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What to Pay Attention to Before Taking Brokerage


Contributed by FXTM
November 18, 2020



Are you thinking of trying Forex trading? Be meticulous in your search for brokerage. In Nigeria, the market lacks regulation. Online trading is growing fast, but there are no tough controls to keep crooks at bay. Here are several important aspects to remember.

As scams are quite rampant, vigilance is key. Unscrupulous brokers advertise trading is a path to quick riches. They encourage you to make a deposit and then vanish into thin air. In this situation, there is little you can do, so take preventative measures.

License and Regulation

Make sure the broker is authorized by an international organization. Trustworthy companies are approved by regulators like the FCA in the United Kingdom, the FCSA in South Africa, or the CySEC in Cyprus. Reliable operators have nothing to hide, so you can see details of their licenses on the official website (usually, in the footer of the home page).

Types of Accounts

Demo trading is the first stage in every trader's journey. It is unlocked with a free account, which is also easy to register. Fill in a basic form on your brokerage site, and the credentials will land in your inbox almost immediately.

These login and password are used to unlock the trading terminal (for example, MetaTrader 4) in its special simulation mode. The system imitates real market conditions, and you can trade with virtual money. As demo accounts have no expiry date (at least with reliable brokers), you can practice at your own pace.

When you are ready to take the risk, switch to a live account. This time, the broker may request a copy of your passport or other documents in order to verify your identity. Still, the process should be quite prompt. Once the credentials are generated, you can fund this account and access the real market. Be careful, though - trading with the real money is more stressful than training, so start small and be wise. Different types of live accounts exist. Top online Forex brokerage firms give you access to more instruments than others. Distinctions also include spreads and leverage conditions. Traders from Nigeria can open accounts in the Nigeria naira to save on conversion costs. For example, these are offered by ForexTime.

Types of Instruments

Diversification is the way to lower risks. Do not focus on Forex alone. Look for trusted brokers with a wider range of instruments. With time, you may consider adding more assets to your portfolio to minimize risks and boost returns. Global brands stand out thanks to their broad range of offerings. Clients may trade the following instruments:

  • Major, minor, and exotic currency pairs,
  • Stocks of major corporations,
  • CFDs on stocks,
  • CFDs on commodities like crude oil,
  • CFDs on cryptocurrencies,
  • CFDs on market indices.

If you do not know what contracts for difference are, here are the basics. This type of derivative is linked to different underlying assets. The trader speculates on price without owning the said instrument. For example, if you had CFDs on Brent, you would profit from the dynamics of the oil price. No physical barrels would be transported. You would only need financial foresight to predict where the price will go.

Market Maker or ECN?

These are two major brokerage models in existence. The difference lies in the way companies generate profit. A market maker sets its own prices based on market conditions. An ECN, or electronic communication network, charges a commission per trade. Its clients use live quotes broadcast directly from the market.

Reliable companies may belong to either type. Moreover, the same broker may offer market maker and ECN accounts. Generally, the first model is more convenient for fraudsters. But why?

Market makers, also known as dealing desk brokers, determine the prices valid for their clients. They also provide liquidity and take the opposite position in each trade. For example, when a trader sells currency (goes short), the broker sells it, and vice versa. This puts these companies in direct opposition to their clients’ interests. Luckily, stiff competition makes unfair pricing rare.

On the other hand, not everyone is happy to pay a commission for every trade. If you trade frequently or use large volumes, the costs may be substantial. Still, ECN brokers offer tighter spreads.

Another advantage is positive slippage. The term refers to the situation when a trade is executed at a different price because there is no exact match in the market. With market makers, you may expect either a positive or a negative outcome. With ECNs, slippage usually works in your favour - i.e., you get a better price than you planned.

A Word of Caution

Steer clear of companies which do not offer practice accounts. Choose regulated brokers and do not fall for deceptive marketing claims. Forex scammers are extremely creative.

 

Tags: forex | currency | Cyprus | South Africa | United Kingdom | Nigeria

 

 

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