Opening an Account
How to Select a Forex
Broker, and Set Up and Fund a Trading Account
The retail forex industry is still in
its infancy, especially relative to stock broking and banking. These days, who
expends that much mental energy when contemplating opening a new savings
account? Most people simply select the nearest bank with competitive deposit
rates. Finding a broker is similarly an afterthought for many aspiring forex
traders. After all, a skilled investor with a good strategy should be able to
profit regardless of which broker happens to be executing his trades, right?
Nevertheless, selecting a forex broker
is a decision that should not be taken lightly. Consolidation has not yet swept
through the forex brokerage industry, and the sea of brokers is still vast.
There is a wide gulf between the best and the rest.
In this chapter, I will offer a
detailed guide for selecting a broker. I’ll present an overview of the most
critical features you should examine before making your selection, including
cost indicators, services, and technological considerations. Finally, I’ll
provide step-by-step instructions for opening and funding your very own trading
account.
What Kind of Broker?
Before we get ahead of ourselves, you
first need to decide how you will engage the forex market. Simply, will you
trade currencies directly in the spot market, will you trade derivatives (such
as options or futures) or will you trade indirectly through Exchange Traded
Funds (ETFs)?
Online Discount Broker
For those of you that intend to invest
in currencies sparingly and over the long term, as part of a diversified
portfolio, it’s probably easier to trade forex through a generic securities
account. If you already have a trading account, you can begin investing in
currencies right now, through ETFs (or even in actual currencies). You won’t
even need to fill out any additional paperwork. You should be able to access a
list of tradable ETFs through your existing trading platform. Simply select the
one that appeals to you and is consistent with your financial profile, and
begin trading!
If this will be your first account, it
makes the most sense to choose an online discount broker. There are perhaps a
few dozen such brokerages that allow you to trade stocks, mutual funds, ETFs,
and sometimes even options at very low commissions. The majority of them are
no-frills websites that spend very little on marketing and suffer from poor
brand recognition. However, they compensate for this in terms of rock-bottom
prices and fast execution. Investors that feel more comfortable with a
brand-name brokerage can choose from Scottrade, TD Ameritrade, E*Trade, Charles
Schwab, and Fidelity Investments.
Personally, I’m partial to Scottrade
(my IRA account is held there) because I like that they have both a strong
online presence and a vast network of more than 500 branches. This means that I
can execute trades online, but I can also have questions resolved in person or
over the phone with a broker that I have personally met. Despite this perk,
Scottrade still only charges $7 per trade.
Then there is Fidelity Investments,
which offers competitive commissions and margin rates, as well as access to
exclusive research reports, managed accounts, and other analytical tools. It
also gives regular investors access to more than 17 international markets
denominated in 12 different currencies. (Recall from Chapter 1 that investing
in overseas capital markets also offers indirect exposure to forex.)
Charles Schwab, TD Ameritrade, and
E*Trade meanwhile have tried to distinguish themselves through the sheer
breadth of securities that they offer. Having begun as simple equities and
mutual fund brokers, all have since expanded into options, futures, bonds, and
even currencies. Their main selling point, then, is an integrated platform
through which to trade a variety of different instruments.
From the standpoint of aspiring forex
traders, TD Ameritrade offers the broadest array of products. Thanks to its
2009 purchase of think or swim, it now offers accountholders access to 14 forex
futures contracts and more than 100 spot pairs, which are made up of 25
different currencies. The downsides are a lack of liquidity (especially in spot
trading), execution delays, and an unfavorable margin policy.
E*Trade, meanwhile, offers several
dozen futures products and approximately 54 spot forex pairs. Its commissions
are competitive, and it provides discounts and access to advanced software for
active trades. It also has a physical branch network, though as the first major
online broker, it is most famous for its Internet presence.
