If you are a new trader entering the Forex market, it could be quite overwhelming. What do you invest in? What strategy do you follow? When do you enter and exit trade?
All of these are no doubt important questions. Yet, none are as important as the question as to which Forex broker you should select. Indeed, it is the one big decision that you will take in your trading career.
In this short post, we will go over the most important characteristics one should look at when choosing a Forex Broker.
With all of the recent news around FXCM being fined by the CFTC, no question is an important as that of whether the broker is following all of the correct regulations for client protections.
Depending on where you live, there may be different regulatory bodies which are responsible for monitoring compliance by the broker. For U.S. traders, these include the CFTC (Commodities and Futures Trading Commission) and the NFA (National Futures Association).
For a Forex broker to be able to offer their services in the U.S., they have to be in compliance with these agencies as a Retail Foreign Exchange Dealer. It is this stamp of approval that offers numerous protections to the trader.
In Europe, Financial regulations are covered by the MIFID agreement. This stipulates that any broker that is regulated in one of the E.U. territories is automatically permitted to offer its services to clients in other EU jurisdictions.
In a previous post, we went into detail about E.U. regulations as it pertained to Binary Option Brokers.
Currency Crosses Available
There is nothing more frustrating than having limited options when it comes to choosing the pairs that you want to trade. However, many brokers only offer the major currency pairs and neglect a number of other pairs including many emerging market currencies.
Therefore, it is essential to ask the broker about which assets they have on offer. This will usually be prominently displayed if the broker has a number of different crosses.
Leverage, Commissions and Spreads
Many forex brokers allow leveraged trading. Indeed, this is one of the ways in which the trader can make multiples of his investment on a particular trade. What leverage is essentially is a loan from the broker to the trader over the life of the trade.
This is a trade on margin. Trading on margin can be quite an effective way of generating large returns. However, it should also be traded with caution as downside risk is also quite considerable.
These are quoted as ratios such as 1:100 or 1:300. Essentially, what it means is that for a single trade size, the notional exposure is in fact 100 or 300 times that.
It is very important to know the leverage ratio before trading as some traders prefer to take less risk and some prefer to take more.
Another important consideration to take into account is the broker’s commission and the spreads on the pairs. This is where the broker makes his money and if you trade quite often, these spreads add up and can impact your bottom line.
The spread is the difference between the bid and offer on the currency pair. It is quoted in pips. For example, taking a look at the GBPUSD quote of 1.2413-1.2415 has a 2 pip spread.
Obviously, the wider this spread, the more the broker makes and consequently the more you lose. When you enter the trade or buy at the offer, you are automatically 2 pips out by nature of the spread. All told, know the brokers spreads and commissions. Take a look at the fine print and understand the numbers that you will be working with.
Deposits, Withdrawals and Account sizes
Make certain that you know the minimum account requirements before trading. Some brokers require a certain account balance in order to provide a number of their services. Once your account goes below this balance, you will automatically be downgraded to less favourable terms.
Also, it is important to know what sort of payments the broker will accept and how likely they will be to pay out. Brokers may have a minimum withdrawal amount or charge clients extra for any withdrawals.
This information is usually also in the fine print of the disclaimer pages although funding options are usually at the bottom of the website.
Of course, having a trading platform that is functional yet relatively easy to use is pivotal. As a forex trader, the tools with which you are able to trade are essential to helping you reach your goals.
For traders who like to trade with very short timeframes then it is important to make certain that the Buy and Sell orders are easy to spot and execute. This includes avoiding any possibility of mistaken orders.
It is also important to read forex broker reviews about the platform from other traders and perhaps use a demo account beforehand should you have the option to.
If you are a more technical trader who likes to develop his / her own algorithms then it makes sense to ask the broker whether they offer Metatrader4 MT4 functionality.
Nothing is more frustrating than trying to reach a broker for an issue that you are having and waiting for a response for an extended period of time. These include queries about your account, trading positions and administrative information.
This can usually be established by reaching out to the customer service while doing research on a number of different brokers. You can be certain that if a broker is not responsive to prospective clients then they will most certainly be slack to their current traders.
Although choosing a forex broker can sometimes be overwhelming with all the choice available. However, if you know what you are looking for with respect to the above criteria then you could easily narrow down your choice.