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 THE ABC OF... |
ABC of...forex
Comparing forex brokers
So you want to trade forex. You're primed to punt on the AUD/USD or the GBP/USD. Before you do, we have a couple of pointers on how to assess the competition and find yourself the perfect broker.
A. Forex brokers
To avoid looking silly, don't confuse forex trading with ordinary foreign exchange transactions. Travelex and Oz Forex are firms that operate in the business of foreign exchange; they'll convert your Australian dollars into American dollars or Japanese Yen before you jet off to New Orleans or Tokyo. They also assist companies doing business internationally.
If you are trading forex for speculative reasons you have to turn to companies that offer trading platforms, research and charting tools on the forex market. See our forex table for the list of brokers in Australia.
Since FX is a global market, you can just as easily sign up with an international firm as a local player. The downside of choosing an international FX dealer is that your funds probably won't be held in an Australian bank account and the company will not be regulated in Australia. If you choose an international player, check that they are regulated in their respective country.
B. Major currencies & cross currencies
The five "major" currencies are the US Dollar (USD), the Euro (EUR), the Swiss Franc (CHF), the British Pound (GBP) and the Japanese Yen (JPY). These currencies are usually quoted in terms of the base currency USD, such as USDEUR.
When these currencies are quoted in terms of each other rather than the USD, such as EUR/JPY (or EURJPY), it's called a "cross" rate. Cross currencies are less liquid and therefore usually attract a higher spread than the "majors". Some brokers will offer more cross currency pairs than others (refer to the table). Whether or not having a bountiful range of cross currencies to choose is important will obviously depend on what you intend to trade.
C. Spreads
Never believe the statement that forex trading is commission free. The last time we looked, forex trading wasn't a charitable enterprise.
What these brokers are endeavouring to say is that while, no, they don't charge a traditional brokerage - in the sense that you pay $30 to buy and sell forex - the commission instead is built into the spread.
In forex-speak a spread is measured in pips and relates to the difference between the value of the bid and offer. For example, if the Pound Sterling against the US dollar is 1.7443/48, a trader is able to buy the Sterling at the offer price of 1.7448 and sell at the bid of 1.7443. The spread in this example is the difference between the bid and offer, and is five pips.
Most brokers will offer a narrow spread for the most liquid currency pairs - as low as a 2 pip spread for the AUD/USD, EUR/USD and EUR/GBP. In a game where every pip counts, these currency pairs are generally more popular with active or day traders. Less liquid currency pairs such as the USD/CAD (the CAD is the Canadian dollar) will generally incur a wider spread.
First decide which currency pairs you intend to trade and then compare the spreads between brokers for this particular currency pair. Also, if you are a frequent trader don't forget to prompt your broker for any special deals or rates.
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