Choosing a good forex broker is one of the most important decisions
you need to make at the beginning (or at any point) of your forex
trading career. Do not take this decision lightly, but at the same time
don’t stress over it – the process does not need to be complicated –
just like in your trading decisions, once you do your homework, things
tend to fall into place. Chance favors the prepared trader and
everything you need to make an informed decision is listed right here.
All you have to do is follow the advice given and you will find
yourself a broker that suits your needs. If you are not familiar with
what is available, you can have a look at the brokers we have listed in
our Broker Reviews
section to familiarize yourself with who is who in the forex world. If
you have already narrowed down your search to just a few, or even one
broker, and want to be sure that they are in fact what you want, then
keep reading.
Regulation (the "Legitimacy Test")
The
first thing you need to do is check whether the broker is regulated.
The fact that the forex market itself is not regulated opens the door
to a lot of possibilities for a scheming mind. There are shifty brokers
out there, ranging from outright scams to just badly run businesses
which are not accountable to any regulatory body. The brokers who are
regulated choose to be so, in order to add a layer of legitimacy to
their reputation. Please do NOT fund any accounts with an unregulated
forex broker. There are not many good reason to do so, and plenty of
reasons not to. It just makes sense.
By far the most respected regulatory bodies are the US-based National Futures Association (NFA) and Commodity Futures Trading Commission (CFTC).
Most forex brokers, even if they are not based in the United States,
are members of the NFA and registered Futures Commission Merchants
(FCMs) with the CFTC. The UK based Financial Services Authority (FSA)
is also a well respected regulating body, as is CySEC (Cyprus), ARIF
(Switzerland), ASIC (Australia) and SFC (Hong Kong) among others. Just
because a firm writes on their website that they are regulated however,
does not make it so. Always check the websites of the regulating bodies
themselves – they all offer a searchable database that allows visitors
to find regulated members by name: NFA/CFTC: http://www.nfa.futures.org/basicnet/ FSA: http://www.fsa.gov.uk/register/home.do ARIF: http://www.arif.ch/en/membres.htm CySEC: http://www.cysec.gov.cy/licence_members_1_en.aspx ASIC: http://www.search.asic.gov.au/gns001.html SFC: http://www.sfc.hk/sfcprd/eng/pr/html/PR002.jsp?charset=ISO8859_1
It
is also important, particularly for US-based forex brokers, to be well
capitalized. Well capitalized companies tend to be much more stable and
less prone to insolvency. This is particularly true in the US because
brokers here are not required to keep client funds segregated from
company operating capital, so clients are at increased risk in case of
insolvency. For CFTC registered FCMs, you can look up the broker’s
operating capital: http://www.cftc.gov/marketreports/financialdataforfcms/index.htm
Furthermore,
if the broker does keep client funds segregated, it is certainly a
bonus, since it provides additional protection of client funds even in
case of insolvency. FSA regulated brokers, for example, are required to
keep client funds segregated. This of course begs the question, where
are the funds being kept? Are they in a safe account at a large bank or
some dodgy private bank in the Cayman Islands? You can find answers to
these questions in our broker reviews
section. Alternately, the broker’s customer support should be able to
answer these questions. If they cannot, they may be hiding something
(or the customer service rep may simply be incompetent - either way
it's not a good sign).
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.
On the other hand, if you are a position trader, who makes 5 trades
per year, then the difference amounts to only $10 per year. This is
minimal and may very well be outweighed by other factors, such as
perhaps higher overnight interest rates in a carry trade strategy, or
better customer support or some other factor that gives you more than
$10 of value added with the higher spread broker. So neither broker is
better or worse, they are just better suited to different styles of
trading.
Automated vs. Discretionary Trading Styles
Some
broker platforms are also better suited to automated trading. For
example, MetaTrader 4 (MT4) is a favorite among retail traders who
program their own “Expert Advisors” or “EAs”. If that’s you, then this
could be a determining factor when choosing a broker. On the other
hand, if you are a discretionary trader who bases trading decisions on
a combined technical and fundamental analysis approach, then it may not
matter to you whether the broker offers MT4 or not, as long as the
platform offers you good charting. You can visit our broker reviews page for details on which brokers use which specific trading platforms.
Islamic Swap-Free Accounts
Another
factor could be a broker’s choice to offer Islamic accounts, which do
not charge or pay any rollover or swap interest. Traders bound by
Sharia Law are not allowed to conduct any business dealing with
interest, so some brokers may be off your list as a result. Many
brokers offer swap-free accounts, but many also do not. Moreover, some
brokers that do offer swap-free accounts may do so only under certain
conditions (read extra fees), since such accounts are susceptible to
abuse, and brokers are very much aware of that.
