Leverage, risk and choosing an ECN broker

Question

Dear Anna,

Thank you for your very helpful book “Forex for Beginners”. I just finished reading it yesterday after a month’s gradual reading; I just left you a review on Amazon.co.uk.

May I ask as per my review there, what ECN brokers you’d recommend for a beginner without much capital (if I I do start to trade for real, it will be micro lots), wanting to keep extra costs down, and who’d like to start with longer-term trading? I’ve read a little on Alpari, who seem good. But with them, I’m not sure how their rollover charges would work out for longer-term trading, wanting to hold longer positions. What is your advice here?

Also, which is the most suitable platform (which of course needs volume indication!) for the same? 

Finally, though you discussed leverage in your book earlier on, I don’t remember it featuring in the later examples and the factoring of one’s risk, so I’m thinking you’d just stay away from that, because it would mutiply risk? If I trade, I don’t want to be too cautious, especially with a small capital, so I’d like to use as much as wouldn’t put me outside of 5% risk per position. 

I hope that these questions aren’t too burdensome for you, and thank you again for your very good book.

Kind Regards,

Answer

Hi – Many thanks for your email and please accept my apologies for the delay in replying, but I have been overwhelmed with emails and calls since publishing my first three books. So all I can say is so sorry for the long delay. I’m so pleased that you enjoyed the books and thank you also for buying them which is much appreciated, as are your very kind comments.

With regard to an ECN broker this of course is a personal choice and the site I always recommend as a good starting point is 100 forex brokers which you can find here: http://www.100forexbrokers.com. The site is an excellent resource, and gives an independent view of all the FX brokers, their packages and platforms and also reviews form other traders etc So it’s a very good starting point in choosing your broker. As always, you must do your own due diligence with regard to ownership and location, and which authority they are regulated by. In the UK it was the FSA and is now the FCA. Do contact the broker direct and ask questions, and if you are planning to trade micro lots, check this carefully. Not all brokers offer this as standard, with many still only offering mini lots as the smallest contract size. With regard to rollover charges these will be applied daily to your account, and will be either credits or debits depending on which pairs you are trading. This will be done automatically and not something you need to worry about unduly, but simply be aware that there is a cost involved in holding positions for the longer term, and as your contract size increases so will any rollover costs. For micro lots of course this will be very small.

On the subject of a true ECN broker, do not dismiss those brokers where you have to pay for each trading position. There is no such thing as a free lunch, and although the commission never appears, it is already built into the spread on the pair. If you want complete transparency, go for an ECN broker who charges a commission up front (as is standard in the stock brooking industry and futures) – many forex traders shy away from these brokers as they have been brought up to believe forex trading is free – with a free platform and no commissions. Everything comes at a price, and with an ECN broker who charges a commission you can be assured of transparency in your trading, tighter spreads and generally a true ECN broker.

With regard to platforms, MT4 is the most popular for forex trading and is widely available from most brokers. The recent changes by Metatquotes in the Build 600 release have added such much needed functionality and security to the platform. In addition, there is now an online shop for 3rd party trading indicators, and with MQL4 now moving closer to MQL5, we should see many more features added in due course as the two platforms and languages are brought together.

There are plenty of other platforms to choose from, but to be honest for a novice trader, this is probably the place to start as others may require data feeds etc and/or charts which do have a cost. Moving to leverage, as I’m sure you know from reading my book, this is a double edged sword. It magnifies profits but also losses, and thankfully the days of 300 and 400 to 1 are coming to an end. You can still find offshore brokers offering these sorts of leverage, but they are generally unregulated and in my opinion best avoided. To put leverage into context, the highest available when trading stocks is 2:1, and in the last few years the US authorities have clamped down hard in this area reducing the maximum allowable for forex to 50:1, and this is now set to fall further to 10:1 for US citizens and brokers. Professional traders will often use much smaller leverage than this, either trading at 1:1 if possible or a maximum of 5:1, which again gives you a perspective on the dangers of margin. With regard to the risk per trade, 5% is the maximum you should consider, but again as I explain in the book, you do need to take a higher risk when starting out. It’s ironic in some ways, but think of this in terms of starting a business – here you take a high risk when starting – the business could fail. Then as you build the business and it becomes profitable, gradually you reduce your risk and exposure. It’s the same in trading – as you start you do need to begin with a higher risk level in my opinion, which can then be scaled back to 1% or 2% in due course.

Apologies once again for the delay in replying and many thanks once again and I hope the above helps to answer your questions. Wishing you every success with your trading. Kind regards – Anna

About Anna 1027 Articles
Hi – my name is Anna Coulling and I am a full time currency, commodities and equities trader. I have been involved in both trading and investing for over fifteen years and have traded many different financial instruments, from options and futures to stocks and commodities. I write and publish articles ( mostly for free ) for UK and international publications on a wide variety of financial issues, and in particular I enjoy helping others learn how to invest and trade.

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