I am very interested to start trading in foreign exchange, especially as the US dollar appears to be very low in comparison to the euro and Sterling. Rather than pay the large spread often associated with buying directly from a bank or similar institution, I would like to trade currencies through an online broker. As a newcomer to this type of trading, how do I get started and what are the pitfalls?

Signing up for a FOREX account is much the same as registering for an online stockbroking account. The only major difference is that, for FOREX accounts, you are required to sign what is called a margin agreement. This agreement states that you are actually trading with borrowed money, and, as such, the brokerage has the right to interfere with your trades to protect its interests. Once you sign up, you simply fund your account (normally by debit card or bank transfer), and you will be ready to trade. There are many international online FOREX brokers to choose from, just as in any other market. To select the best one for you, here are some things to look out for:

Low spreads. The spread calculated in 'pips' is the difference between the price at which a currency can be purchased and the price at which it can be sold at any given point in time. FOREX brokers don't charge a commission, so this difference is how they make money. In comparing brokers, you will find that the difference in spreads in FOREX is as great as the difference in commissions in the stock broking market. Lower spreads therefore save you money.

Quality institution. Unlike stockbrokers, FOREX brokers are usually tied to large banks or lending institutions because of the large amounts of capital required. Also, FOREX brokers should be registered with the appropriate regulator. You can find this and other financial information and statistics about a FOREX brokerage on its Website or the Website of its parent company. You must therefore ensure that the broker is backed by a reliable financial institution.

Extensive tools and research. FOREX brokers offer many different trading platforms for their clients. These trading platforms often feature real-time charts, technical analysis tools, and even support for trading systems. Before committing to any broker, be sure to request free trials to test different trading platforms.

Wide range of leverage options. Leverage is necessary in FOREX because the price deviations (the sources of profit) are merely fractions of a cent. Leverage, expressed as a ratio between total capital available to actual capital, is the amount of money a broker will lend you for trading. For example, a ratio of 100:1 means your broker would lend you €100 for every €1 of actual capital. Many brokerages offer as much as 250:1. Remember, lower leverage means lower risk of a margin call. If therefore you have limited capital, make sure your broker offers high leverage.

Account types. Most brokers offer two or more types of accounts. The smallest account is known as a mini account and requires you to trade with a minimum of about €200, offering a high amount of leverage (which you need to make money with so little initial capital). The standard account lets you trade at a variety of different leverages, but it requires a minimum initial capital of about €2,000. Finally, premium accounts, which often require significant amounts of capital, let you use different amounts of leverage and often offer additional tools and services.

(Sourced from various FOREX sites)

Past performance is no guide to the future and, except where amounts are guaranteed, the price of investments (and the currency in which it is denominated) may fall as well as rise. Your personal tax situation will depend on residence. Always consult a professional adviser. This article does not intend to give investment advice and its contents should not be construed as such. Readers are encouraged to seek professional advice on their personal financial situation.

Mark Hollingsworth is the director of Hollingsworth International Financial Services Ltd, licensed by the MFSA to provide investment services under the Investment Services Act 1994 and enrolled insurance broker under article 13 of the Insurance Intermediaries Act (Registration No. C32457). Tel: 2131-6298; e-mail: mh@hollingsworth-int.com; www.hollingsworth.eu.com.

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