In Lesson 4 we presented some considerations when choosing a broker. In this lesson, we’ll tackle the technical aspects for which we need a more in-depth analysis.
Features we will discuss in this lesson, in order for you to choose a broker that best suit your needs, are:
- Rollover rates
- Lot limits to operate
- Type of platform
- Financial leverage
Although we’ll come back to this topic several times, it is good to familiarize yourself with spreads right away. In previous lessons we saw what a spread consists of. To recap, it is the difference between a purchase price and selling price of a particular currency pair. This difference is the broker’s gain, so the higher the spread, the more the broker gains. Obviously, the more the broker gains the more you’ll pay, so you need to find a broker that has low and reasonable spreads.
Now, since spreads are the broker’s “sources of income” derived from individual transactions, the broker will be interested in having you perform as many operations as possible, and will “cheer” you on. Moreover, it should be considered that the more the broker is “hired” by traders, the more he will earn from individual transactions and therefore the lower he can set spreads. For this reason, if you choose a “big” broker, you can count on lower spreads.
To explain what rollover rates are, let’s start with the word “rollover” which means “renewal”, or the end of one cycle for the beginning of another. With regards to Forex, a rollover consists of extending the settlement date of an open position (e.g., the position of purchase or “long” on the EUR/USD). In Forex, all transactions must be closed within 17 hours, which is the settlement date. An operation that remains open after this time will be subject to a rollover, and be renewed for the following trading day. This transaction is subject to a rate, called a rollover rate (positive or negative) that we’ve examined in detail in its own article.
Lot limits for trading
This may seem difficult to understand in theory but in practice is really easy. When trading on markets, including Forex, minimum lots are set. By lots we mean quantities of securities or, in this case, of currencies. Let’s take shares for example: if we want to buy Telecom shares with a CFD, we can do so with a minimum lot of 100 shares. We cannot buy 50 shares–it has to be at least 100. This is the minimum lot needed to trade.
Type of Platform
The type of platform depends on the broker type. “Type” could refer to:
- CFD or Binary Options platforms
- Market Maker, ECN, or other for CFD trading
An excellent example of a CFD platform is Plus500.
Market maker brokers create the market so that trades take place between the subjects that operate with the same broker’s platform, in a sort of micro market, parallel to the Forex market. Prices refer to the market but will be different since there is a “spread” added to CFD prices.
ECN brokers are more secure and require acceptance of the order given by the client (you) and execution if possible.
We will talk about leverage in a separate article.
Go to the next lesson – Leverage in Forex