Brokers criteriaSearching for a Forex broker is no longer an easy task. There was a time not too long ago that there were a handful of Forex brokers. That is no longer the case. Now, the choices are many and the differences between them are narrow. However, the differences are very important to know in order to choose the right Forex broker. These are some of the key points you need to keep in mind whether you are searching for your first Forex broker or switching from your current one.
Important Points
1. Regulation – The first search criteria is for a regulated Forex broker. Regulated brokers are required to keep the transactions they are involved in transparent. These transactions must be documented and submitted to the proper authorities. If the broker does not follow the rules, they can be fined and or have their membership terminated. While Forex brokers can be located anywhere in the world, most countries have some kind of regulatory standards that are required of members.
In the United States, Forex brokers are regulated by the NFA (National Futures Association) and the CFTC (Commodity Futures Trading Commission). Swiss based brokers are regulated by the FDF (Swiss Federal Department of Finance). In the United Kingdom, Forex brokers are regulated by the Financial Services Authority. Australia has its own Forex broker regulators known as the ASIC or Australian Securities and Investment Commission. While in Japan, Forex brokers are regulated by the FFAJ or Financial Futures Association of Japan. A good Forex broker will not hide who they are regulated by. Regulation is the first protection for the investing public from brokers who practice fraud or abusive trading practices.
2. PIP spreads – Forex brokers rarely charge a commission per trade, rather there is a built-in spread between the currency pair. The smaller or tighter this spread the better for you. Pips can be variable or fixed. If the spread is fixed, it will be the same all of the time. Of course if it is variable, the pip spread will fluctuate depending upon a few factors.
The spread between the EUR/USD is usually low since it is a popular pair. On the flip side, the spread between GBP/NZD (British pound/New Zealand dollar) will be larger. The time of day and how many markets are open can also influence the pip spread. For example at 5 pm Eastern time, the New York and London markets are closed. Sydney, Australia, is open so there is only one market trading Forex, which means the pip spreads will usually not be as tight. When more markets are open, the spread will be smaller. In any case, you should still compare PIP spreads between brokers.
3. Software – Charts and trading platforms offered by the Forex broker can make your trading decisions easier. Many Forex brokers provide access to free charts for quick analysis. Some trading platforms offered by brokers will immerse you in a total trading environment. These software packages have live charts, news and the ability to make trades quickly without going to another window. Depending upon the size of your account, you may not have access to this trading or charting software. If having the ability to program the software is important to you, keep an eye out for brokers that offer this as standard with their software package. You may also want a broker that offers web based trading, which means trading using a browser or JAVA application.
4. Training – To get new clients, many Forex brokers have educational sections. Not all of the training is equal. Some brokers have minimal education centers that do not go beyond some obvious definitions while others have extensive training programs. They may offer frequent seminars, or books and ebooks for their clients. Some of these training aids can be had for free or for a small fee. If you are new to Forex or trading, it is probably a good idea to look for a broker that offers training and education that suits your level of trading experience.
5. Fees – When searching for a Forex broker, you need to look at the fees that are charged by the broker. Fees can be minor or major depending upon the broker. Some brokers charge wire transfer fees, while some charge for sending paper statements. It all depends on the broker. Ask for a list of fees and how these fees may pile up if you use them often. Good brokers will not hide their fees and almost all will post them on their website.
6. Practice for free – Almost all Forex brokers allow you time to try their trading platforms before you decide to open an account. Usually, practice accounts are open for one month and you can evaluate how the platform works and how it works for you. All of these practice accounts nicely mimic a real account without the use of real funds. Take advantage of these practice accounts to compare and contrast brokers and their platforms.
7. Funding Options – Forex brokers allow customers to fund their accounts in more ways than using the traditional bank check. Wireless bank transfers, credit and debit cards or PayPal can all be used to fund your account. While these funding options seem minor on the surface, they can be a great resource if you want to send money quickly.
8. Not just Currency Pairs – Many Forex brokers allow customers to trade gold and crude oil as well as the traditional currency pairs. Some Forex brokers allow you to trade many different currency pairs. The more pairs you can choose from, the better your chances to make money.
Keep in mind that Forex pairs are affected by supply and demand. Some pairs have large spreads because the volume of trades made is significantly less then the trades made on more popular pairs. Many Forex brokers also allow clients more order options. This is a feature that more advanced traders usually look for and should be treated on a per case basis – meaning one feature may be great for one type of trader while another may have little to no use for it.
The ‘Everything’ Broker
A lot of traditional full service and discount stock brokers have been entering the Forex market. It is quite possible that your current brokerage firm may offer Forex trading and since you already have a broker-client relationship, you may feel more comfortable. A lot of traders like to have a separate Forex broker to separate their accounts and to keep their cash allocation in balance. Forex is a leveraged market that can go up quickly and go down just as fast. There is the temptation to move any available cash you have in your equity account to the Forex account. This will make it difficult to keep the account balance proper. The biggest reason to go with a dedicated Forex broker is the features they may offer that your current broker does not. The most important factor is to compare your current broker’s features to see if they will match what you are looking for. If you decide to use your current broker, make sure they have comparable features to dedicated brokers. Try out the platform to see if it works for you.
When searching for a Forex broker, it makes little difference where you live. The important factors remain the same. Keeping these important points in mind when searching for a Forex broker help protect you from losing your money outside of trading. Sadly, there are Forex brokers that open up shop online and are there only to take your money with little in the way of actual service in return. Forex trading is difficult enough without adding the extra burden of an unscrupulous broker to the mix.
Take your time and realize your level of trading expertise in order to help narrow the search. A new Forex trader needs excellent service but may also want to have access to training tools. On the other hand, a veteran Forex trader can dispense with the training tools in order to receive a better trading platform. Finding the right broker for you is not difficult or time consuming if you understand what you are looking for.
