One of the most critical decisions you will make as a beginning trader will be in choosing your forex broker. The forex market is highly volatile, host to many subtle complexities, and a beginning trader may become so overwhelmed that they neglect to research one of the most important aspects of their trading.
When choosing a broker you should compare your candidates on the following points:
- How reputable are they? How long have they been in business?
- What are their leveraging options? Excessive leverage can be a red flag.
- What are their margin call policies?
- How do they fill orders? Are they market makers?
- Their minimum account balances?
- What are their historical spreads and rollover charges?
- What are their deposit and withdrawal policies?
Let’s look at some of these points in more detail.
What Does the Broker Do?
Your broker will control your options of trading platform, your trade execution time, your available leverage options, your contract sizes and the spreads that you will be paying.
Ominously, the forex market is flooded with disreputable brokerage firms and outright scams.
Since the foreign exchange is an immense, booming and above all unregulated market, there are many brokers that are able to prey on the uninformed.
Unfortunately, the huge interest in online retail trading in recent years has also meant a rise in disreputable companies and outright scams.
These brokers may charge abnormally high spreads, delay trade executions or simply make withdrawing your funds hopelessly convoluted.
The CFTC publishes bulletins warning of many of these scams. It’s wise to heed these warnings. The CFTC imposes strict controls within the U.S and prohibits firms from targeting U.S investors. Many retail brokers are not able to offer accounts to U.S. citizens because they don’t meet these stringent requirements.
Do your research In recent years it has become increasingly difficult to find authentic and unbiased information on the forex market. With hundreds of retail brokers in existence, it can be difficult to determine what is legitimate without extensive background research.
Many informational forex websites are littered with fake ratings and falsified reviews provided by paid shills. To further obscure the issue, good brokers may obtain bad reviews or ratings due to traders who were simply not prepared to enter the market.
How to Compare Brokers
To begin comparing foreign exchange brokers, a) find out where they’re based and how long they’ve been in business, b) what their fees are, and c) how responsive their customer service is.
Some of the larger brokerages include:
Oanda – Trades 60 currency pairs, plus metals
FXCM – Forex and commodities, offers 200:1 leverage
eToro – Largest social trading platform, offers a simple copy trading program
Markets – Offers Forex, CFDs as well as a host of research and analytical tools
LiteForex – Trading in Forex, indices, and commodities
Easy Forex – Currencies, indices, and commodities
All of the above offer free practice (or demo) accounts. For a more comprehensive comparison of brokers see here.
Technical factors Important technical variables to consider include: their historical spreads, their currency options, their leveraging options, their margin call policies, and their minimum account balances.
Keep in mind that higher than average leverage can be a bad sign; more leverage is not always preferable. Research their deposit and withdrawal policies, and consider it a red flag if it’s easy to deposit money but difficult to take it back out.
Keep an open mind when checking customer review sites. Brokers may obtain bad ratings due to traders who were not prepared to enter the market.
It will also be necessary to consider your own trading techniques. If you are a scalper, a high spread and a sluggish trading platform will completely invalidate your technique. These faults may be more forgivable if you hold positions long term.
If you have a technique that involves variable lot sizes, you may find that this option is only available with specific brokers (read more about the roles of different brokers).
In addition, a more extensive “due diligence” checklist can be found here.
Make Use of Demo Accounts
A good forex broker will offer a free demo account for testing purposes. It is of vital importance that their platform allows you to execute commands quickly, accurately and confidently.
Make sure your trade orders are filled correctly without excessive slippage or re-quotes in a fixed quoting system. It’s also wise to check during periods of high volatility, such as around important economic releases. In run-away markets some brokers may widen spreads such that trading is prohibitively expensive. Others may even halt trading altogether.
With your demo account it’s also very important to make sure your broker isn’t hiding additional fees at rollover. Unscrupulous brokers often use this as a sneaky tactic to increase their profits.
Additionally, while many new traders are irritated by a lengthy sign up process, it is actually a sign that the broker is following the appropriate industry regulations.
Choosing a good forex broker is not only an extremely important decision, it is also an early step towards becoming an informed trader. Like the forex market itself, choosing wisely involves a healthy amount of skepticism, critical thought and risk assessment.
This is not like choosing a bank: a bad forex broker might not only cause you to perform poorly, but in cases such as slippage, high spreads and price misquoting, a trader could falsely conclude that it is their own technique to blame.