Looking to start trading options? The first step is to pick a strong broker. Your broker should work for you, not nickel and dime your cash away from you. We’ve listed several things that you should be on the lookout when selecting the perfect broker for you and your financial needs.
Legality of Trading with these Brokers
We’ve already stressed the importance of sticking with a broker that follows the rules. But what you might not have picked up on yet is the fact that if you go with a broker outside of the jurisdiction of where you live—no matter how reputable and well liked they are—if something does go wrong, you will find yourself having a really tough time correcting the problem. In extreme situations, you might just find your money disappear through a scam. No matter what else you look for in your broker, this should be the first test that you put it through.
Returns on Investment
You can’t do much about the outcome of your trade once you’ve put the time and energy into your research, but you can do a lot before hand. And one of the most important things you can do to influence your profitability, and luckily for us it’s one of the easiest things that you can do too, is to look for strong rates of return. If a broker offers lower rates than another, with everything else being equal, the one with lower rates is not helping you as much. Over the course of a year, this can mean thousands of dollars that you are missing out on.
Simple math illustrates this well. Let’s say you make 1,000 correct trades over the course of a year at one broker offering 74 percent back on $50 per trade. At another broker, someone else makes those same 1,000 correct trades with 78 percent back at the same $50 per trade. The 74 percent would give you a profit of $37,000. The 78 percent gives you a profit of $39,000. That extra $2,000 could be the difference between a great year and a losing one.
If you are wondering about how many trades you will make per year, 1,000 equals less than 3 per day.
Most successful options traders only deal with a handful of different assets over the course of a day. They do this because it is too hard to have a broad range of knowledge about many different assets and still trade them with any sort of success. Obviously, the first thing you need to check here then is that the broker you wish to use has the assets that you are most familiar with. Most brokers tend to focus on currency pairs simply because many Forex traders also use options to help them increase their profitability.
Beyond this, most brokers also offer an array of stocks, indices, and commodities. Depending on where the broker is based out of and who their target audience is, the assets listed within these categories will vary. If you have a few assets in mind that you definitely want to trade, consult the broker’s asset list before you sign up for an account.
Having multiple choices is important because you want to have flexibility within your trades. Let’s say you usually trade the EUR/USD and the GBP/USD pairs, but you see that crude oil and Exxon’s stock are both moving in an easy to predict manner. If your broker offers these two assets, then you can branch out with ease. If they don’t, you might be missing out on a valuable money making opportunity.