As we commented in our previous post, the process of choosing a broker can sometimes be more tedious that it could seem at first sight. That’s why from FXStreet we’ve prepared a set of posts, related to the webinar The process of chosing a Broker made by Gonçalo Moreira, our Content Advisor, on July, 9th; with the aim of helping traders in the process of selecting the broker that bests suits their trading needs. When selecting a broker we have to keep in mind that most of them require you to make a certain minimum deposit to open an account. In fact, figure can range from as little as 1$ to several thousand dollars.
Hedging Facilities and FIFO Rules
FIFO stands for “first in, first out”. It consists in a Forex trading policy that complies with the regulations set by the National Futures Association (NFA). There are ways to evade FIFO rules. Entering a new position with a different size could be enough. In fact, in some brokers the rules state that if a previously entered position is of a different size than later positions, it is not subject to the FIFO rules. Other platforms comprise the ability to close tickets/trades in a nonFIFO order, which includes hedging and linked orders. Other brokers mix trades so that you have no way to evade the FIFO rule. Let’s assume you enter a short position in EURUSD at 1.3600 and thereafter a second short position at 1.3900. The total blended position would have an average price of 1.3750. If the current price is now 1.3800, you could not exit the the second position at a 100 pip profit. Any exit of the entire position would incur a 50 loss. Hedging can work for most brokers, but we recommend that you test it out in a demo account before you proceed. The main point is that if you want to make use of hedging, be sure to test out a demo account with a prospective broker first. There is no point in registering and funding an account, only to find that you can’t deploy your trading strategy because of FIFO and hedging rules.
Leverage
Leverage is the ability to gear your account into a position greater than your total account margin. This may also change accordingly to the margin size, that is, the balance in your account. Regarding margin and leverage policy, Moreira recommends that you ensure to understand the broker’s margin terms before setting up an account. You should ask yourself questions like which the margin requirements are, how they calcule their margin or this margen does vary according to the currency pair being traded. Some brokers may offer different margins for different type of accounts. With respect to leverage, most brokers offer anywhere from 50:1 all the way up to 400:1. Take care with leverage, it can be a tricky business. As a general rule, don’t abuse of it. Leverate is perhaps the main reason why rookie traders blow up their accounts.
More tips soon! Enjoy your trading!
One of the most overlooked and least understood aspects are whether your broker intervenes or allows straight through processing. You do not want your position to be able to be harvested by your broker for their profit because they know where your stops are. That is abuse of privileged information but goes on all the time. They are after your cash, the only question is how much of it?