is short for Percentage in Point and is the smallest amount of price move in the forex trade. For example, if the EUR/USD is trading at 1.3000 and later moves on to 1.3010 it is supposed to have moved by 10 pips. One pip is equal to 1/100 of one percent which can be numerically expressed as 0.0001. Accordingly two pips would be 0.0002, three pips 0.0003 and so on. An example of a five pip spread for any currency pair can be 1.1520/1.1525. In case you buy and sell immediately without any change in exchange rate happening, you stand to lose money for certain because the broker’s buy price is always lower than the selling price. Spreads offered by different brokers can greatly vary and though there may not appear to be much difference in a 4 pip and 5 pip trade it can translate into quite a big amount in real terms and mean even a 25% difference in trading costs depending on the number of transactions, the currency traded and amount involved.
Institutional backing- Forex trading requires huge capital and therefore forex brokers are generally attached to big lending institutions and banks which provides them with the necessary leverage. Brokers in the forex business also need to be registered with the FCM (Futures Trading Commission) and are regulated by the CFTC (Commodity Futures Trading Commission). All the financial information about a forex broker can be found by browsing the site of the broker or that of the company to which he is attached. You must make sure that the broker you choose is attached to a reliable financial institution.
These are just some points that are necessary to know as you prepare to enter the forex trading market. Make sure that you educate your self properly and get a broker who meets certain criteria and who will also assist you in developing a proper trading strategy suitable to your situation before you start forex trading.