Through its acquisition of options Xpress
in 2011, Charles Schwab became the latest to join the fray of one-stop online
brokers. While its platform doesn’t support spot forex trading, it does offer
17 different currency futures contracts, as well as a handful of currency
options products. Unfortunately, as this book goes to press, optionsXpress
remains a separate but affiliated company, which means that existing Charles
Schwab account holders would need to open a separate account to take advantage
of the broker’s currency products.
Online Futures Brokers
For those of you who expect to engage
forex primarily through futures and options, there are a large number of online
brokers that specialize in derivatives contracts. Especially for those who
already trade futures contracts (such as commodities or interest rate futures),
you are probably aware that forex futures and options can be traded from the
same account. Specialized futures brokers typically offer the lowest
commissions, fastest execution times, best liquidity, and overall best value
for active futures traders.
The CME Group, which is the largest
futures exchange, lists more than 120 brokers in its online directory, 15 of
which are given the “preferred broker” designation.
Not including the handful that I have already profiled above, perhaps the two
most worthy of mention here are Interactive Brokers and TradeStation.
The breadth of products offered by
Interactive Brokers is simply incredible; from structured products to corporate
bonds, and everything in between, you’ll find the investment vehicle that’s
right for you at this brokerage. It is plugged into every major exchange on the
planet, which means that liquidity is deep for products that aren’t even
offered by other brokers. Its sophisticated trading software will search around
for the best deals and slice orders up in order to optimize execution time and
price. Its FXTrader platform supports trading in 17 different currencies, with
liquidity provided by 13 major banks and spreads as low as 1/2 a PIP. It offers
15 different types of orders to facilitate advanced trading strategies, and its
software enables analysis and simultaneous trading across multiple asset
classes, such as spot forex and currency futures. The downside is that
rock-bottom pricing is only possible due to a rock-bottom level of service.
Only serious, self-directed traders should apply!
In contrast, what TradeStation lacks in
breadth (only 34 currency pairs) and liquidity (higher spreads than pure forex
brokers), it makes up for in service and technology. Its industry-leading
trading software supports backtesting strategies using an amazing 38 years of
data. Meanwhile, its proprietary Portfolio Maestro software facilitates risk management
across the full range of asset classes. It can graphically display your risk
exposure and make recommendations for optimizing your portfolio allocations and
minimizing your risk. Customer support representatives are available for live,
one-on-one training sessions and account troubleshooting. This obvious effort
to enhance the user experience should help make TradeStation a magnet for
beginners and distinguish it from Interactive Brokers.
Retail Forex Brokers
Those that plan to trade currencies exclusively
and somewhat regularly will probably opt to open an account with a dedicated
retail forex broker. This category includes perhaps 100 brokers worldwide,
about a dozen of which are registered in the United States.
While there is a broad matrix of criteria
that you should look at when selecting a forex broker, there is one overriding
factor: broker registration. You should absolutely choose a broker that is
registered with its national government agency/regulator, ideally in the
country where you reside. Consider that prior to the financial crisis,
regulatory jurisdiction in forex was unclear, registration was essentially
optional, and meaningful oversight was nonexistent. The forex spot market was
rightfully referred to as “the wild west” of
retail trading.
This changed in 2008 when the
Dodd-Frank Wall Street Reform and Consumer Protection Act finally gave the
Commodity Futures Trading Commission (CFTC) power to regulate spot forex
trading. Every retail forex broker that intended to do business in the United
States was required to register with
the National Futures Association (NFA) as either a futures commission merchant
or as an introducing broker. The former are understood as forex brokers. The
latter operate primarily as marketing agents, referring customers to the
brokers and sometimes even taking orders but never executing trades internally.
Table 8-1 shows the registration
status of forex firms that operate legally in the United States.
Table 8- 1 : NFA Registration information for USE Forex brokers
The NFA quickly moved to bring all forex
firms under its umbrella. Those that resisted were prosecuted and/or forbidden
from operating in the United States. Those that accepted discovered that their
decade-long party had ended. Strict capital requirements, margin rules, and
various other regulations were quickly implemented. The NFA began to apply
close scrutiny to all registered forex firms, and huge fines were meted out to
rule violators.
