If you are a trader in the foreign exchange market, there are dozens of online forex brokers looking to win your business. Visit any financial news website and you're likely to be bombarded with an overwhelming number of internet advertisements from forex brokers. In this article, we look at five things to consider when choosing the broker that is right for you.
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1. Regulatory Compliance
The first thing to check when selecting a forex broker is their reputation. In the United States, a reputable forex broker will be a member of the National Futures Association (NFA), a self-regulatory organization for the futures industry. It will also be registered with the Commodity Futures Trading Commission (CFTC), which regulates the commodity futures and options markets in the U.S.
A flashy website does not guarantee that a broker is an NFA member or under CFTC regulation. A broker will typically provide its NFA member number in the "About Us" section of its website. In addition, each country outside of the U.S. has its own regulatory body. Due to potential concerns regarding the safety of deposits and the integrity of the broker, accounts should only be opened with brokers that are duly regulated.
2. Account Features
Each forex broker has different account offerings. Here are four areas to consider when comparing features among brokers: leverage and margin; commissions and spread; initial deposit requirements; and ease of deposits and withdrawals.
Leverage and Margin
Depending on the broker, forex participants may have access to leverage made available in their margin account. For example, using 50:1 leverage, a trader with an account size of $1,000 can hold a position that is valued at $50,000. Some brokers offer as much as 200:1 leverage. Leverage works in a trader's favor with winning positions, since the potential for profits is greatly enhanced. However, leverage can quickly destroy a trader's account since the potential for losses is magnified as well. Use leverage with caution.
Commissions and Spreads
A broker that takes commissions may charge a specified percentage of the spread, which is the difference between the bid and ask of a forex pair. Many brokers that charge no commission instead make their money with wider spreads. Know how your broker makes its money and shop around.
For example, the spread could be a fixed spread of three pips (a pip is the minimum unit of price change in forex), or the spread could be variable depending on market volatility. The wider the spread, the more difficult it can be to make a profit. Popular trading pairs, such as the EUR/USD and GBP/USD, will have tighter spreads than more thinly-traded pairs.
Most forex accounts can be funded with a very small initial deposit, even as low as $50. With leverage, of course, the buying power is far greater than the minimum deposit, which is one reason forex trading is attractive to new traders and investors. Many brokers offer standard, mini and micro accounts with varying initial deposit requirements.
Ease of Deposits and Withdrawals
Each forex broker has specific account withdrawal and funding policies. Brokers may allow account holders to fund accounts online via credit card, ACH payment, PayPal, wire transfer, bank check, or business or personal check. Withdrawals can typically be made by check or wire transfer. The broker may charge a fee for either service.
3. Currency Pairs Offered
While there are a great deal of currencies available for trading, only a few get the majority of the attention and, therefore, trade with the greatest liquidity. In addition to the aforementioned EUR/USD and GBP/USD pairs, the major pairs include USD/JPY and USD/CHF. A broker may offer a huge selection of forex pairs, but what is most important is that they offer the pairs which interest you as a trader.
4. Customer Service
Forex trading occurs 24 hours a day, so a broker's customer support should be available at any time. Also consider whether it's easy to get a live person on the phone. A quick call to a broker can give you an idea of the type of customer service they provide and average wait times.
5. Trading Platform
The trading platform is the investor's portal to the markets. As such, traders should make sure a broker's platform and software comes with the technical and fundamental analysis tools they need, and that trades can be entered and exited with ease.
This last point is especially important: a well-designed trading platform will have clear buy and sell buttons, and some even have a "panic" button that closes all open positions. A poorly designed interface, on the other hand, could lead to costly order entry mistakes.
Other considerations include customization options, order entry types, automated trading options, strategy builders, backtesting features, and trading alerts. Most brokers offer free demo accounts so that traders can try out the trading platform prior to opening and funding an account.
The Bottom Line
If you have confidence in your forex broker, you will be able to devote more time and attention to analysis and developing forex strategies. A bit of research before committing to a broker goes a long way, and can increase an investor's odds of success in the competitive forex market.