Considerations When Choosing A Forex Broker
Of course, you want a broker that you can trust, one who will not suddenly disappear from the internet along with all of your money. So it is important to have these considerations when choosing a forex broker.
The forex market is generally not regulated by a lot of laws because of its global nature. This means that there are a huge number of brokers and some are more trustworthy than others. Your first step is to check that the broker is a member of at least one voluntary regulatory body. In the USA these include the Commodity Futures Trading Commission (CFTC) and the National Futures Association (NFA).
Look for a forex broker with a clean record in any complaints logged against them on the NFA site. Do your own research if you are looking for a broker in another country. Then you need to think about whether the broker’s software platform is reliable. You will need to connect with this whenever you want to trade. If it is often offline, it is likely to cause problems for you. You could miss out on either opening or closing a trade at the best time. Check forex trading forums for feedback from users on this point, although be careful not to be swayed either way by a single individual who may have his or her own reasons for being strongly for or against a particular broker.
The forex markets are open 24 hours from Sunday night to Friday afternoon EST. Check that your broker’s trading platform is available all of this time (most are) and that they offer 24 hour customer support on trading days too.
Check that they cover at least the seven major currencies USD, AUD, CAD, GBP, EUR, CHF, JPY. Again most will, but it is worth being sure. Even though we have recommended starting with one currency pair, you may want to diversify when you become more experienced.
A broker should offer you charts including bar, line and candlestick charts. They should also offer indicators including parabolic S&R (or SAR), stochastics, MACD, Bollinger bands and RSI. You do not need to know what all of these mean right now, just check that you have them. You also want instant execution of your orders at the displayed price.
Some brokers apply slippage so that if the price changes during the split second between you seeing/clicking on the price and your order being received, you get the new price, not the price you expected.
Avoid these brokers and go for one who offers ‘what you see is what you get’.
Your screen layout should include real-time price quotes and a summary of your current account balance including current commitments, margin available, and realized and unrealized profit and loss.
Be aware too that there are two types of trading platforms offered by brokers. One type is accessed over the internet and hosted by the broker (web-based). The other type, you download and install on your computer (down-loadable).
Web-based platforms are generally considered slower, but they can be accessed from any computer that has internet access, or even a PDA. If you download a platform you can only use it on that one computer. You don’t have access to your account if your main computer breaks down or you are away from it. It may be more vulnerable to viruses and hackers. Also, you can usually only download to computers that run Windows.
Forex brokers do not charge commission but make their money from the spread. As you know, this is the difference between the buy and sell prices on any currency pair. Spread can be anything from 1 pip or less, up to about 3 pips, depending on the broker and the pair. The size of the slice taken by the spread can make the difference between profit and loss in your trading account in the long term so look closely at this. If you know which pairs you are likely to trade most often, the spread on those pairs will be more important to you than others. At the same time, do not be drawn in by a special offer because that may have changed by the time you are ready to trade for real.
Something else which can be a cost (although not necessarily) is rollover interest. Even though forex is a 24 hour market, brokers have a nominal end to their trading day, usually at 5 pm EST. They will either charge you or pay you interest relating to trades that stay open from one day to the next. So rollover could apply even to a two-minute trade if it was opened at 4.59 pm and closed at 5.01 pm.
Roll-over depends on your margin and position. Interest is paid on the currency that is borrowed and earned on the currency that is bought. The interest rates for different currencies can be different, so unless you are trading two currencies that happen to have the same interest rate, there will be a discrepancy.
For example, EUR has a higher interest rate than USD. This means that if you are buying EUR/USD you will earn interest, and if you are selling it you will pay interest. All you need to do here is check the interest rates that your broker offers and make sure they are not wildly different from other brokers for the currency pairs that you are most likely to trade.
- Minimum Investment
Even though you will not invest any real money right away, you should look at the minimum investment size for an account. Most new traders are best advised to start small, so look for a broker who will let you open an account with $1,000 or less, even if you have more money available.
Margin requirements can be very different from broker to broker. A lower margin requirement means higher leverage, and higher leverage gives you greater profits or losses on the same fund size. So low margins seem great when you are doing well, but losses will be bigger if things go badly.
- Lot size
Lot size can vary too. Generally the lot size in a ‘standard’ account is 100,000, ‘mini’ is 10,000 and ‘micro’, where available, is 1,000. Micro accounts tend to carry high proportional costs, so you will probably want to begin with a mini account.
We have given you a lot of information in this section so that if you feel ready, you can go ahead and find yourself a suitable broker right now (check the “Resources” at the end of this ebook) That way you will be able to understand the next section better. But only set up your demo account at this stage. We are not ready to start trading for real yet.
When you do open an actual trading account, be sure to open a spot account and not a ‘forwards’ or ‘futures’ account. All of the forex trading that we are discussing here, and most of the information you will find anywhere else, relates to spot trading. We will not be dealing with forex futures at all.
Next Page: Forex Charts And Indicators