Aspiring traders in the United States
are strongly advised to open an account with a registered forex firm. (The only
exception is CitiFX Pro, which is regulated by the SEC via its parent company,
Citigroup.). This system also provides information on “enforcement
actions” for all firms, as well as on
corresponding fines and punishments.
If you choose an unregistered broker,
you will also have to forgo the peace of mind that comes with knowing that both
your equity capital is safe and always withdrawable and that your broker is
subject to government monitoring. Of course, there are dozens of brokers that
are registered with Britain’s Financial Services Authority (FSA) and other
national financial regulatory agencies, all of which are suitable for traders
in those countries. However, while agencies like the FSA in many ways perform
the same function as the CFTC, the fact that your broker has decided not to
register with the NFA is perhaps an indication that it cannot meet stringent US
regulatory requirements. At the same time, it is inevitable that London, being
a global financial capital and the epicenter of forex, would be home to
reputable brokers. If you must open an account with such a broker, then so be
it. All else being equal, though, I would recommend choosing a firm that is
registered in your country of residence.
There are also dozens of firms with
prolific advertisements and legitimate-looking websites that are registered in
offshore tax havens (like Bermuda or Cypress), which is to say that they
are completely unregulated. While the allure of higher leverage (their main
selling point) might seem attractive, consider that in the event of dispute or
fraud, you will have no recourse whatsoever.
Fees/Commissions
The single most important criterion in
broker selection for most aspiring traders is cost. Remember that the majority
of forex brokers earn money by pocketing the difference (known as the spread)
between buy and sell orders. It stands to reason, then, that brokers that are
able to offer the narrowest spreads represent the best deal for traders.
Alas, spreads may vary across different
currency pairs and over time. One broker might offer the lowest EUR/USD spread
and the highest USD/JPY spread for reasons that are unclear. In addition, some
brokers do away with spreads in favor of a commission-based model (e.g., a
standard $4 per 10,000 trade), which can make apple-to-apple broker comparisons
very difficult. Finally, there is the difficulty of securing reliable data. While
brokers will boast about their low spreads in their promotional materials, they
simultaneously warn in the fine print that these sample spreads may not be
accurate!
The best way to get an idea of
potential spreads is by opening a demo account (or two or three), which should
be supplied with the same live quotes that actual account holders have access
to. Alternatively, FXIntel.com offers real-time data on spreads (measured in
PIPs) for all of the major brokers and currency pairs. Users can check a box to
include commissions and can view real-time spread comparisons for specific
currencies, as in Figure 8-1.
(Please note that this screenshot is for illustrative purposes only and should
not be considered current.)
Figure 8-1. Live, streaming forex spread matrix (Source: FXIntel.com)
When researching different brokers, you
should also look into any fees. If you are trading regularly and don’t require
any special assistance, such fees probably won’t affect you. Still, some
brokers charge inactivity fees, wire fees, telephone execution fees (for orders
that need to be executed manually during server crashes), currency conversion
fees, etc., all of which you should be aware of before you open an account.
Broker Type
There is an important distinguishing
characteristic among brokers that many traders (and brokers) like to draw
attention to: the execution system. Specifically, brokers use different systems for
sourcing quotes and filling orders, and every broker insists that its model is
absolutely the best one. Some brokers use dealing desks, in which orders are
manually filled. Dealing desk brokers may take opposing positions from their
clients rather than matching up the buy and sell orders from other traders.
Spreads are typically fixed, and discrepancies may appear between broker quotes
and the interbank market. Other brokers rely on straight-through processing
(STP) systems, in which orders are executed through third-party liquidity
providers. Finally, brokers that are plugged into Electronic Communication
Networks (ECN) facilitate direct trading between their accountholders and
third-party traders and banks.
All of the systems have arguable
strengths and weaknesses. In theory, the dealing desk model could create
conflicts of interest, since a broker’s gain might be furthered by clients’
losses. The ECN model, meanwhile, should most closely resemble the interbank
market, though by its very nature it requires a commission-based fee structure.
