You can opt for foreign brokers. But, you should make sure that the broker is regulated under multiple tier 1 and tier 2 global regulators like:
The first and the foremost step, before you start with trading, is choosing a broker. You should compare brokers considering the following points:
Take a look at the institutions under which the brokers are registered. Regulatory institutions are divided into three categories or "tiers":
Tier 1( Highly Trusted)
Tier 2( Moderately Trusted)
- CBRC( China Banking Regulatory Commission, China)
- DFSA( Dubai Financial Services Authority, United Arab Emirates)
Tier 3( Low Trust)
- This includes regional regulators from a few nations. It is better to avoid brokers who are only regulated by tier 3 brokers.
In general, you should go for a broker regulated under at least a couple Tier-1/ Tier-2 institutions.
Deposit methods vary from broker to broker. Also, the time taken to reflect the deposits into your trading account differs. First, list the payment methods you are most comfortable with and also the payment methods you would like to have
as options. Then, compare the brokers based on the list you've made.
As mentioned before, brokers offer a variety of options in trading instruments. Since you want to trade in forex, choose the currency pairs you want to invest in and then crosscheck the brokers based on your preferences.
Trading Tools Offered
Trading tools aid you in trading. Some of the most popular trading tools are:
- Stop-Loss Orders- stops a trade when the value of the underlying asset or security goes beyond/below a certain limit.
- Negative Balance Protection- prevents you from losing more than you have invested.
- Economic Calendar- lists all periodic global events that have influenced the markets in the past and are likely to do so in the future.
- Calculators- Financial calculators can be based on various parameters, such as pips, spreads contract sizes, price charts, etc.
However, do note that not all brokers offer these tools for free. Sometimes the charges for using these tools are direct. Otherwise, the features may be reserved for premium accounts, where the charges are written off as maintenance charges
or annual fees.
Account Types Offered
As we have previously discussed, brokers offer different types of accounts to their clients. This usually includes standard and premium accounts.
Apart from this, you can also opt for brokers who offer ECN accounts. ECN stands for Electronic Communications Network and ECN accounts are especially beneficial for short-term traders. This is because commissions are charged based on
the number of transactions processed instead of the volumes of the trades. Also, ECN accounts offer more liquidity and tighter spreads.
Lastly, you can also opt for Islamic accounts. Islamic accounts follow the principles of the Sharia law and offer interest-free trading with no rollovers or overnight fee.
The most popular trading platforms are MT4( MetaTrader 4) and MT5(MetaTrader 5). All the different trading software applications offered by the brokers are based on one of these two platforms.
Also, if you want to use your smartphone to trade, you should look for brokers who offer mobile trading apps.
Do note that the software applications for trading are different for Windows, Mac OS, Android and iOS. So, it is better to check if the brokers offer trading applications compatible with your device(s).
Fees and Charges
We have already discussed how different brokers charge their clients in the previous section. So let's now take a look at the two most important additional charges that you might incur while trading:
- Overnight Charges
Also called rollover fees, overnight charges denote the interest charged on a position that remains open overnight. It is generally calculated for positions that remain open after 5 p.m. EST.
- Inactivity Fees
Inactivity fees are charged on accounts that have remained idle for a long time. An idle account is one that has recorded no transactions over a set period of time. The duration after which brokers charge inactivity fees is usually
Inactivity fees are a liability for long-term/ buy-and-hold traders. So, you must keep this in mind while comparing brokers and also, while maintaining a trading account.
Once you're done with comparing the brokers of your choice and choosing one from the list, all you need to do now is open a trading account. The basic steps involved in opening an account are:
- Signing up with the broker you have chosen and selecting the account type of your liking.
- Submitting your details/ documents for account verification. This may take some time, which again varies from broker to broker.
- Depositing funds.
- Lastly, downloading the trading application(s) of your choice to start trading.
As a new investor, start with a demo account and also, keep the amount of leverage you use in check.
What are the Risks of Forex Trading
Forex trading, like other forms of investments, also comes with certain risks involved. Just like any other investment, the risks increase based directly on the return potential.
Three of the most common forms of risks involved in forex trading are:
- Leverage Risk
As we have previously discussed, with a higher amount of leverage the risk involved is higher. So you should always open a trade based on the amount of risk involved i.e. the amount of losses you can incur, and not on the potential
gains from the trade.
- Exchange Rate Risk
Exchange rate risks are caused by fluctuations in the value of your local currency versus other foreign currencies. Exchange rate risks are unavoidable but one way to mitigate the same is through diversification.
Diversification is the act of investing in a variety of unrelated/weakly-related assets or securities. The risks involved and return potential of each investment varies and the total risk-to-reward ratio of your assets can be tuned
to your liking.
- Liquidity Risk
The value of a country's currency fluctuates when it goes through any economic, social or political crises of a local, national or global scale. This causes changes in the value of the related forex pairs and, consequently, the
market becomes volatile.
During times of high volatility, traders get exposed to liquidity risks i.e. the inability to exit a trade as they might incur huge losses.
The best way to reduce the risks involved in your investments is through risk management.
Risk Management not only focuses on reducing the amount of risks involved but also maximising the gains from your portfolio. The basic steps involved in risk management are:
- Gaining knowledge about the markets.
- Keeping track of local as well as global news.
- Limiting the amount of leverage used.
- Shedding thoughts of unrealistic gains.
- Using stop-loss orders to customize your trades.
- Not trading based on your emotions.
Lastly, the success of any operation depends on devising a plan. In the case of forex trading, you must follow a trading strategy.