Some years ago finding an online forex trading broker was easy. Why? Simple, there were only about two or three! Today the task is a bit harder. The growth of the internet has had it's effect on the forex brokerage industry. As time goes by more and more people use the net with confidence, internet connections are faster, and people learn more and more about forex trading. These factors amongst others have fueled an impressive growth in the forex brokerage industry. Today there are about 20-25 online forex brokers who will cater the needs of all size of traders, from the smallest to the biggest. Let's explore five areas that are important to consider when choosing a forex broker.
Currency Pairs
Spread: The spread is the difference in pips between the bid and the ask price of any currency pair your forex broker offers. You buy at the ask and you sell at the bid. This difference between the bid and the ask price is how forex brokers make their profit. The narrower the spread is the less you are paying for the trade. A narrow spread is mostly important for a forex trader who executes many trades in a short period of time with smaller profit objectives. On the other hand, traders using a forex trading system that aims at catching medium to long term market swings are affected less by the spread of the currency pair they are trading. Personally, I will not pay more than 3 pips on EUR/USD, GBP/USD, USD/CHF and USD/JPY (the most liquid pairs). For the EUR/USD there is no need to pay more than 2 pips in today's competitive market.
Approaching a Forex Broker
Spread Guarantee: This is a very important issue that can affect very much your trading. When you approach a forex broker you will be quoted a spread for the currency pairs that you can trade with that forex broker. What is important is not the spread that the broker quotes but how stable is that spread. Many brokers will widen the spread at times and that is ok. No way around that. The question is how often. It is perfectly understandable that during extreme market conditions such is following news events your broker will widen the spread of the pair you are trading. However, the question is by how much. Some brokers will make a great effort to keep it as narrow as possible and those are the ones you should aim to trade with. Another example of spread increase is during very low liquidity periods such as parts of the Asian trading session. That as well is understandable. However, I will not trade with a broker that does not respect the spread of the currency pair I am trading during liquid normal hours such as the European session and US session.
Limit/Stop Orders: There is a nice trend developing today due to intense competition amongst forex brokers: provide guarantees on stop and limit orders. However, always look at the fine print of these guarantees. As an example, some brokers will tell you our guarantee is good except in "extreme market conditions". Make sure to ask them what is "extreme market conditions". Is it only on NFP announcement? If so, how long before and/or after NFP release does the guarantee stand?
Trading Platform: When you open an account with an online forex broker you will be trading through the broker's proprietary trading platform. Make sure before opening a live account you open a forex demo account in order to test the trading platform. You have to be comfortable with it and you have to make sure it fulfils all your needs.
Forex Mini Accounts
Mini Accounts: Several years ago you could not open an account with a forex broker with less than USD 10,000. Things have changed dramatically in this aspect in favor of the small trader. Today you can open what is called a forex mini account and fund it with USD $300 or sometimes less. If this is your objective make sure that the broker you approach has this type of service (today, most do).
The above are essential elements that you have to consider when hunting for a forex broker. Remember, the broker you trade with is as important as the forex trading system you are using (sometimes even more important). Invest time and effort in your research and I promise it will pay off.