Unfortunately, there have been a number
of recent scandals and lawsuits in which firms were accused of misrepresenting
claims about the transparency of their execution systems. Suffice it to say
that each model is only as good as the moral standing of the broker.
This truth is confirmed by client
profitability data. Every forex broker is required by the NFA to release the
percentage of its accounts that are profitable in any given quarter. All else
being equal, traders should achieve comparable profitability, irrespective of
the broker.
Unfortunately, this is not the case. By
comparing the data, it is possible to determine whether one execution model is
indeed superior. You can see from Figure
8-2 that OANDA—which uses an ECN system—was the industry leader in every
quarter in 2011. Meanwhile, Forex Capital Markets (FXCM), which claims that its
non-dealing desk model is one of its strongest selling points, is near the
bottom of the pack. While both FXDD and FX Club use dealing desks to execute
trades, client profitability is significantly stronger for the former. In
short, there is not a compelling case for choosing one broker over another on
the basis of execution system. The size of the broker, the fairness of its
trading platform, and the strength of its liquidity relationships will more
significantly affect profitability for traders.
Figure 8-2. Percent of forex broker accounts that were profitable in
any given quarter (Source: NFA)
Margin Policy
In order to be successful in swing
trading, you must develop some comfort with leverage. A loan from your broker
will enable you to open larger positions than you would otherwise be able to
afford. In return, your broker expects you to post collateral, which is known as
margin and expressed as the inverse percentage of the maximum amount that your
broker will lend you. In the United States, leverage is now capped at 50:1 (2%
margin) for major currencies and 20:1 (5% margin) for exotic currencies.
In Chapter 9, I will offer a detailed
overview of the mechanics of margin, but for now, I just want to offer a gentle
reminder that you should investigate your broker’s margin policy in advance.
Find out: How does the broker calculate interest? Is interest charged on
intraday positions or only on overnight positions? Can traders earn
interest—where the differential between the long and short currency is
positive—or is interest always debited from accounts, regardless of the
differential? When will a margin call be triggered? Will the broker close
positions without first notifying you and giving you the opportunity to add
funds to your account? You may also want to compare margin/rollover rates among
brokers, as there may be substantial disparities.
Service, Software &
Everything Else
Here is where your broker really has a
chance to impress you. The best brokers should also have the best service.
Online chat and helplines that are open 24/7 are practical de rigueur in
retail forex. Brokers that don’t offer such a perk may need to work harder in
other areas to distinguish themselves. You shouldn’t hesitate to make use of
this feature, especially when you are still in the process of selecting a
broker. Do the customer service representatives seem helpful? Knowledgeable?
How many currency pairs do you expect
your broker to offer? If you intend to trade exotics, are the spreads
reasonable? Does your broker maintain requirements for minimum account
balances? How many years of operating history does it have? How many
accountholders? How much volume does it transact every month? Does it guarantee
stop orders?
Lastly, you should examine and test out
every broker’s analysis and trading software. Due to unbelievable technological
advancements and computing power, there is very little need for
noninstitutional traders to pay extra for trading programs. While every broker
will offer a solid baseline software package, their platforms may differ
substantially in quality and usability. You should undertake to answer the
following questions: Does the broker have a proprietary platform or does it use
the same generic program as its competitors? Does the platform integrate with
other software? Is the platform user-friendly yet sophisticated? Are profits
and losses calculated in real time? Is mobile trading supported? Does it
provide free access to proprietary research and trading ideas? Are there
streaming business news fees? Are better perks offered free of charge to
premium account holders?
Finally, what is the broker’s
reputation among other traders? You should browse dozens of forums and
broker review websites and try to understand the experiences and level of
satisfaction of other users. (See Appendix for more information.) If many traders
seem to share a similar gripe—such as slow execution and price slippage—it
should serve as a warning sign that a particular broker should be avoided.
