One of the types of investing that is gaining popularity recently is forex trading. While forex trading doesn’t involve actually investing in something as you would a stock or a bond, it does involve the ability for you to earn money by risking your assets on whether or not a currency gains against another currency.
If you decide that trading forex is something that fits within your financial and emotional risk tolerance, you will need to find the right trading service or platform for you. There are a number of dealers and exchanges out there offering a number of forex services, and you need to decide what will work best for you.
Dealer? Or Broker/Exchange?
Your first decision is whether or not you want to go through a dealer/broker that can help you trade on the spot/OTC forex market, or whether you want to go through a broker or exchange that offers currency derivatives.
Most spot/OTC transactions take place through broker/dealers. In this arrangement, you might see a wide variety of quotes. The dealer makes money on the spread, so you don’t pay commissions in the traditional sense. You enter and exit positions that are “long” or “short.” If you are right about the direction a currency pair is moving, you make money, and the leverage involved in forex trading means that you can make a great deal of money indeed. Of course, if you are wrong, then you can lose just as much; leverage magnifies your losses just as it does your gains.
Your other choice is to trade in a more regulated setting. Many exchanges offer currency products, such as forex options, currency futures, and even currency ETFs. You can usually access these forex trading services and products through a more traditional online discount broker. There are several brokers that have access to exchange products that can allow you exposure to forex without the same level of risk (or opportunity for leverage). With these exchange products and services, you are more likely to see more uniformity of pricing as well, and there are different standards met as well.
What to Look For in Forex Trading Services
Once you decide how you want to trade currencies, you need to look for a forex services that work for you. If you decide to go the dealer/broker route, make sure you search carefully for reviews online. There are a few large dealers that have good reputations, and it can make sense to start there. Before you begin, make sure you understand how the payout works, as well as any rules related to cashing out. You also want to make sure that you are eligible for using the forex dealer. For example, there are some forex binary options dealers/brokers that you can’t use if you live in the United States.
Carefully consider the offerings, reputation, and payout policies of various brokers before you begin. No matter how you work it, when you trade forex, you are putting your money on the line in a way that you might not be familiar with — and you need to be careful.
Miranda is freelance journalist. She specializes in topics related to money, especially personal finance, small business, and investing. You can read more of my writing at Planting Money Seeds.