How to Choose the Best Forex Broker

April 10, 2013 08:48 AM

The forex market is a $2 trillion industry so it comes as a surprise to some, that instead of having one central exchange like the stock market, forex prices are maintained by the big market players (the banks) who deal and trade with each other via the ‘interbank’ market. However, to trade the ‘interbank’ market is not possible for the majority of ordinary traders, since to do so would require a vast amount of money and credit with the banks.

Retail forex brokers solve this problem by acting as the middle man between the bank and the trader, but as with anything, some brokers are better than others.

Some brokers offer barely competitive prices, some brokers take the other side of your trades and some brokers may even manipulate spreads. With so many dubious brokers around, selecting the best one becomes the essential first step for any trader.

Regulation

The first question to ask when selecting a forex broker is whether they are regulated by a professional body. If not, it could be a sign that the broker is not up to scratch in one or more areas of its business. There are many regulatory bodies around the world who work to make sure that brokers are secure and dependable. The main ones in the US are the National Futures Association (NFA) and the Commodities Futures Trading Commission (CFTC). There are also separate bodies for the UK (FSA), Australia (ASIC), Germany (BaFIN) and many more. This information can normally be found in the ‘About’ section of the broker website.

Spreads

These days, most retail brokers earn money not off commissions or trading fees, but the spread with which they offer each market. Essentially, a broker makes money by buying the interbank rate and then selling a slightly wider rate to its customers. Of course, there is nothing wrong with this, but it means retail brokers are essentially market makers. There is every reason, therefore, why a trader might want to shop around to find the tightest spreads.

Furthermore, some brokers may take the other side of your trades or may advertise spreads that are tighter than they actually are. The best thing to do is to test the broker out for yourself using a demo account to see whether the spreads are consistent with the market rates.

Typically, ECN brokers, which have no dealing desk, tend to be closer to the interbank market and thereby offer tighter spreads. They are also thought to be more honest in terms of taking the other sides of trades and upholding true market prices.

Features

Forex brokers tend to come in all shapes and sizes. Some seem to come with just a trading platform and a few charts whereas others offer up a whole host of advanced functionality and features. As a trader, you must decide what features you need to be able to trade effectively and what features you can go without. Does the trading platform respond quickly enough? Are different entries such as limit orders available? Is one-click trading enabled? Does the broker offer back-testing or MetaTrader compatibility? A broker need not have all the bells and whistles, but it does need to have enough functionality to enable you to feel comfortable in your trading setup.

There are other factors that are important when selecting a broker too, such as the level of margin available or amount of leverage. Generally, the higher the level of margin available, the smaller the size of account that can be opened. ECN brokers meanwhile, tend to require the largest account minimums.

Support

Customer service is always a key concern when deciding on a forex broker since if you have a problem, it is nice to know there is someone on the other side who is able to help you out. As a bare minimum, your broker should be able to provide telephone support during market hours in case your machine crashes and you need to close an open position. As with any company, poor customer service often belies deficiencies in the business elsewhere so it pays to search out a broker that puts its customers to the top of its priorities.

Reputation

The beauty of the internet is that information is more freely available than ever before which is why one of the best ways to choose a forex broker is to simply look around to see what other people say about them. Online forums and message boards provide great places to find unbiased opinions from people who have used the services of a particular broker and can attest to their reliability. Similarly, industry magazines often provide independent reviews of brokers and also list those brokers who have managed to win awards for their services.

Other than message boards and magazines, a lot can be gained just by looking over a website. Does the web site contain a lot of marketing and sales information or does it present itself in a professional way with the customer’s interests at its heart? Also, is the broker a big, established player in the market and does it offer up much in the way of guidance and educational materials to new traders?

Another thing to consider is what the broker does with your funds while they are not being used. Some brokers may pay you a small amount of interest for keeping it there whilst others may charge. Likewise, some brokers go to the lengths of securing capital in a bond, which protects it in the event of bankruptcy.

Conclusion

As you can see, there is a lot to think about when selecting a forex broker. The information may seem overwhelming but it’s important to do your due diligence since you will eventually be putting real money at risk. Most brokers offer demos as a way to trial their platforms and demos are generally the best way of getting to know a new broker. Together with advice from blogs and the investment community, it should not be too hard to find the broker right for you.


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