Broker Overviews
In the pages that follow, you will find
separate overviews of a handful of the most popular forex brokers. I have
mainly limited inclusion to those that are registered with the NFA and operate
in the United States, but I also featured one UK broker for the sake of
comparison. While this list is not exhaustive, it nonetheless includes most of
the major players in retail forex. Those that didn’t make the cut are too
small, disreputable, unregistered, or generally not recommendable.
OANDAFX
OANDA is the consistent leader in
client profitability rankings and is in the best position to argue that it
strives to help its clients become winning traders. Due to the backing of a
diversified forex parent company, OANDA FX is able to offer deep liquidity and
automated execution. Settlement is instantaneous (rather than after two days),
and interest is credited and debited every second, rather than once a day. Of
course, the downside of this is that some margin traders will pay interest on
intraday positions, which is not the case with other brokers.
Most importantly, OANDA deserves an A+
in transparency for providing information on open orders so that traders have
context for entering orders and understanding the prices at which their orders
are filled. All traders receive the same spreads and execution priority,
regardless of account size. OANDA also offers real-time macro-level data on
which trades have been most and least profitable and on whether other OANDA
traders are net-long or net-short in specific currency pairs. You can see how
spreads have fluctuated over time and plan accordingly.
OANDA offers nearly 60 currency pairs
(including a handful of precious metals), the latest software, and several
advanced analytical tools. It’s no wonder that it also leads the industry in
the number of account holders.
FXCM
In 2010, Forex Capital Markets (FXCM)
became the first forex broker to become a publicly listed company, bringing
prestige and respectability to the industry. Unfortunately, it was also around
this time that its regulatory troubles began. It was fined $2 million by the
NFA in August 2011 due to price slippage. Basically, when prices moved against
traders with open orders, their orders were executed at the lower price. When
prices moved in traders’ favor, however, FXCM also filled the orders at the
lower price. This practice cost traders millions of dollars and generated
significant profits for FXCM. In October 2011, FXCM was fined an additional $6
million and ordered to pay out $8 million in restitution to affected customers.
Monitoring of its execution system was ordered for 3 years. Since its IPO, it
has also been the subject of numerous class action lawsuits, alleging unfair
trade practices. All of this is extremely unfortunate, as FXCM goes to great
lengths to emphasize the advantages of its non dealing desk execution system
and has made this system a cornerstone of its marketing efforts.
To be fair, FXCM has received numerous
awards for service and technology. Its Trade Station platform is cutting-edge
and industry-leading, and features advanced charting, automated execution of
trading strategies, and complete customization. Its affiliated DailyFX site is
bookmarked and pored over by serious traders. It offers fractional PIP pricing
(1/100,000th of one unit!) and transparent rollover rates. In short, while its
regulatory history should not be overlooked, it deserves credit for its serious
efforts toward reform.
GFT Forex
GFT, in contrast, has never been the
subject of regulatory action, a point that is highlighted on the company’s
homepage. GFT also boasts about automated order execution and minimal negative
price slippage, and its client profitability numbers are impressive. It offers
more than 120 currency pairs and attractive spreads for all of the majors (and
even a handful of exotics). In addition to its proprietary DealBook 360
software—which includes more than 85 technical indicators—it offers the gold
standard MetaTrader 4 program, and both are free of charge. GFT has also made a
commendable effort to attach itself to some of the most famous names in forex
analysis, including Boris Schlossberg and Kathy Lien. Their daily commentary
(available on FX360.com) and free research reports are a must-read for those
looking for inspiration.
GFT offers four different types of
accounts, and it awards certain perks to those that maintain higher balances.
Platinum accountholders with more than $250,000 in equity capital receive four
streaming news feeds, waived fees, more favorable rollover rates, and free use
(for six months) of GFT’s proprietary technical analysis software. Its powerful
Foresight-A.I. is an algorithmic trading tool designed to time entry and exit
points, while its prized DiNapoli D-Levels are customized technical indicators
used by professionals. In short, GFT is a solid choice, especially for those
that are well- capitalized.
