Forex Trading – Top 5 Best Online Brokers for Forex Trading

RankNameCommissionsRatingMore Info
1eToro USAForex: Low fixed spreads 1-3 pips
Solid platform. Low Spreads.
Advanced tools.
2Speed TraderForex: Low spreads 1-3 pips
Instant execution.
Multiple Trading Platforms.
3OANDA fxTradeForex: Low spreads 1-3 pips
Average spread is 1.5 pips.
Same spreads for all customers.
4Interactive BrokersForex: 0.2-0.1 basis points per trade based on volume.
Volume traders get big discounts. Fast execution
5Lightspeed TradingForex: 1-2 Pips for most common FX pairs
Low margin rates.
Automated trading tools

What is Forex Trading?

Forex is a term used to refer to the Foreign Exchange Market. It is on this market that investors from around the world can make trades between currencies like the US Dollar, Euro, Yen, or dozens of others national currencies. Forex trading is very volatile, and not recommended for beginners. Those looking to get into this potentially lucrative market must first understand the the dynamics involved and where to get started.

Playing the Forex Market
The purpose of the foreign exchange market is to smooth out international business by providing a place for businesses to exchange currencies. So for example if an American firm wants to buy machines from a small German company, it would pay for it in Euros. To get those Euros, the American company can turn to Forex where it can make the exchange for a small fee. But participation in Forex is not limited to businesses, that use may be in fact be in the minority. Forex today is used by investors, speculators, major financial institutions, and even Central Banks for a variety of reasons. The Foreign Exchange market is often referred to as the closest thing to perfect competition. To understand why, lets list some of the features that make it unique:

High Liquidity – Forex has huge trading volumes making it easy for investors of any size to move their money in and out positions. Recent estimates put the average daily turnover of global foreign exchange markets at nearly $4 trillion.

Continual Global Operation – The Forex markets are open 24 hour a day throughout the week (closed on weekends.) Forex is decentralized with thousands of brokers around the world providing customers access.

High use of Leverage – Investors can leverage their positions heavily, which gives the potential of enhancing profits. Most Forex brokers allow 100:1 leverage. This means an investor can control the equivalent of $100,000 worth of currency with a $100 bet.

Ways to Trade
Because Forex trading involves so much leverage, a one penny move can make a huge difference. Moves between currencies are measured in what are called ‘pips’ which are the fourth decimal point out. Let’s use the US Dollar and Euro to illustrate this point. On one particular trading day the Euro bought 1.3187 US Dollars. That’s a change of -0.0055 from the previous day. That means there was a move of 55 ‘pips.’ Investors will quickly become familiar with this jargon as they gain more experience trading.

Now lets look at the different ways to trade on Forex. Just as there are several ways to trade stocks, there are different financial instruments available to Forex traders.

Spot Transaction – The most common Forex trade. Spot transactions represent a direction exchange between two currencies and involve cash rather than a contract.

Forward – In Forward transactions, two parties agree to exchange currency at a certain rate at some date in the future. No money changes hand until that agreed upon date which can be one day, a month, a year, or any other length of time.

Swap – Also called a FX Swap, these are the most common sort of forward transaction. In a Swap, two parties trade different currencies for a certain length of time and then reverse the trade at a later date.

Future – These are standardized forward transactions that trade openly on exchanges. While Swaps offer more versatility, futures are more liquid and easier to trade. The average contract length for a future is three months and the rate usually includes any interest.

Option – FX Options are derivatives where buyers have the right, but not the obligation to exchange one currency for another at some future date. They function similarly to stock options, but are traded on a much larger volume.

Fundamentals vs Technicals
Forex is regarded as the best market for technical traders. The high leverage involved means a position can grow or be completely wiped out even if the fundamentals are pushing the currencies involved in a different direction. Long-term US Dollar decline doesn’t mean much if a $1000 position can get wiped out in a matter of seconds. For less leveraged positions, and for options its important to keep track of both technical and fundamental data. Currencies can be effected by the relative economic statistics of various countries, and by a host of other events. Politics, natural disasters, crop yields, and many other factors determine the daily movements of a currency. There are many Forex trading strategies available to Investors, but the best place to begin is with a virtual account. Most online Forex brokers allow their customers to trade with a ‘virtual’ account to get some practice in, and to familiarize themselves with the interface. This is a great opportunity to test yourself and see if you’re ready to start investing in the exciting world of Forex!

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