So much money is traded on the foreign exchange markets every day that it is one of the hottest investment opportunities around. For this reason, the number of brokers is increasing, and choosing the right broker can be difficult due to the many advertisements claiming to have the best deals.
Here are 5 things you should consider when choosing a Forex broker.
1. They comply with regulation
First of all, it must be a licensed broker. In the US, a reputable forex broker is a member of the National Futures Association (or NFA) and officially registered with the US Commodity Futures Trading Commission (CFTC) as a futures commission merchant as well as a retail forex dealer.
In addition, the NFA is an industry-wide, fully self-regulatory organization for the futures industry in the United States. Its primary mission is to develop rules, programmed and services to protect the market and its participants. It also aims to ensure that members meet their regulatory obligations and comply with certain requirements.
Do your homework on the website. Just because a broker looks professional does not mean it’s properly licensed and regulated.
2. The trading platform
The trading platform is the investor’s portal to the market. Therefore, forex traders should make sure that the platform is easy to use. It should also have all the necessary financial market analysis tools to help you trade.
Most importantly, it should make it easy to enter and exit the trade. A well-designed trading platform has clear buy and sell buttons, and some even have a “panic” button that can be used to close all open positions. A poorly designed interface, on the other hand, can lead to costly order entry errors, such as accidentally adding to a position instead of closing it, or going short when you meant to go long.
Other considerations include customization options, order entry types, automated trading options, creating elite forex trading strategies, backdating newly learned theories, and trading alerts. Most brokers offer free demo accounts so traders can try out the trading platform before opening and depositing an account.
3. Account Details
Even though every forex broker is different, they all have similar account offerings:
Forex participants have access to a range of leverage amounts, such as 50:1 or 200:1, depending on the broker. Leverage is a credit given to margin account holders by their brokers. At 50:1 leverage, a forex trader with a $1,000 account can hold a position worth $50,000. Leverage works in the trader’s favor for profitable positions, as the profit potential is significantly increased. However, leverage can also quickly destroy a trader’s account as the potential for loss is also increased. This leads us to the point that leverage should only be used with caution.
A forex broker makes its money through set commissions and spreads by charging a certain percentage. However, many brokers advertise that they do not charge commissions and instead make their money through wider spreads. For example, the spread could be a fixed spread of three pips, or the spread could be variable depending on market volatility. For example, let us say that a GBP/USD quote of 1.5551 – 1.5554 has a spread of three pips. This means that a market participant who buys at 1.5554 has already lost three pips in value, as he could only sell the position immediately for 1.5551. So, the bigger the spread is, the harder it is to make a profit. In fact, common trading pairs like GBP/USD and EUR/USD usually have tighter spreads than the less heavily traded pairs.
Most forex accounts can be set up with a very limited initial deposit, which can even be as low as $50. Of course, with the buying power of leverage, the minimum deposit can be significantly exceeded. This is one of the many reasons why forex trading is so attractive to new traders and investors. Many brokers offer standard, mini and micro accounts with changeable initial deposit requirements.
Each forex broker has its own account withdrawal and deposit policies. Brokers may allow account holders to fund their accounts online via PayPal, easily with a credit card or via ACH, not to mention wire transfers, cashier’s checks or business or personal checks. Withdrawals can usually be made by check or bank transfer. Reputable and good forex brokers may charge a fee for each service.
It is imperative that your broker pays you the best possible price for your orders. Under normal market conditions (e.g. normal liquidity, no important news or surprising events), there is no reason for your broker not to execute your orders at or very close to the market price you see when you click the “Buy” or “Sell” button.
For example, assuming you have a stable internet connection, if you click “buy” EUR/USD for 1.3000, you should get filled at that price or within micro-pips of it. The speed at which your orders get filled is very important. A few pips difference in price can make that much harder on you to win that trade.
5. Customer Service
Forex trading occurs 24 hours a day, so a broker’s customer support should be available at any time. Therefore, you must pick a broker that you could easily contact if and when problems arise. The competence of brokers when dealing with account or technical support issues is just as important as their performance on executing trades. Brokers may be kind and helpful during the account opening process but have terrible “after sales” support.
When considering a broker, a quick call can give you an idea of the type of customer service they provide, wait times and the representative’s ability to concisely answer questions regarding spreads, leverage, regulations and company details.