Forex.com (Gain Capital)
Forex.com is another publicly listed
forex company that has been targeted by regulators. In 2010, it was fined
$459,000 by the NFA for abusive margin, liquidation, and price slippage
practices, and was ordered to pay restitution to traders that were adversely
affected.
On the other hand, it has a strong
global presence, deep pockets, and impressive liquidity. The average trade is
executed in 0.06 seconds and 99.4% of trades are executed in less than one
second. All quotes are live and ready for automatic execution, rather than
requiring confirmation from a third-party liquidity provider. Its instant
execution mode ensures that market orders are executed favorably. Given that
Forex.com’s internal quote system is almost perfectly symmetrical with the
interbank market, it should come as no surprise that 100% of limit orders are
filled at or better than the prices requested by its customers.
Forex.com offers attractive spreads for
50 currency pairs through both web and mobile trading. Its proprietary
platform, FOREX Trader Pro, supports automated strategies and customization of
its features. For traditionalists, MetaTrader 4 and eSignal are both offered
free of charge. Forex.com improves on the customer service of its competitors
by offering free online consultations with market strategists who gauge your
experience and critique your approach to fundamental and technical
analysis/strategy. Thanks to this emphasis on service, Forex.com remains a
popular choice for new traders.
Saxo Bank
Saxo Bank is not unlike Interactive
Brokers. Both offer a broad suite of investment products that go well beyond
forex, including stocks, bonds, futures, and contracts for difference (which
are similar to futures, but prohibited in the United States). It offers an incredible
160 currency pairs and even 40 currency options of both the plain vanilla and
binary versions. It is also the only major broker that I know of that offers
trading in outright forex forwards. Its software is award-winning, its service
is top-notch, and its reputation is stellar. It supports leverage of up to
200:1 and is especially good at accommodating high-volume traders with large
account balances.
While Platinum accountholders will
rejoice in tighter spreads and lower commissions, the average trader will
probably find fault with Saxo Bank’s standard spreads, which are well above
average. Saxo Bank also charges commissions on all orders below $100,000. As if
this weren’t enough, its platform suffers from serious price slippage, which
affects about 10% of all stop orders. Finally, the fact that Saxo Bank is not
registered in the United States may be a deal-killer for American traders.
Thus, while its one-click, integrated trading platform is a great sell, traders
with multi-asset strategies might be better off opening an account with
Interactive Brokers.
CitiFX Pro
After the sudden exit of Deutsche Bank
FX from the forex brokerage business, Citigroup became the last major bank with
a retail forex trading arm. CitiFX is unique among forex brokers in that it is
regulated by the SEC, not the NFA. While it generally adheres to NFA forex
regulations on leverage and other aspects, it unfortunately does not have to
release information on the number of trading accounts it holds and client
profitability. At the same time, there are tangible advantages to dealing with
a bank. You can expect spreads to be quite narrow, since Citigroup participates
directly in the interbank market. It offers strong liquidity in more than 130
currency pairs. The financial crisis notwithstanding, Citigroup has a massive
balance sheet, which affords peace of mind to those concerned about credit
risk. It also maintains a large research department.
All accountholders receive free access
to four trading platforms and to auto chartist software, which can be used for
trend confirmation. (More on this in Chapter 9.) Elite traders may qualify for
a free Reuters workstation, as well as discounts on commissions. In short, for
traders that are still concerned about broker ethics, CitiFX Pro is a good
choice.
Interbank FX
What Interbank FX lacks for in brand
recognition, it makes up for in value. Its spreads are average, but it has
consistently scored well in the client profitability rankings, due perhaps to
its multi-bank liquidity system for trade executions. It also scores well in
transparency and publishes live data on spreads, execution time, and execution
rates, even when this data is unfavorable. It was the first broker to unveil
MetaTrader 5, and its innovative IBFX Connect system facilitates social trading.
