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Traders have different selection criteria for their broker, so you first need to identify the criteria which are of significant importance to you in order to compare the various brokers. Reputation Always check the reputation of a forex broker. One way is to do a google search with the name of the broker plus the word “complaints”. Check around and get opinions from traders on forex message boards. Spend a fair amount of time doing your research. This is an important relationship. You will want to be absolutely comfortable with the broker that you decide on. The important thing to remember is that you will have to do some homework here. It is imperative that you are not lazy about it. Don’t be sucked in by a glossy sales page with extraordinary claims. Investigate! Use a demo account. Take some time to shop around. In the end, you will be happy that you did. If the broker is part of a large group of companies, you can be more confident since it will be watched by the group itself. Nevertheless, this is not a 100% proof strategy, as we all remember Refco, one of the largest Forex and commodity brokers in terms of capital, going into liquidation. So finding out how long the broker has been established on the Forex market constitute an important criterion. The longer the broker has been active on the market, the more chance you will have to gather feedback from traders who have used their services. Regulation The forex market is an unregulated market meaning there is no central exchange. However, forex brokers themselves are regulated. In the US they should be registered as a Futures Commission Merchant (FCM) with the Commodity Futures Trading Commission (CTFC) and a member of the National Futures Association (NFA), Financial Service Authority (FSA) regulates brokers in the United Kingdom. You can verify a broker’s status with the NFA on the NFA web site. If you do not find the broker you are interested in listed with the NFA, look for another broker that is listed and has a clean record. Types of accounts Individual investors may choose between different types of accounts: • Demonstration accounts or "demo accounts” . They allow you to test the trading platform and the related work environment. Free practice accounts are a great way to experience Forex trading since you can truly put yourself in the shoes of a trader with a live account. The demo account is of course set up with fictitious money. • Mini accounts. Choose a mini account if you are just starting on the Forex market. It is possible to use a leverage higher than in a standard account but as we will see later, using leverage is not necessarily a wise move when starting trading on the Forex. • Standard accounts. These accounts are the real thing. The minimum capital is higher than the mini account and the leverage is less important. The bank account where your money will be placed is also not to be neglected and it is advisable to choose a broker who uses a well-known and well established bank. Some brokers also offer the possibility to open an account in various currencies: euro, dollar, yen, etc. Beware: if you decide to trade in a currency which is not that of your own country, you need to take into account the exchange rate between your national currency and the currency you decided to trade with. Commission This term "commission" designates a fixed sum of money taken prior to a position being opened. Most brokers offer commission-free trading. Should a broker ask for one, you need to check whether or not he offers additional services (marketplaces news, economic analysis, etc.). So, how do they earn a living? Saying that brokers offer commission-free trading is only partially true, since they get paid for their services partly through spreads. Their "commission" is therefore proportionate to the size of your position. Brokers also have additional internal mechanisms at this disposal to earn money but this does not fall within the scope of this page. Spread The spread amounts to the number of pips between the bidding price and the asking price, and it's what forex brokers use to make money on every trade placed through their network. It's an obvious advantage to sign your account with a broker who offers tight spreads. Slippage The quote difference occurs when market volatility increases: as quotes change very quickly, by the time you place an order and it is executed, the quote has already changed again. Either the broker makes you pay the last quoted price and not your asking price, or your order has not been executed. Some trading platforms do have a tolerance threshold: if the real price difference is less that X pips, your order is being executed at the real price. This phenomenon is common during economic statistics. You therefore need to select a broker whose data flows are fast enough, so that you are quickly informed of price changes and your orders executed rapidly. Practicing on a demo account is sadly not a guarantee of success, as on the one hand, one can never be certain that data are sent over to the same server (despite the fact that services offered by brokers are identical), and on the other hand, it is proving rather tricky to clearly identify a broker's reliability in terms of slippage. I therefore encourage you to discuss this subject with other traders to check whether they did not experience major issues with a specific broker. The quest to find a broker with no slippage at all is only an illusion. Even if you trade with a top notch highly reputable broker, if your Internet connection slows down for half a second, you will experience some slippage. Leverage Leverage allows you to multiply your position on the market: with a leverage of 100:1, you will use $100 on the market for each $1 of your capital. All brokers offer 50:1 leverage minimum. Using a 100:1 or even a 400:1 leverage is not necessarily an advantage, because the more you increase your leverage, the more you increase the risk. To sum up, leverage is not a determining factor when choosing your Forex broker, since all brokers do offer sufficient leverage for all types of trading. Margin It is the deposit required to open or maintain a position. If you experience high losses, your margin deposit available decreases in order to control your position. In any event, your risk is limited to the size of your initial capital. When your margin deposit goes down to a low percentage, your broker will have to close your positions still open so as to ensure a positive balance on your account. Each broker applies his own "margin call" policy, i.e. the operation consisting in closing your positions. You therefore need to check what margin you need in order to hold your positions, as well as whether it is fixed or variable. Rollover Policy Is there a daily credit or debit rollover of interest? For traders who hold their positions for few days, weeks or longer, this can be an imperative feature. Execution of orders How fast are orders executed? Trading platform The trading platform is crucial. You will use this tool very often, so you need to feel as comfortable as possible with it. Beyond its user-friendliness, ask yourself whether it is reliable during significant market movements and statistical announcements (avoid crashes, frozen platform, etc.). How many currencies does it allow you to trade? Does it give you the ability to program your own trading strategy? What functionalities does it have (One-click trading, stop loss, trading via your mobile, etc.)? Customer Service Forex trading hours vary depending on what currencies you are most interested in trading. With that in mind, it is important to find a broker with 24 hour customer service. The forex markets can be wild at times. If you had a question about order execution or a closed order, you should be able to get your question answered no matter what time it is. A good test of a forex broker’s customer service ability is to contact the support desk and ask some questions by phone. Keep notes on how responsive they are to your questions and what attitude they have about answering them. Remember, you are trust these people with your money. You need to feel absolutely comfortable that all your needs will be addressed. 1. Margin provided (usually 1-4%). |
