My Trading Method (Session 11)
Selecting the Right Brokering House
There are so many brokering house for forex. Just do a google search and you will find lots of them. So which one?
Selecting the right one means a lot, and to me it is important as it has to fit well and has to do with the method I am using to trade.
Take an example, a standard lot (or lag) for forex is 100,000 units of a currency. There are some broker to stand by this transaction and that means you need to have say EUR2500 or SGD5000 for a single transaction of GBP/JPY for a margin of 50:1
As such other starts to offer mini-lots or micro-lots, that is a fraction of 100,000 but still fix in size.
Below are some of the considerations:
a) Local or foreign broker
b) Cost per transaction
c) Size of transaction
d) Margin
e) Company setup
f) Charting service
g) Auto trade service
h) Call and helpline
i) Spread and the rate of change in spread
j) Internet reliability
Local and Foreign Broker
A search by Google on "forex" will lead you to a list of broker.
If you happen to open a real trading account with a foreign broker and the very next day, the company close shop and run away with your money, there will be little chance you can recover your money.
In Singapore, a leverage trading company or broker has somewhat some protection from MAS. In the event of a closure, you may not recover all your money, but at least some. In addition, you can go to the shop and create a commotion, hopefully get some attention!
Regardless, a local broker has always the advantage of geographical nearest and you can always easily get to the shop should you need help or any compliants.
When you choose a foreign company you need to consider bringing money out of that country. You may be tax.
As a guide, for local broker, capital gain is not taxable, meaning you are not tax by the government when you withdraw your money. For US and Canada, foreigners bringing out money based on capital gain is also not taxable. Bringing money into Singapore from capital gain is also not taxable.
Beware of broker or company that setup simple to solicite your money and offer you a lot of incentives to open an account with them.
Do your due deligence on the company. A due deligence is necessary especially so for a foreign company. A due deligence can be conducted through a detail research. Creditibility is needed from the site that gives good report for the company. The broker may pay a particular site to give false report. Use forum to get a unbias report. A better due deligence is to visit the company oversea and physically know that such a broker exist. Beware of company on site that does not have a physical address or even a telephone number.
Cost per transaction
The basic cost for your transaction is spread. The difference between bid and ask price everytime you enter a transaction is call spread. Check the spread and compare the spread across broker for the same currency over the same period of time.
The bigger the spread, the more difficult yo break even and make money. For example, company A has a spread of 4 pips for EUR/USD while company B has 2 pips. You get to earn 2 pips less from company A than B.
The other cost per transaction is commission. Beware that some broker charge on top of just the spread, they charge a fix cost, say a ten dollar for a standard lot transaction. Compare to Company A which charge 4 pips for a standard lot transaction, which cost you 40USD for EUR/USD. If Company C charge 2 pips plus a $30USD per standard lot transaction, the total cost works out to be 50USD or in fact 5 pips per standard lot transaction!
For some company, if your number of transaction per month is less than a certain volume, a fee will be levy on you.
Size of Transaction
Some company offer only standard lot size transaction - that is 100,000 units. Other permits a fix fraction of the standard lot - call mini lot 10,000 and micro lots 1,000
Other, offer any size.
Because forex is a leverage trading, it means that in order to buy 100,000 units of GBP/JPY using a leverage of 50:1, you may need USD5000. Some may not have that capital. Normally, you don't throw all your capital to buy 1 transaction. Therefore you need more capital.
Margin
Forex is all about leverage trading. The broker will give you x times the dollars you put into the transaction for your purchase. For example, for a leverage of 100:1, for every dollar you put into the transaction, you can buy 100dollars worth of currencies.
But more is not also good. If the direction is with you - good, the more leverage you have, the bigger earning you have for the little you put in. The reverse is also true, if the direction is against you, you lose a lot!
Some company offer 100:1 and even 200:1. For others only 50:1
Please also understand the margin call policy related to the company. If you are losing money and has insufficient capital or margin to cover, you get a margin call. Some company ilterally call you and ask you to top up. Beware that you can go into the red and the company will ask you for money to cover the losses. Because you levarage, instead of losing a dollar, you are losing 200 dollars. that is why, the impression that many has on leverage trading is that your lose seem unlimited.
For other company, they simply closes your transaction and you take losses not more than your capital. These company do so to protect you from losing more than you have put in. But I say that it is because, it is difficult for them to go after me for money as I am 20000 miles away from the US!
Company Setup
Forex exchange is not centralized. That is it is not like SGX, whereby anyone who want to trade stock - either buy or sell must come to SGX.
Foreign currency exhange cis decentralized. They vary in size in terms of the volume of transaction they handle. As such the bigger broker who trade for banks, you can expect the voltality. There are also those that the internet term as buck shop. The former matches per standard lot transaction buyer for seller. The later take your transaction, buy or sell them regardless of whether there is an opposite seller or buyer.
Worse of all, there are those who are spam.
Physically, some has a shop front, some don't.
Charting Service
Most broker offer you a free demo account. Use them and practice and get use to the trading platform.
Make sure you like the charting software. Check out the technical that is offered.
