Tuesday, January 18, 2011

Timeframes

OK, so your broker has passed the “legitimacy test”. They are regulated, well capitalized, and they don’t mix client funds with operating capital. Now it’s time to make sure that they provide the type of trading conditions that suit your trading style. Depending the timeframes that you trade, it may be important for spreads/commissions to be very low. Also, if you trade very short timeframes (scalping) you should make sure that your broker doesn't have a problem with that. Generally, brokers who are market makers will have a problem with it, while brokers that use straight-through processing or actual ECNs generally don't mind. Please read our "ECNs vs. Market Makers" article if you are not sure what that means. If you are a day trader, then your transaction costs can make you or break you. If you enter and exit the market several times per day, these costs really add up. Consider, for example, that you are trading 1 mini lot (10,000), 5 trades per day on EUR/USD. If the spread your broker offers you is 3 pips on average, then you are paying $3 per trade, $15 per day, $300 per month etc… you get the picture. If you instead had a broker that offers you an average spread of 1 pip on EUR/USD, then you would be paying $1 per trade, $5 per day, $100 per month! That’s a difference that anyone serious about their business should not ignore.

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