Foreign exchange (or forex) markets are one of the fastest and most volatile financial markets to trade. Money can be made or lost in a matter of seconds; at the same time, currencies can display significant trends lasting several days, weeks, even years. Most importantly, forex markets are always moving, providing an accessible and target-rich trading environment.

Choosing a Broker for Currency Trading

Online currency trading is offered by dozens of different retail trading brokerage firms operating from all over the world, so you have many options to choose from. Here are some key questions to ask when youre choosing a broker:

How good are trading executions? The key to evaluating any brokers is the speed and reliability of your trade executions. Are you consistently able to trade at the price youre trying for? If youre trying to sell, and your trade request fails, and youre offered a lower price, youre probably being requoted. (Requoting effectively means youre trading on a wider spread than you bargained for.) Does your broker offer price improvement on limit orders? For stop-loss orders, the brokerages execution quality comes down to the amount of slippage experienced when prices gap following data or news announcements. You should expect some slippage on stop-loss order executions the question is, “How much?”

How are orders filled? Find out exactly how your stop-loss or take-profit orders are filled. Is a stop-loss sell order filled when the bid price matches the stop price, such as a selling stop at 10 triggered by a price quote of 10/13? Are stops guaranteed? If so, are there any exceptions to such guarantees? Whats the policy for filling limit orders? Does the market bid price need to match the price of the limit order to sell, for example? A reputable broker will have clearly defined order execution policies on their website.

Are dealing spreads stable in all market conditions? Most forex brokers offer variable spreads these days. When market liquidity is high, the spreads will be tightest. During volatile market conditions and around major news events, spreads will naturally widen. However, the amount of variability can really differ among brokers, so make sure you understand how wide spreads can go when the markets really moving.

Look on a brokers website to see if they publish their execution statistics, which can give you more insight into their execution quality including speed, the percent of trade requests that are successfully executed, and the opportunity for price improvement. Remember: Tight spreads are only as good as the execution that goes along with them.

What is the commission structure? Most online forex brokerages provide trade executions without charging trade commissions. Instead, the broker is compensated by the price spread between the bid and the offer. A few brokers offer a commission-based pricing structure coupled with narrower trading spreads. If the brokerage charges a per-trade commission, you need to factor that cost into your calculations to see if its really a better deal than a spread-based commission.

How much leverage does the firm offer? Too much of a good thing? In the case of leverage, yes. Over the past several years, the maximum leverage available to retail traders has been reduced by regulators. For example, in the United States, the maximum available leverage is 50:1. In some markets outside the United States, such as the United Kingdom and Australia, 200:1 leverage is available. Generally speaking, firms offering excessively high leverage (higher than 200:1) are not looking out for the best interest of their customers and, more often than not, are not registered with a major regulatory body.

What trading resources are available? Evaluate all the tools and resources offered by the firm. Is the trading platform intuitive and easy to use? What charting tools are available? What newsfeeds are available? Do they provide live market commentary on a regular basis? What type of research does the firm provide? Do they offer mobile trading? Are you able to receive rate alerts via e-mail, text message, or Twitter? Are there iPhone/iPad apps? Does the firm support automated trading? Does the platform offer robust reporting capabilities, including transaction detail, monthly statements, profit-and-loss (P&L) reports, and so on?

Is 24-hour customer support available? Forex is a 24-hour market, so 24-hour support is a must. Can you access customer service firm by phone, e-mail, and chat? Are the firms representatives licensed? Knowledgeable? The quality of support can vary drastically from firm to firm, so be sure to experience it firsthand before opening an account.

Is the firm regulated, with solid financials? In the United States, online currency brokerages are regulated by the National Futures Association (NFA), which is the self-regulatory body subject to Commodity Futures Trading Commission (CFTC) oversight. Other geographies with solid regulatory frameworks include the United Kingdom/Europe, Australia, Japan, Hong Kong, and Singapore ideally you should trade with a broker that is regulated by at least one of these regulatory agencies.

Who runs the firm? Management expertise is a key factor, because a traders end-user experience is dictated from the top and will be reflected in the firms dealing practices, execution quality, and so on. Review staff bios to evaluate the level of management and trading experience at the firm. If the brokerage doesnt tell you who is running the show, it may be for a reason.

Grasping the Fundamentals of Currency Rates

Knowing the fundamental drivers of currency rates is the foundation of understanding price movements. This is very important to understand if you want to trade currency as an investment. Here are some suggestions:

Get to know the major economic data reports from all the major economies.

Understand the importance of expectations versus actual outcomes. Anticipate alternative outcomes to better gauge how the market is really reacting.

Stay aware of the pricing in and pricing out of market expectations that occurs in advance of data and events.

Factor incoming data and news into the major fundamental themes of interest-rate expectations, economic-growth prospects, inflation, and structural developments.

Be aware that technical and position-related themes can overwhelm the fundamentals.

Identifying Currency Trading Opportunities and Creating Trading Plans

Identifying trading opportunities and planning each trade from start to finish is essential to success in currency trading. When you trade currency as an investment tool, remember to:

Maintain trading discipline by formulating and sticking to a complete trading plan: position size, entry and exit (stop loss and take profit) before you enter a trade.

Always trade with a stop-loss order. Decide on the stop loss before youre in the trade and dont move it unless its to protect profits.

Identify trade entry and exit levels in advance through technical analysis.

Understand how each currency pairs prices move and what drives the prices.

Determine position size based on the trade setup and your financial risk-management plan.