If you're interested in getting involved in the foreign currency exchange market, you're going to need a Forex broker. Your broker will help you set up a Forex trading account and their brokerage will cover you when trading margins.
There are a lot of different Forex brokerages out there; it can be hard to choose one which will look after your interests. Keep reading for five things you should look for as you examine different brokers to decide which one to open a Forex brokerage account.
1. Reliability
You'll obviously want to find a reliable brokerage to work with - the Forex market is not as strictly regulated as the stock market or other commodities trading markets. The last thing you need is to open an account with a fly-by-night operation.
If you're in the US, check if the broker you're thinking of opening an account with is registered with the CFTC (Commodity Futures Trading Commission) as well as the NFA (National Futures Association). The NFA and the CFTC are the regulatory bodies governing Forex trading in the US. Each country has its own agencies who govern Forex trading, so look for the equivalent registrations in your country if you are outside of the US. Look into any complaints which have been filed with the NFA against the broker you're examining; you should try to find a brokerage who has as few complaints as possible (preferably none).
The next step is to look at the platform the broker uses - is their software reliable? If you can't connect when you want to trade, this is a serious problem and can cost you money. If the broker's platform isn't reliable, then keep looking. You can get some advice from looking at Forex trading forums to see what other investors are saying. However, read several different forums and take what you read with a grain of salt - some of these forum users may have their own interests in mind when appraising a certain broker or platform. Some unscrupulous brokerages will even post positive comments about themselves on these forums, so as always, caveat emptor.
2. Services
Forex markets are open around the clock from 5PM Sunday to 5PM Friday (EST). Make sure that the trading platform used by your broker is up and running through the entire trading week and that 24 hour support is available as well.
You'll also want to make sure that your broker deals in at least the seven most important currencies. These are the US Dollar (USD), the Australian Dollar (AUD), the Canadian Dollar (CAD), the UK Pound (GBP), the Euro (EUR), the Swiss Franc (CHF) and the Japanese Yen (JPY). Very few brokerages do not deal in at least these seven, but you should always check.
Your Forex broker should provide market analysis, charts and trades which can be executed at the price you see displayed in real time.
3. Costs
Unlike stock brokers, Forex brokers make their income in the spread (the difference between the purchase and sale prices) rather than a commission based on the total amount of the exchange. The spread is expressed in Pips (Point in Percentage); a pip is .0001% of the spread. Your broker will receive anywhere from under 1 pip to around 3, depending on the currencies traded and the broker's policies.
The spread is also where Forex traders make their profits. The spread on the pairs you plan to make the bulk of your trades in are of course the ones you'll want to watch the most closely.
Look for a broker who will let you begin with a very small investment (preferably $250 or less). It's best to start small with any investment and Forex is no exception - the potential for profits is great, but so is the potential for loss.
4. Margins
Every brokerage has different requirements for margin trading. The lower the margin, the greater the leverage needed. The higher the leverage used, the greater the profit (or loss) will be on a trade. Low margins can be both a blessing and a curse, so read up on margin trading and find out what your broker's policies are.
5. Lot size
Lots can vary in size depending on the brokerage. A standard lot is 100,000 units of a given currency. There are also mini lots (10,000) and micro lots (1,000). There are even fractional lots available from some brokers; these let you decide on the size of lots you want to trade in.
These five items are the most important things to look at when choosing a Forex broker- but there are other things you'll want to consider such as rollover charges, interest paid on margin accounts and more. Forex trading can be complex, so it pays to do some research and choose your brokerage very carefully.
