Choosing a Forex Broker
In order to trade forex you need to open an account with a Forex broker. In simple terms, a broker is an individual or company that buys and sells orders according to the trader's instructions.
Time invested in finding the right broker is a worthwhile investment.
Factors to consider in choosing a broker
• Regulation
• Customer service
• Trading platform
• Policies
• Fine print
Regulation You might have heard that the forex market is unregulated. That's misleading. Individual players in this market are regulated. These firms must comply with reporting requirements and meet other guidelines. The firms are regulated but the overall market is not.
To make sense of this, compare the currency markets to the equity markets. The U.S. equities markets are regulated by the U.S. Securities and Exchange Commission. The SEC has the right to regulate stock exchanges that are located within U.S. borders.
But there is no central geographic location for currency trading. There is no 'floor of the exchange'. Currency trading occurs everywhere around the world, twenty-four hours a day. Governments can and do regulate forex firms that do business within their borders. But the overall market is so vast - with an estimated turnover of about $4 Trillion per day - that it is impossible to record and track every transaction. To attempt to regulate a titan like the forex market would be akin to trying to count the grains of sand on a beach, or measure the amount of water in an ocean. However, the individual companies that do business in forex are regulated and must comply with regulatory guidelines.
The most credible brokers are registered with a regulatory agency. Never trade with an unregulated forex broker.
In the United States a broker should be registered as a Futures Commission Merchant (FCM) with the Commodity Futures Trading Commission (CFTC) and a NFA member. The CFTC and NFA aim to protect the public against fraud, manipulation, and abusive trade practices.
You can verify Commodity Futures Trading Commission (CFTC) registration and NFA membership status of a particular broker and check their disciplinary history by phoning NFA at (800) 621-3570. You may also check the broker/firm information section of NFA's Website at www.nfa.futures.org/basicnet/.
Look for regulated firms with clean regulatory records and solid financials.
The NFA has attempted to educate investors about retail forex trading through their brochure, 'Trading in the Retail Off-Exchange Foreign Currency Market'. The NFA recommends you read the brochure before trading forex.
Customer Service Forex is a 24-hour market. Your broker should provide 24-hour customer service, including technical support. You should be able to contact your broker by phone, email, live chat, any time day or night. The more sophisticated brokers provide a 'call-back service', wherein, with a click of your mouse a rep will immediately call you back.
The quality of support can vary from broker to broker. You may want to review your prospective broker's customer service before opening an account.
Be aware that as in other types of business, pre-sales service might be better than post-sales service.
Trading Platform Here are some questions to consider in evaluating a trading platform.
• Does the broker have its own proprietary trading software, or is it rented or bought? You're safer with a broker with proprietary trading software.
• Does the broker provide a variety of online trading platforms for maximum availability? For instance, can you trade from anywhere in the world? Can you trade on your cell phone or on any PC?
• Does the broker provide a back-up phone service in the event that its trading system goes off-line?
• Does the platform provide instantaneous order execution?
• No request for quote (RFQ)? Users should be able to click on a live streaming price feed. They should get no re-quotes whatsoever, even in fast markets, no timers and no dealer intervention, pure one-click dealing.
• Is the platform fully secure and robust with, say, 128 bit SSL encryption?
• Does the platform provide integrated technical analysis & real - time charting tools?
• Does it provide integrated live news-feed streaming real time market news? Integrated real-time account management and reporting, margin analysis, P&L, deal confirmation, market analysis & back-office reporting marked to market every second?.Same conditions on demo and live platforms?
• Guaranteed fills on both limit and stop orders?
• Does the platform come with a comprehensive, user-friendly user guide?
• Is your broker ISO 9001 certified by SGS (Societe Generale de Surveillance (SGS), is the leading inspecting, verification, and certification company)?
• Is your broker ISO 27001 certified by SGS?
Policies You should closely examine the broker's features and policies. These include:
Available Currency Pairs
You should confirm that the prospective broker offers, at minimum, the seven major currencies (AUD, CAD, CHF, EUR, GBP, JPY, and USD).
Transaction Costs
Transaction costs vary by broker. The lower the number of pips required per trade, the greater the profit you make.
Margin Requirement
The lower the margin requirement (meaning the higher the leverage), the greater the potential for higher profits and losses. Low margin requirements are great when your trades are good, but not so great when you are wrong.
Minimum Trading Size Requirement
The size of one lot may differ from broker to broker, spanning 1,000, 10,000, and 100,000 units. A lot consisting of 100,000 units is called a 'standard' lot. A lot consisting of 10,000 units is called a 'mini' lot. A lot consisting of 1,000 units is called a 'micro' lot.
Rollover Charges
Rollover charges are determined by the difference between the interest rate of the country of the base currency and the interest rates of the other country. The greater the interest rate differential between the two currencies in the currency pair, the greater the rollover charge. For example, when trading GBP/USD, if the British pound has the greater interest differential with the U.S. dollar, then the rollover charge for holding British pound positions will be greater. On the other hand, if the Swiss Franc were to have the smallest interest differential to the U.S. dollar, then overnight charges for USD/CHF would be lower.
Trading Hours
Most brokers align their hours of operation to coincide with the hours of operation of the global Forex market: 5:00 pm EST Sunday through 4:00 pm EST Friday. That's a basic requirement.
Cash Withdrawals
You should be able to withdraw funds from your account with relative ease. Wire transfers from your broker should deposit funds to your account in two days max.
Fine Print Be sure to scrutinize a prospective broker's 'fine print' section to be fully aware of all the nuances that a specific broker may impose on a new trader.