I remember a case of a poor charting service offered by broker A, but because broker A offered the best cost per transaction, I employed the charting service of broker B.
Some allow you to custom your own technical indictors, but most don't.
Some give you a quick click to make a transaction, others don't. Remember when you place your trade with a click of a mouse, it take some time for the order to be transmitted and what do you think will happen to the price during this short moment?
Auto Trade Service
Auto trade allow your program that is based on your trading strategy to be run. So instead of you placing the order, the order will be execute automatically and in accordance to your entry signals.
Some like Meta 4 offer free, other you need to pay for the API. Most allow programming in Windows, some limited for Linux or Mac or Java. Most use C or C++.
To write a program, you need to be familiar with the libraries and you need to know the programming structure. That take time to learn. So the easiest is to check if there are many people using it, so that when you face problem, you know who and where to seek help.
A good strategy needs data for back testing. These data are normally provided by the broker, but check again, do you need to pay.
A good strategy also need forward testing and that takes time. If you need to pay, then you are losing money before you earn them!
Call and Helpline
Are they available? When are they available?
You may need them. Especially so when it come to your account and it involves money.
Call them and check if they are friendly. Some are only available via email. Test these too. But more importantly, check out their service in terms of technical competency.
Spread and the rate of change of spread
I have mentioned what is spread and different broker offer different spread for the same pair over the same period.
Please note that there is a different in spread for different currency and there is also differnt spread across the 24 hours time zone. Holiday and weekend have differnt spread from weekdays.
When news announcement, the spread normally widen.
Do an experiement for yourself to see how the spread widen during major news announcement. But more importantly, compare how fast the spread closes back. Some broker has rediculous spread widening during news and some simply take too long to closes back.
Nevertheless, if you are not trading by the news, you will be least affected.
But if you are, know the spread - how wide the opening and know how fast they closes back after the news. They can affect your position you place.
I have witnessed that the spread widen so fast and zoom pass my desired price and give my price a miss!
Internet Reliability
Know how fast your transaction is being executed. Know how often the broker server broke down. Know how often your local service provide broke down and worse know how often you have a black out.
In the event you lose a internet connection - know what happen. You may want to test this out and see for yourself what appen to your transaction by simple switching off the internet power.
In the event of a lose connection, how is the connection re-establish? Does it need you to reboot and login again or can it and will it re-establish connection automatically?
Conclusions
Know what you need - your trading method, your money management, and be comfortable with the broker you are to use.
There will be risk - can you accept them. All business has risks. To spread out your risk, you may want to employ more than 1 broker.
There are so many brokering house for forex. Just do a google search and you will find lots of them. So which one?
Selecting the right one means a lot, and to me it is important as it has to fit well and has to do with the method I am using to trade.
Take an example, a standard lot (or lag) for forex is 100,000 units of a currency. There are some broker to stand by this transaction and that means you need to have say EUR2500 or SGD5000 for a single transaction of GBP/JPY for a margin of 50:1
As such other starts to offer mini-lots or micro-lots, that is a fraction of 100,000 but still fix in size.
Below are some of the considerations:
a) Local or foreign broker
b) Cost per transaction
c) Size of transaction
d) Margin
e) Company setup
f) Charting service
g) Auto trade service
h) Call and helpline
i) Spread and the rate of change in spread
j) Internet reliability
Local and Foreign Broker
A search by Google on "forex" will lead you to a list of broker.
If you happen to open a real trading account with a foreign broker and the very next day, the company close shop and run away with your money, there will be little chance you can recover your money.
In Singapore, a leverage trading company or broker has somewhat some protection from MAS. In the event of a closure, you may not recover all your money, but at least some. In addition, you can go to the shop and create a commotion, hopefully get some attention!
Regardless, a local broker has always the advantage of geographical nearest and you can always easily get to the shop should you need help or any compliants.
When you choose a foreign company you need to consider bringing money out of that country. You may be tax.
As a guide, for local broker, capital gain is not taxable, meaning you are not tax by the government when you withdraw your money. For US and Canada, foreigners bringing out money based on capital gain is also not taxable. Bringing money into Singapore from capital gain is also not taxable.
Beware of broker or company that setup simple to solicite your money and offer you a lot of incentives to open an account with them.
Do your due deligence on the company. A due deligence is necessary especially so for a foreign company. A due deligence can be conducted through a detail research. Creditibility is needed from the site that gives good report for the company. The broker may pay a particular site to give false report. Use forum to get a unbias report. A better due deligence is to visit the company oversea and physically know that such a broker exist. Beware of company on site that does not have a physical address or even a telephone number.
Cost per transaction
The basic cost for your transaction is spread. The difference between bid and ask price everytime you enter a transaction is call spread. Check the spread and compare the spread across broker for the same currency over the same period of time.
The bigger the spread, the more difficult yo break even and make money. For example, company A has a spread of 4 pips for EUR/USD while company B has 2 pips. You get to earn 2 pips less from company A than B.
