Choosing the right Forex Broker.

 

 

What is meant by Foreign Exchange Brokers?

 

 

Generally speaking, Foreign Exchange Brokers are the companies that facilitate foreign exchange trading.

 

These brokers handle the money you deposit and are often - but not always -the ones that take the other side of your trades.

  • If you are buying, then foreign exchange brokers will often sell to you.

  • If you are selling then foreign exchange brokers will often buy from you.

They have the responsibility to make sure that we, as traders, can afford to trade, that we understand the risks involved and that we do not intend to launder money. These brokers have to put a lot of money at risk and have a large staff of employees to help with compliance, book keeping and administration requirements.

 

 

If you're searching for a forex broker it's easy to get overwhelmed by the sheer number of choices, available.

 

 

A quick search on Google for "forex broker" easily yields over 4,570,000 search results, not to mention a ton of ads!

 

 

So with all of these potential brokers, where do you start?

 

 

What should I look for in a Forex Broker?

 

 

1.   Make certain that they are registered as a legal fincancial services providers in their country of origin. Their location will affect who they are regulated by.

 

If you decide to choose a broker regulated by the NFA or CFTC, you can checkout their standing, and any complaints filed against them at:

 

http://www.nfa.futures.org/basicnet/

 

Search by firm name, and you can get case histories, and any actions brought against them.

 

As you are likely aware, the NFA recently (2009/08) has made some major changes to the regulations regarding order types that traders can now place.

 

Brokers registered with the NFA are NO LONGER allowed to accept:

  • OCO orders, (one cancels the other, used when bracketing the market for breakouts)

  • Stop Loss Orders (To Limit Your Losses or Risk in a given Trade) - GONE

  • Limit Orders (To Exit You Out Of Your Position When Your Target Is Hit) - GONE

  • Hedging (trades in different directions at the same time) are also no longer allowed.

By implementing these rules they made it in fact very difficult for a trader to protect himself while trading.

 

Some brokers have simply removed these orders all together, others have created a temporary patchy work around (which can come crashing down on a MOMENTS notice), and others still have sent ALL of their clients overseas!

 

For the moment then we will not recommend

trading at a NFA regulated broker

till the situation is more clear.

 

One other thing that is not to be overlooked is the financial stability or the net capital reserves on each broker's books. In this age of large businesses going belly up, we need to choose wisely.

 

 

2.   Make certain that they have a good reputation with their clients and that they are totally reliable. Unfortunately there are sharks out there, companies whose aim it is to drain your account as quickly as possible.

 

 

3.   What kind of services do they offer?

Do they have charts? Recommendations? or any other services that you will find handy?

 

 

4.   Trading Platform: When searching for the foreign exchange brokers that suit your needs, you will want to see what platforms they offer to trade from. (A platform is another name for the program that you will use to trade with).

 

  • If you think you may eventually want to trade with EA's or robots then you may want a Meta-Trader 4 platform.

  • Some foreign exchange brokers have several different platforms to choose from.

 

Do they have a free demo account? This will enable you to test drive the trading platform without committing yourself to anything. You will be able to see what features you like, and what you don't like. This can make a big difference in your final selection.

 

Check ease of use of the program:

  • How easy is it to activate or close a trade?

  • How long does it take before a trade is activated or canceled?

  • Are the quotes easy to read?

  • How much can you customize things?

  • Is their platform intuitive enough for you?

  • How reliable is the program does it crash on your computer?

  • How reliable is the internet connectivity? If it is very unstable, it may be that the problem is not with the trading program, but with your internet service provider.

 

5.   What is their minimum account size?

If you only have a couple of hundred dollars to trade with, then this is a key factor. Knowing the companies minimums will allow you to start the filtering process.

 

 

6.   What is the minimum transaction size that you will be able to trade at this company?

 

Some companies deal only in full contracts (smallest amount per transaction is $1,000.00), while others cater for mini-forex trading (smallest amount per transaction is $100.00) and micro-forex trading (smallest amount per transaction is $10.00).

 

Again, depending on your account size, and your experience, this is a factor to consider.

 

When getting your feet wet for the first time, you may want to start off with mini-forex or even micro-trades so that any lessons learned will cost you a tenth or a hundredth of trading a full contract.

 

 

7.    Pipspread:

Just as important is the spread on the platform. This is the difference between the ask (buy) and the bid (sell) price that brokers offer to you. These are the prices you'd pay to sell and buy, respectively. The smaller the spread, the less you pay.

 

The spread is where most forex dealers make their money, as most do not charge a commission.

 

 

8.   Do they charge a commission?

Most do not, as they make their money from the spread. With the number of no commission dealers out there, it pays to shop around.

 

 

9.   Also leverage requirements and limitations vary among brokers. Some foreign exchange brokers are known for widening the spreads around news times or even blocking you from entering trades. To be fair, they are trying to make money - since this is also their business. But when they go stop hunting and go further than what the market itself actually went - then they are crossing the line.

 

 

10.  Will they accommodate your trading style? To be able to choose the correct broker, you need to ask yourself what type of trading you engage in the most. Scalping, Swing, short term, news trading?

 

Some brokers will not allow scalping or news traders.

Other brokers welcome them.

 

 

11.  Customer service is a large factor in the brokers that I will recommend.

 

 How easy is it to get hold of the people at this firm?

 Are they available at all times? (trading is a 24/5 activity)

 How quickly do they respond when you try to contact them?

 Are there a lot of complaints about this company by clients about the way their problems were handled?

 

 

Recommended Brokers:

 

I have worked with the brokers that I recommend on this website for quite some time (some since 2004).

  • They are all registered financial services providers in their countries of origin.

  • All have a good reputation and clients are happy with the services they receive from these brokers.

  • Pip-spreads vary from low to average.

 

Therefore I have no hesitation in recommending them to you.

 

Open a free demo trading account at any of them, and start experimenting!

 

 

You are welcome to contact me if you have any questions regarding the selection of a broker, the opening of a live trading account, or training.

 

 

Johan

2009/09/17

 

NFA Publication

 

"Trading in the Retail Off-Exchange Foreign Currency Market - What Investors Need to Know"  (PDF format)

 

 

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Disclaimer

 

Risk Disclosure: Trading foreign exchange on margin carries a high level of risk, and may not be suitable for all investors. The high degree of leverage can work against you as well as for you. Before deciding to invest in foreign exchange you should carefully consider your investment objectives, level of experience, and risk appetite. The possibility exists that you could sustain a loss of some or all of your initial investment and therefore you should not invest money that you cannot afford to lose. You should be aware of all the risks associated with foreign exchange trading, and seek advice from an independent financial advisor if you have any doubts.

 

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