In this way, participants can share trading ideas and mimic the strategies of
others. There is also a ranking system so that you can see how your performance
this week or this month stacks up against other traders. Overall, Interbank FX
is a good option for those that enjoy the social aspect of trading and are
generally looking for something different in their broker.
ATC Brokers
ATC Brokers is registered with the NFA
as an introducing broker, and all of its orders are executed through FXCM. Fortunately,
ATC Brokers has been spared the enforcement issues that have dogged FXCM.
Instead, its model is commission-based, and it assesses a standard $4
commission on every lot for every currency pair. ATC Brokers also supports
forex futures trading (through separate accounts for regulatory purposes).
Ultimately, ATC Brokers’ most notable feature is its miniscule spreads, which
are among the lowest in the industry and often fall below 1 PIP. Unfortunately,
its NFA- registration status as an introducing broker does not require it to
publish client profitability data, so we have no way of knowing whether ATC
Brokers accountholders benefit from this.
Opening an Account
In addition to choosing a broker, you
will also need to select an account type. First of all, do you want to open an
individual account, a corporate account, or an IRA, which may be subject to
different tax treatment from the IRS? Some brokers offer both standard accounts
and mini/micro accounts. The advantages of using a micro account are that there
is neither a minimum balance requirement nor a minimum allowable trade size.
The downside of opening a micro account is that the temptation to use enormous
leverage to enhance profits will be difficult to suppress. You must either get
very comfortable with leverage or expect to make only a few hundred dollars per
year in profit.
You will find that other brokers also
classify account types based on account balance, trading frequency, and types
of securities that can be traded. Some brokers will allow you to trade several
different assets using one account and one platform, while others require
segregated accounts. All brokers will try to entice you to commit to a more
ambitious account type, using lower spreads and other perks to draw you in. My
advice is to not let these marketing tools sway your decision. Trust your
intuition, and don’t be forced into the position of overextending yourself.
The next step is to electronically fill
out the documentation that is required to open the account. Most brokers will
ask you for a combination of personal, financial, and employment information.
You may also need to prepare documentation that can confirm your address, such
as a recent utility bill, as well as to upload scans of government- issued
identification. Finally, you will be expected to agree to a litany of terms and
conditions. If you haven’t already perused your broker’s margin policy and
other terms of business, this would be a good time to do so.
The final act is to fund your account,
which can be done using a debit card, credit card, or wire transfer. On the one
hand, I would recommend only funding your account with money that you could
afford to lose. At the same time, initially depositing more funds will save you
the trouble and personal anguish of having to top up your balance (which may be
required by your broker) in the event that you sustain heavy losses. In
addition, the more that you invest, the less you will have to rely on leverage.
Trading data corroborates the idea that accounts with higher balances are more
likely to be profitable than those with low balances. Whether this is due to
skill, leverage, or other factors is unclear, but the fact remains.
Conclusion
If you followed all of the steps
outlined in this chapter, you will have a funded account and already be in the
position to make trades. This is it, the moment that you have been waiting
for—the chance to test out everything that you have learned. The only problem
is that you still don’t know how to read a quote, or even place an order!
That’s why I recommend that before you
open an actual account, you first open a demo/practice account (and finish
reading this book, to boot). Every reputable broker will offer you this service
completely free of charge. You can initially use these demo accounts as a tool
for evaluating different brokers, kind of like test-driving a car. How are the
spreads? Execution? Is the software powerful and easy to use? Many brokers
offer multiple platforms (usually the most up-to-date version of MetaTrader, as
well as a proprietary program). At the very least, you will need to try out
these different platforms in order to determine the one that suits you best and
through which you will ultimately place orders and interface with the forex
market.
Even after you have selected a broker
and a platform, you should continue to trade with the demo account, not only to
develop a familiarity with the mechanics of placing trades, but also in order
to hone your strategies, backtest them, and determine whether they are
profitable in real-time. Let’s now take a closer look at this process.