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What to look for when choosing a Forex Broker?
An important task for any trader is to ensure that they choose the best Forex broker for their trading.
While to the uninitiated brokers may on the surface all appear the same, in truth they can actually be quite different. Their differences can be down to both the services they offer and the way in which they deal with their clients.
Both of these factors can impact trading performance and ultimately lead to a loss of capital.
For this reason selecting the best Forex broker is not a task that should be approached without some due consideration.
Here are going to take a look at some of the key criteria that you should consider when weighing up the pros and cons of different brokers.
While reading through these points it is important to remember that there is no ‘best Forex broker‘ only the best broker for you and your particular trading requirements.
1. Broker Regulation
This is an absolute fundamental requirement. If the broker you are investigating is NOT regulated then go no further!
Although regulation has tightened up a lot in the Forex industry in recent years, it is still vital that you check the regulatory status of any broker that you are considering opening an account with. This will help to add some validity to the operation of the company as well as provide a secure base for your trading.
Most brokers advertise membership of a regulatory authority on their website. If they don’t, or you have doubts then check them out with the local regulator.
Regulation requires the broker to segregate your funds from their own operational capital. It also ensures that their accounts are regularly audited.
This means that any capital that you have deposited with them will be protected. Therefore in the event that the broker runs into financial difficulties you won’t have any fear of losing you money as compensation will be available and if not it will be covered by the regulator.
- UK Financial Conduct Authority (FCA)
- National Futures Association (NFA)
- EU Markets in Financial Instruments Directive (MiFID)
It stands to reason that if the broker does not offer the assets that you want to trade then you aren’t going to get very far with your trading!
While this is less of an issue than it has been in the past you should still make some basics checks to find out what is on offer before opening your account.
Don’t be duped by the fact that a broker boasts a huge asset index containing every currency pair or market you have ever heard of. You can’t and should’t try to trade everything, so if they offer the key markets that you are looking to trade then this is sufficient.
These days many of the top Forex brokers also offer access to assets other than simply currency pairs. Most major financial indices, commodities and in some instances even individual stocks can be traded via Spread Betting and CFD accounts.
Be sure to check the availability of these accounts with your broker.
The ‘spread’ is a term used to describe the difference between the ‘buy’ and ‘sell’ that you are quoted on an order.
Competition among brokers has seen the spread charged on the most liquid currency pairs drop dramatically in recent years. The result is that competitive spreads of just 1 or 2 pips are quoted on most major pairs. Typical pairs with the lowest spreads include EUR/USD, GBP/USD and USD/JPY.
If you plan on trading more exotic markets then you need to look more closely is being offered. All other things being equal, go for the broker with lowest spreads.
Spreads tend to be variable and based on market liquidity. It is however possible to find some Forex brokers offering fixed spreads on their accounts. However, expect to pay more for this known cost.
4. Account Types
Most brokers will allow you to open different levels of account tailored to your needs rather than opting for a account ‘one fits all’ approach.
This can prove particularly beneficial if you are trading with smaller amounts of capital. The use of fractional lot sizes on smaller accounts allows you to trade with a much lower level of risk per pip.
Brokers may typically offer –
- Micro Accounts equal to 1,000 units of base currency per position, approximately $0.10 per pip.
- Mini Accounts equal to 10,000 units of base currency per position, approximately $1.00 per pip.
- Standard Accounts equal to 100,000 units of base currency per position, approximately $10.00 per pip.
For many traders, Micro accounts are ideal. They be can easily be scaled up by running additional lots as the account grows, until you are ready to take the next step up.
5. Minimum Deposit Requirements
A low opening deposit a great attraction when it comes to opening an account.
Mini and micro accounts as described above often have a very low minimum deposit requirement. In some instances this can be as low as just $25.
However while this is great to get your account up and running, these deposit amounts should not be seen as recommend trading levels.
To trade successfully you will need to provide adequate funding for your account. This means setting aside $500-$1000 to allow yourself to enact proper risk controls.
You don’t don’t want to be opening a Standard account with only a few hundred dollars as you will be unable to keep your risk to just a few percent of capital on each trade.
6. Trading Platform
Due to the time spent interacting with the trading platform it is important that you happy with both its operation and the features it provides.
The trading platform is used to place your orders, manage open positions and carry out administrative functions on your account. Advanced platforms also allow you to integrate analytical tools and news feeds. Ultimately you can end up with a central portal for your trading.
Most of the top Forex brokers offer a choice between their own in house developed and third party trading platforms.
Of these MetaTrader 4 (MT4) is the most popular. It offers the ability to use custom trading indicators and custom built indicators.These can prove invaluable in assisting the trader with market analysis.
If you become familiar with this platform you will also benefit from being easily being able to transfer your system indicators and chart setups between other MT4 brokers.
7. Demo Accounts
Most brokers offer free demo accounts to potential traders. As well as allowing you to evaluate their services, they can prove to be a useful trading tool if used correctly.
They offer a risk free way for you to test trading strategies under live market conditions and monitor and analyse your results.
When trading with a demo account you need to ensure live price feeds for accurate trading simulation. The only difference should be that you are making use of virtual capital rather than your deposited funds when open your positions.
The amount of leverage available from a broker often becomes an obsession with new traders.
While it can offer several trading advantages, most obviously increased profits, in truth it is likely to get your fingers burned. You really need to fully understand the implications of using leverage.
Leverage can be thought of as the amount that your Forex broker will lend you on your position. For example a leverage of 100:1 means that for every $1 in your account you can control $100 in the market. A leverage of 200:1 allows you to control $200 and so forth.
The preoccupation with leverage is due to the magnification of the gains (or losses) that it can lead to on your account. However this ‘double edged’ sword is best avoided when first starting out.
The key to understanding margin requirements is to think of them as a deposit to your broker in exchange for a share of the risk on your positions.
The actual amount of your deposited account that is set aside as margin will depend upon the actual trading conditions of the broker.
On a $1,000 trade with a 0.5% margin requirement your margin would be $5.
This would show that you are using a leverage of 200:1 ($1000 / $5 = 200)
A low margin requirement generally indicates a high amount of account leverage.
If your account lacks sufficient funds to cover your required margin on your open positions this is called a ‘margin call’. In this scenario your broker takes over your account and will start liquidating your positions. This is done in order to prevent further losses for both you and the broker.
This is obviously not desirable. In fast markets it can also mean that your losses can extended beyond the level of capital deposited in your account!
It is therefore worth checking that your broker offers some form of account protection. Guaranteed stops will help to limit your maximum obligation in things go wrong.
10. Deposit Bonuses
Forex brokers tend to be keen to offer deposit bonuses to new clients.
Most deposit bonuses will match your deposit to a certain amount of provide a set amount of additional funds which are deposited to your account for a specified time.
There is nothing particularly wrong with these incentives when used responsibly. For example they can often provide much needed funds to help new traders take a more balanced risk approach. This can prove useful for a trader when first starting out.
It is however important before accepting a bonus that you read any associated terms and conditions. Pay particular attention to any trading requirements that are stipulated.
11. Customer Service
One area that new traders often fail to take into account when selecting a broker is support. While you would hope that things don’t go wrong, they can and often do.
Having a broker that is responsive and able to sort out any issues on your account is something that you will only appreciate when you need it.
Most of the best Forex brokers offer a wide range of support options. Look out for dedicated telephone lines, email support and live chat on their website.
Also be sure to check out other resources they may offer. Frequently asked questions pages or the educational sections of their websites can often provide good trading resources. Many offer videos, webinars, calendars and downloadable guides to assist you with getting up and running on your account.