Choosing a forex broker

When you reach the point in which you want to start trading forex, you need to find a reliable broker. I guess in doing so the first thing to do is establish exactly what a Forex broker is and does. Forex brokers are companies that offer currency traders access to trading platforms that you can buy and sell foreign currency through.

If you’re looking for a Forex broker, you need to research the reputation of brokers and see whether or not they’re able to meet you requirements. The majority of brokers offer demo accounts so that prospective traders can get an understanding of what the platform is really like. It’s a good idea to test out a few to get a feel for each one.

Here are a few things you should consider.

The importance of regulatory compliance

One of the first things to check when searching for a trusted forex broker is regulatory compliance. Here in Australia, that means ASIC regulated. ASIC’s main responsibilities include developing the rules, programs and services to not only protect the market, but it’s participants. ASIC is an independent agency whose function is to protect market participants and the public from any kind of manipulation, fraud and abuse related to financial markets.

What to look for in an account

Firstly, leverage and margin. Brokers offer a variety of different leverage ratios such as 100:1, 50:1, etc. Leverage is like a loan that is given to account holders by their forex broker. As an example with 100:1 leverage, A forex trader with a $1000 account size can hold a position up to $100,000. Leverage has the potential for great profits, however it’s also capable of destroying a trader’s account.

Next, let’s consider spreads and commissions. Forex brokers make their money through established commissions and spreads. Brokers that utilise commissions often charge a set percentage, or the difference between the ask and bid price of a particular currency pair. Typically, a broker that states that they don’t charge commission often makes their money through wider spreads. For example, the spread of a particular currency pair could be a fixed 3 pips, or alternatively it could be variable depending on the market volatility. Common trading pairs like EURUSD generally have much tighter spreads than the thinner pairs.

Third, you’ll need to consider the initial deposit that a broker may offer. Most forex accounts can be funded with a very low initial deposit, some as little as a couple of hundred dollars. This is a significant reason as to why Forex trading is so appealing to newer traders and investors.

Finally, we have the ease and speed of deposits and withdrawals. Some brokers may allow traders to fund their accounts using paypal, credit cards, bank transfers or cheque, and often there can be a fee associated with this. Importantly, a good broker should have quick and easy withdrawal methods.

Customer Service

Because Forex is active 24 hours a day, a broker’s support team must be available at any time. Also, it should be easy to speak to an actual person, live. When considering a forex broker, give them a quick call. This will give you an idea of the customer service they provide, wait times, etc. Also, you can sus out the sales rep’s capability to answer your questions about spreads, leverage, regulation, etc.

The Trading Platform

Your trading platform is what connects you to the market, and as such you’ll likely be using it for extended periods of time. That’s why it’s important for it to be simple to use and aesthetically pleasing. Also, it should have a suite of technical and fundamental analysis tools and of course be extremely easy to enter and exit a trade.

A poorly designed trading platform can lead to some costly mistakes such as accidentally opening positions or accidentally inputting the incorrect order size. This can be costly and emotionally draining. MetaTrader 4 is a common reliable platform, and is available through most forex brokers.

You may also want to consider the platform’s customisability, order types, automated trading capabilities, backtesting, strategy builders or alerts.

Summing up

There’s no single best forex broker, however if you’re confident with your choice of broker you’ll be able to spend more time and attention focussing on strategies and analysis.

Source: Vantage FX Blog