In the 21st century, online retail forex trading has become very popular, and it is now an accessible hobby even for people who do not have a huge bankroll to risk. There are online forex brokers available where you can start with a $100 deposit and trade micro or nano lots.
Currency pairs
The currency market is based on currency pairs. One currency is purchased by paying within another currency.
Here are some examples of commonly traded currency pairs on the forex market:
- The Euro and the United States dollar: EUR/USD.
- The United States dollar and the Japanese yen: USD/JPY.
- The British pound sterling and the United States dollar: GBP/USD.
- The United States dollar and the Swiss franc: USD/CHF.
- The Australian dollar and the United States dollar: AUD/USD.
- The United States dollar and the Canadian dollar: USD/CAD.
- The New Zealand dollar and the United States dollar: NZD/USD.
In a currency pair, the first currency is known as the base currency, and the second one is the quote currency. This means that in the currency pair EUR/USD, Euro is the base currency and the United States dollar is the quote currency. In the currency pair USD/CAD, the United States dollar is the base pair, and the Canadian dollar is the quote currency.
What is a pip?
In the forex world, one pip is the smallest unit of a price move that the exchange rate can make. The bid-ask spread of a forex quote is measured in pips.
Pip = Percentage in point
One pip equals one basis point.
A one-pip movement can seem small, but for traders with huge open positions, even a one-pip movement can be equal to vast amounts of money.
Example of pip movements
Based on market convention, most currency pairs are priced out to four decimal places. One single pip is then one move of the last (fourth) decimal.
Example:
Right now, the exchange rate for the currency pair USD/AUD is 1.4532. If the rate moves one pip up, it changes from 1.4532 to 1.4533. One pip down would be going from 1.4532 to 1.4531.
For the USD/AUD, one pip is one-hundredth of one percent, which is 1/100 x 0.1.
Example: You bought Euro when the exchange rate was EUR/USD 1.1735. You sold when the exchange rate was 1.1802. This is a 67 pip change. (1.1802 minus 1.1735 is 0.0067.)
A notable exception from the convention of pricing the currency out to four decimal places is quotes for the Japanese yen. For the Japanese yen, the convention is to price the currency out to only two decimal places.
Example: USD/JPY 112.06
What are fractional pips?
In situations where more precise measurements are desired, fractional pips can be used. At a quoted exchange rate, fractional pips appear as a superscript numeral at the end.
Forex derivatives
In this context, a derivative is a financial contract whose value depends on an underlying asset, group of assets or benchmark. A forex derivative can, for instance, be based on a currency pair.
Here are a few examples of forex derivatives:
- Basis swap
- Currency swap
- Currency future
- Foreign exchange forward
- Foreign exchange option
- Forward exchange rate
- Non-deliverable forex forward
- Power reverse dual-currency note (PRDC)
Finding the right forex broker for your forex trading
Selecting the right forex broker can make or break your forex trading plan and be the difference between losing money and having a fun and profitable hobby.
It is important to select a broker that is suitable for your particular trading strategy. If you are planning to do scalping or any similar strategy where you open a large number of small positions, you must avoid brokers who charge you a hefty fixed fee per transaction since such fees will eat up any small profit from each transaction. If a tight spread is vital to the success of your strategy, do not go with a broker who promises you zero commission but compensates themselves with huge spreads, and so on.
Below, we have collected a few good examples of points to keep in mind when choosing between online retail forex brokers.
All costs matter
Don´t just look at commissions and spreads. What are the other costs, and how will they impact your overall profitability over time? Forex brokers may, for instance, charge you deposit, withdrawal, and platform fees. You might need to make expensive phone calls abroad each time you need phone support. Can you make free or low-cost transactions to and from your trading account with this broker, or does this broker only accept transaction methods that are expensive for you to use, such as an international Wire Transfer?
Assets
Which currency pairs are available for spot trading, and which forex derivatives are available? Does the selection suit your needs and preferences?
How is the trading platform?
If you want to have profitable forex trading as a long-term hobby, it is important that you like the trading platform and find it easy to use.
For strategies where every second counts, a slow and complicated trading platform can end up turning profits into losses.
Avoid trading platforms where the user interface makes it easy to make costly mistakes.
Tips! Most online retail forex brokers will allow you to try out the platform in advance before you make any first deposit. That way, you can avoid platforms that are unsuitable for you. Open a free demo account with the broker, and let them fill it with play-money for you. Now, you can make play-money trades on the platform to see how it works and whether you like it.
Important: If you plan on trading on your mobile device (smartphone or tablet), use your demo account to check out the mobile app and/or mobile web browser platform. Some platforms work great on big computer screens but are difficult to navigate with small touch screens.
Deposit requirements
If you have a small bankroll, choose a forex broker that welcomes small-scale micro and nano traders. Otherwise, you might struggle to find enough cash to make your first deposit. Some online forex brokers require a first deposit of $10,000 or more, which can be tough for the small-scale hobby trader who is just starting out. Even worse, making small trades on the platform might not be possible, so you will end up putting “all your eggs in one basket” for each trade, which is really poor risk management.
To summarize: If you are a small-scale trader, pick a broker that allows you to make a small first deposit and carry out micro trades or nano trades. That way, you can engage in proper risk management even on a small budget.
How can you get in touch with customer support?
If getting real-time support is important to you, select a broker who offers phone or live chat support. Some brokers only offer email support, and it can take quite some time to get an answer for each email, so it is not suitable for real-time support.
If phone support is important to you, check in advance if you will be required to make a potentially expensive call to another country to reach the phone support. Some brokers will offer local phone numbers, toll-free international numbers or call-back services.
When is the customer support staffed?
Is the support staffed during those hours when you are most likely to be trading and run into possible issues? If you trade mostly in the evening and nighttime, support that sticks to standard office hours will not be there when you need it.
Important: The support might be located in another time zone than you, so double-check to make sure you understand what the listed opening hours mean from your perspective.
Technical analysis
If you are into technical analysis, it can be convenient to pick a broker and a platform with built-in support for this. Some brokers and platforms also come with a wide range of educational resources for traders who wish to learn more about technical analysis.
Rules & Reputation
We all want to stay away from fraudsters and dodgy brokers, but how?
A good start is looking online and seeing how other traders rank a certain broker. All brokers (like most other businesses) have disgruntled clients, but how does this particular broker fare against the average? And are there certain negative points that get brought up over and over again by many different clients?
Secondly, it can be a good idea to check how long the broker has been active. Yes, a new broker launched last week can be 100% serious and an old broker that has been around since 2005 can come under new ownership and turn bad, but those are the extremes. As a novice trader, it is often a good idea to select a broker that has been around a while and has had time to develop a reputation among the traders online.
It is also a good idea to learn a bit about the various licensing authorities and select a broker that is licensed by one of the more strict and reputable license givers. Examples of license authorities that have a pretty good reputation for being stringent are CySEC (Cyprus), UK FCA (United Kingdom), ASIC (Australia), and BaFin (Germany).