It should also be noted that the brokers who do offer swap-free
accounts to all their traders, with no extra charges, are a great
choice for non-Islamic traders as well, if they simply want to short
the carry trade - just be careful, as most such brokers are not
regulated.
Tradable Instruments
Finally,
when it comes to trading style, some forex brokers have a much wider
range of tradable instruments than others. In addition to the major
currency pairs, some brokers allow you to trade exotic pairs (such as
PLN/SGD or Polish Zloty vs. Singapore Dollar) Gold, Silver, Oil or any
number of other instruments. You may or may not find these of interest,
but if you do, then going with a broker where you can trade your
desired instruments is a must.
Minimum deal sizes
Another
concern, particularly for smaller accounts, is minimum deal sizes. Some
brokers only allow you to trade standard lots (100,000), which does not
give someone with a $5,000 account very much flexibility when it comes
to money management. Money management is a very important aspect of any
trading strategy, and the finer “resolution” you can get when
calculating deal sizes, the more accurately your money management
calculations can be reflected in reality. This is an often overlooked
or at least underestimated factor when it comes to choosing a broker,
but it is absolutely critical. The best choice for small account
holders are the brokers that offer traders deal sizes as small as 1
unit, giving traders maximum flexibility when choosing the size of
their trades and positions.
Leverage
In
contrast, an often overestimated factor involved in the appropriate
choice of a broker is maximum leverage allowed by the broker. Most
forex brokers have a margin requirement of 1% or even lower, which
allows for 100:1 maximum leverage – more than enough for any sensible
trader, and yet some traders insist on ridiculous 0.25% margin
requirements. This has been the highway to ruin for most who have tried
to use anywhere near that much leverage. You don’t have to be a genius
to see why, since leverage multiplies your drawdowns. All it takes is a
small losing streak and your account is blown. In any case, this is not
a lecture on the pitfalls of high leverage. We can address that in
another article. Suffice it to say that low margin requirements and the
resulting high maximum leverage should NOT be a factor when choosing
your forex broker.
Customer Support
One
way to get a glimpse inside your forex broker’s business is to contact
their support staff by a variety of methods. Send emails, use live
chat, call them, get them to call you, whatever. No matter how small or
irrelevant your questions may seem, they are important. Not only
because you are a potential customer and you deserve their time and
attention, but also because it allows you to judge how committed they
will be if you do open a real account with them. If they are unable or
unwilling to spend time with you to answer your questions now, then
they most likely won’t act any differently after they have received
your money. I encourage you to ask as many questions as you can think
of, sometimes even ones you know the answers to, just to see if they
will lose patience with you or refuse to answer questions that may seem
obvious, or that expose their weaknesses. Some brokers get defensive
when you ask them about regulation, for example – not a good sign. Make
sure you also ask some tough questions about their internal systems,
such as how they process orders, if they offset client orders in a
higher tier or if they are the counterparty to clients’ trades, ask
them about their liquidity providers, withdrawal fees etc (if you are
not sure what these things mean, please refer to our "How Forex Brokers Work"
article). These are all things that a client has the right to know. Any
decent broker has to respect that and give you the answers. There is no
reason not to, unless they have something to hide. It is also a good
idea to keep a record of all your correspondence with your broker, just
in case some disagreement arises in the future.
Test-run the Platform
All
forex brokers nowadays offer traders the ability to test their trading
platform with a demo account. Before funding a real account, it is
highly recommended that you do this. It will give you an idea of how
the platform performs. Are there any glitches? Is it stable? Is it
fast? Is it easy to use? Is the charting package any good? Does it have
the features I need? These are all questions you can answer very
quickly when trading on a demo account. What you cannot know from
trading a demo account, unfortunately, is how order execution will be
on a real account. Execution is always flawless on demo, but this is
not representative of the real market and can be vastly different
if/when you make the switch to real market conditions. It is also not
possible to withdraw the money from a demo account (very unfortunate),
so you cannot judge how quickly these are normally processed. The same
goes for deposits. The best way to get an idea of this is to have a
look at our broker reviews
page, where we have tested each broker with a real money account, and
given them a 0-5 rating on how good their order execution is, how quick
their transaction processing is, and a number of other important facts.
How we can help
We
built a broker review section that is specifically designed with the
above criteria (and more) in mind. We have listed all the information
you could possibly want to know about each broker in order to help you
choose the right broker for your individual needs. This is the most
detailed information you will find anywhere, because we have thoroughly
tested each broker with real money accounts. We keep adding new broker
listings all the time, so check back every once in a while. We hope you
find it useful.
http://www.forextradingzone.org/articles-How_to_Choose_a_Forex_Broker
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