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Wednesday, March 05, 2008

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Choosing a Forex Broker

By Grace Cheng

As you may already know, foreign exchange (Forex/FX) is an unregulated market that is not traded on an exchange, which means that prices you see and get from one broker could vary from those of another broker. There are mainly two types of brokers. One type is an ECN (Electronic Communications Network) and another a Market-Maker.

Market-makers "make" or set the prices on their systems based on what they think is best for themselves as the counter-party. This is because every time you sell, they must buy, and when you buy, they must sell to you. This is why they can give you a fixed spread since they are setting both the bid and the ask price. Many of them will then try to "hedge" or "cover" your order by passing it on to someone else; however, some may decide to hold your order, and thus trade against you. This can result in a conflict of interest between the retail trader (you) and the market-maker.

ECNs, on the other hand, pass on prices from several banks and market-makers, as well as from the other traders in the ECN, and display the best bid/ask prices based on these input. This is why sometimes you can get no spread on ECNs, especially in very liquid currency pairs. How do ECNs make money then? They do so by charging you a fixed commission for each transaction.

Here are some of the pros and cons of ECNs and market-makers:



* Usually give free charting software and news feed
* Prices can be "smoother" and less volatile than ECN prices (this can be a con if you are scalping or trading very short term)
* Often have a more user-friendly trading and analysis interface


* They may trade against you. In that case, there will be a conflict of interest between you and them
* The price they offer you may be worse than what you could get on an ECN
* It is possible that they may trigger stops or not let your trade reach your profit target levels by manipulating prices
* During news, there will usually be a large amount of slippage; their systems may also lock up or not allow order placing during times of high volatility
* Many of them discourage scalping and put scalpers on "manual execution" which means their orders may not get filled at the price they want

Examples of some market-makers:

* Pros: You can usually get better bid/ask prices since they come from several sources
* Variable spreads between bid and ask may give no spread or tiny spreads at times
* If they are a true ECN, they will not be trading against you but will pass on your orders to a bank or another customer on the other end of the transaction.
* You will be able to offer a price between the bid and ask with a chance of it getting filled
* If they support Stop-Limit orders, you can prevent slippage during news by making sure that your order either gets filled at the price you want or not at all
* Prices may be more volatile which will be better for scalping


* Many do not offer integrated charting
* Many do not offer integrated news
* Many of the trading platforms are less user-friendly
* Because of variable spreads (between bid and ask,) it may be more difficult to calculate stop loss and profit target in pips beforehand.

It is important that you carefully look into the pros and cons of each broker before choosing the one which best suits your needs. You may also wish to have several broker accounts to mitigate the risks, and so that you can compare bid/ask prices and trade on the broker with the best prices for the direction you wish to trade. Because of the unregulated nature of forex, US brokers are not required to keep your money in an untouchable account that only you can have access to if they were to collapse. As customers of Refco (was one of the world's largest brokers) found out, their unprotected accounts made them unsecured creditors, and thus are less likely to get their money back than those who had given secured loans to Refco. What this means is that the customers' money was used to pay other creditors.

The moral of the story is this:

Deposit as little money with your broker as you need for trading, and withdraw your profits when they exceed a certain amount. Keep the rest of your trading capital in your own bank accounts which are probably government-insured.

Additional Info On Forex Today
foreign exchange student

The Commodity Futures Modernization Act of 2000 (CFMA) made clear that the CFTC has jurisdiction and authority to investigate and take legal action to close down a wide assortment of unregulated firms offering or selling foreign currency futures and options contracts to the general public. The CFTC also has jurisdiction to investigate and prosecute foreign currency fraud occuring in its registered firms and their affiliates. The CFTC issued an advisory in 2001 that discussed these CFMA amendments to the Commodity Exchange Act (CEA), 7 USC 1, et seq.
More info on Forex trading

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We�d like to remind you that the higher the credit leverage, the higher is your profit if the fluctuation of the currency rate was anticipated correctly. However, if your anticipation was wrong, your losses will be bigger.

foreign exchange student

Another way that experienced brokers and traders in the Forex use to forecast the trends is called fundamental analysis. This method is used to forecast the future of price movements based on events that have not taken place yet. This can range from political changes, environmental factors and even natural disasters. Important factors and statistics are used to predict how it will affect supply and demand and the rates of the Forex. Most of the time, this method is not a reliable factor on its own, but is used in conjunction with technical analysis to form opinion about the changes in the Forex market.

Today's Forex News
European Mid Morning Update 4th March 2008

Tue, 04 Mar 2008 02:34:42 -0500
The Dollar’s decline should stall ahead of the European rate decisions and U.S. non-farm payroll numbers

Releases from Europe:
Q4 Forecast Actual
Swiss GDP (QoQ) +0.6% +1.0%
Swiss GDP (YoY) +2.9% +3.6%

Swiss CPI (MoM) +0.2% +0.1%
Swiss CPI (YoY) +2.4% +2.4%

Only Swiss numbers released so far this morning which look pretty positive. However, while the Q4 GDP number is impressive the Q1 statistics this year have fallen well short of those from the previous quarter and this still points to substantial easing in growth.

Inflation will be more uncomfortable for the SNB but they are likely to sit back and watch for a while longer to see whether there forecast of inflationary easing from lower growth is correct. The figures haven’t really had any strong impact on rate so far but the risk of the Dollar easing a bit further still remains.

The following economic releases are due today:

Euro-zone GDP (QoQ) +0.4%
Euro-zone GDP (YoY) +2.3%

U.K. Construction PMI 52.8

Yesterday Dollar-Yen dropped to its lowest level in 3 years and is expected to retest the string of lows around 101.20-101.67 that has supported the Dollar for the past 12 years.

It has brought comments from Japanese officials suggesting the drop was “abnormally rapid” and that they will “keep watching movements in foreign exchange rates from now on.”

However, the Bank of Japan has refrained from market intervention for around 4 years now when they bought Dollars around the same levels. Although central banks have preferred to leave exchange rates to move freely in the largest and most liquid market there may be reasons to begin reconsidering this.

However, given the exceptional pressure that the U.S. economy is suffering and the inflationary implications of a lower Dollar there are reasons to suggest that the case for concerted intervention is stronger.

This week sees rate decisions from the ECB and BOE while the U.S. publishes its non-farm payroll numbers on Friday which is expected to show a rise in unemployment.

The extreme bearishness we are seeing now should continue to pressure the greenback today with potential targets at 1.5322 Euro, 1.0216 Swiss Franc and while less certain any continued losses against the Yen would stall around the 101.67-82 area. These should contain the downside for now and cause a period of correction.

Note important support and resistance areas:

Res: 104.74-92 1.5322-50 1.0525-64 1.9971-06
Res: 103.69-92 1.5238-75 1.0435-56 1.9900-10

Spt: 102.60-93 1.5120-40 1.0375-85 1.9783-10
Spt: 101.67-82 1.5000-22 1.0280-07 1.9666-00

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