All forex brokers are not created equal. Likewise, the currency market is unlike any other. Since it is a worldwide market, there is no single regulating body to oversee its operations. In addition, forex brokers are regulated by their perspective countries. And they do not necessary belong to any central governing agency. This leaves a lot of room for abuse by unscrupulous brokers. If you are new to the currency market and are considering opening a trading account, I highly recommend you research your perspective brokers thoroughly. Choosing the right broker could mean the difference between success and catastrophic failure.
Here are the main points to consider when choosing a broker.
1. Is the broker regulated?
A brokerage house in the U.S. should be a member of the National Futures Association (NFA). It should also be registered as a Futures Commission Merchant (FCM) with the Commodity Futures Trading Commission (CFTC).
You can check a broker's NFA membership status and any disciplinary actions by visiting the NFA official website below.
2. Broker support.
The currency market is a nonstop 24 hour market. This means anytime of the day, you should be able to pick up the phone and call the help desk to handle your trades. This is especially important if you suddenly experience Internet outage and you need to exit your trades immediately.
You should test your perspective brokers by contacting their help desk by phone, email or chat at different times of the day. Try to gauge how quickly they respond to your questions. If they put you on hold for a long time and did not answer your questions to your satisfaction, it might be a red flag for future problems with this broker.
3. Spreads
Currencies are traded in pairs. The difference of the selling (bid) and the buying (ask) is known as spread. A rule of thumb is that the spread should be no larger than 5 pips for the major currencies. The Majors are: EUR/USD, GBP/USD, USD/JPY, USD/CHF, AUD/USD and USD/CAD.
You want brokers to offer as tight a spread as possible, preferably between 3 to 5 pips.
4. Speed of execution
You orders should be filled immediately. Your broker shouldn't take more than ten minutes to execute your trades.
A good way to check their execution speed is by opening a "paper money" account with them. This way, you'll not risk your real money and get to test out their system. Please keep in mind that some brokers do have different servers for "real" and "paper money" trades. The execution speed on the two different servers could vary greatly. Nonetheless, in the absence of trading actual money with them, it's still a good indicator of how well they will handle your trades in the future.
5. Leverage
Leverage gives traders the ability to buy and sell large quantities of currencies with little capital. For example, with a leverage ratio of 200:1, it means your broker would lend you $200 for every $1 of actual capital.
However, leverage is a double-edged sword. Without proper risk management, a trader could lose all his/her capitals in a matter of minutes.
Most reputable brokers offer leverage ratios from 100:1 to 400:1. If a broker offers very high leverage, they are exposing themselves to greater risk. It could be a red flag to the future stability of the company. Most traders recommend beginners should trade no more than 400:1 leverage.
6. Guaranteed stop loss protection
This is a good feature to have for new traders. It basically guaranteed that your losing positions are closed automatically so you wouldn't lose more than your initial deposit. Most brokers now offer this feature.
7. Broker Platform
The platform that the broker provides is also very important. Is it stable? Does it crash often? Is it easy to use?
Although trading platforms varies greatly among brokers, the basic usability of the platform should be paramount. You should be able to quickly enter and exit a position without going through a lot of unnecessary and confusing steps.
8. Broker website
Often times you could tell a lot about a broker by visiting their website. Do they heavily advertise high leverage or spreads that seems too good to be true? Are their marketing message seems to be overly hyped? Do they make a big deal about earning an outrageous amount of money from currency trading with very little initial capital?
These are warning signs of potential fly-by-night brokers that disappear overnight.
Choosing the right broker could be a daunting task. Just like everything in life, there is no such thing as a free lunch. Everyone has to do their due diligence. By choosing the right broker at the start, it puts you on better footing to succeed in the currency market.