The other cost per transaction is commission. Beware that some broker charge on top of just the spread, they charge a fix cost, say a ten dollar for a standard lot transaction. Compare to Company A which charge 4 pips for a standard lot transaction, which cost you 40USD for EUR/USD. If Company C charge 2 pips plus a $30USD per standard lot transaction, the total cost works out to be 50USD or in fact 5 pips per standard lot transaction!
For some company, if your number of transaction per month is less than a certain volume, a fee will be levy on you.
Size of Transaction
Some company offer only standard lot size transaction - that is 100,000 units. Other permits a fix fraction of the standard lot - call mini lot 10,000 and micro lots 1,000
Other, offer any size.
Because forex is a leverage trading, it means that in order to buy 100,000 units of GBP/JPY using a leverage of 50:1, you may need USD5000. Some may not have that capital. Normally, you don't throw all your capital to buy 1 transaction. Therefore you need more capital.
Margin
Forex is all about leverage trading. The broker will give you x times the dollars you put into the transaction for your purchase. For example, for a leverage of 100:1, for every dollar you put into the transaction, you can buy 100dollars worth of currencies.
But more is not also good. If the direction is with you - good, the more leverage you have, the bigger earning you have for the little you put in. The reverse is also true, if the direction is against you, you lose a lot!
Some company offer 100:1 and even 200:1. For others only 50:1
Please also understand the margin call policy related to the company. If you are losing money and has insufficient capital or margin to cover, you get a margin call. Some company ilterally call you and ask you to top up. Beware that you can go into the red and the company will ask you for money to cover the losses. Because you levarage, instead of losing a dollar, you are losing 200 dollars. that is why, the impression that many has on leverage trading is that your lose seem unlimited.
For other company, they simply closes your transaction and you take losses not more than your capital. These company do so to protect you from losing more than you have put in. But I say that it is because, it is difficult for them to go after me for money as I am 20000 miles away from the US!
Company Setup
Forex exchange is not centralized. That is it is not like SGX, whereby anyone who want to trade stock - either buy or sell must come to SGX.
Foreign currency exhange cis decentralized. They vary in size in terms of the volume of transaction they handle. As such the bigger broker who trade for banks, you can expect the voltality. There are also those that the internet term as buck shop. The former matches per standard lot transaction buyer for seller. The later take your transaction, buy or sell them regardless of whether there is an opposite seller or buyer.
Worse of all, there are those who are spam.
Physically, some has a shop front, some don't.
Charting Service
Most broker offer you a free demo account. Use them and practice and get use to the trading platform.
Make sure you like the charting software. Check out the technical that is offered.
I remember a case of a poor charting service offered by broker A, but because broker A offered the best cost per transaction, I employed the charting service of broker B.
Some allow you to custom your own technical indictors, but most don't.
Some give you a quick click to make a transaction, others don't. Remember when you place your trade with a click of a mouse, it take some time for the order to be transmitted and what do you think will happen to the price during this short moment?
Auto Trade Service
Auto trade allow your program that is based on your trading strategy to be run. So instead of you placing the order, the order will be execute automatically and in accordance to your entry signals.
Some like Meta 4 offer free, other you need to pay for the API. Most allow programming in Windows, some limited for Linux or Mac or Java. Most use C or C++.
To write a program, you need to be familiar with the libraries and you need to know the programming structure. That take time to learn. So the easiest is to check if there are many people using it, so that when you face problem, you know who and where to seek help.
A good strategy needs data for back testing. These data are normally provided by the broker, but check again, do you need to pay.
A good strategy also need forward testing and that takes time. If you need to pay, then you are losing money before you earn them!
Call and Helpline
Are they available? When are they available?
You may need them. Especially so when it come to your account and it involves money.
Call them and check if they are friendly. Some are only available via email. Test these too. But more importantly, check out their service in terms of technical competency.
Spread and the rate of change of spread
I have mentioned what is spread and different broker offer different spread for the same pair over the same period.
Please note that there is a different in spread for different currency and there is also differnt spread across the 24 hours time zone. Holiday and weekend have differnt spread from weekdays.
When news announcement, the spread normally widen.
Do an experiement for yourself to see how the spread widen during major news announcement. But more importantly, compare how fast the spread closes back. Some broker has rediculous spread widening during news and some simply take too long to closes back.
Nevertheless, if you are not trading by the news, you will be least affected.
But if you are, know the spread - how wide the opening and know how fast they closes back after the news. They can affect your position you place.
I have witnessed that the spread widen so fast and zoom pass my desired price and give my price a miss!
Internet Reliability
Know how fast your transaction is being executed. Know how often the broker server broke down. Know how often your local service provide broke down and worse know how often you have a black out.
In the event you lose a internet connection - know what happen. You may want to test this out and see for yourself what appen to your transaction by simple switching off the internet power.
In the event of a lose connection, how is the connection re-establish? Does it need you to reboot and login again or can it and will it re-establish connection automatically?
Conclusions
Know what you need - your trading method, your money management, and be comfortable with the broker you are to use.
There will be risk - can you accept them. All business has risks. To spread out your risk, you may want to employ more than 1 broker.
posted by Ernest Seng at 1:14 PM
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