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Choosing the Right Forex Broker

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Before choosing a broker, we hope you have studied the previous articles in our forex school and concluded that you’re qualified to trade forex on a preliminary basis? Do you possess the determination and moral courage necessary to recognize and overcome emotional problems inherent in forex trading? Do you possess the drive and the intelligent focus necessary to concentrate all your energies on the one goal of success in whatever endeavour you take?

If you possess the drive, focus, and perseverance necessary for concluding any activity successfully, forex is your ground. Armed with the necessary knowledge, and almost immune to the tricks and lies of fraudsters through the information that we provide in this website, you are ready to step to the next phase of your trading activity. After acquiring the background information, the first step of trading forex must be the opening of an account with an online broker.

There are a large number of forex brokers in the retail forex market these days, each touting its services as the best in the entire market. It can be a daunting task to sort out between them seeking those that are best suited to your needs, however, as usual; we have worked to simplify your task by reviewing some of the most reliable brokers in the market. You can find those in the forex broker section of this website. Here we would like to explain the importance of the various criteria according to which you can screen the brokers we have reviewed, and make your choices. Due to the vast diversity of options, it is not possible to speak of a broker who is perfect for all kinds of traders. Instead, you should carefully consider your own expectations from trading, and compare that with what is offered by the broker and choose the one that is best suited to your needs.

Here we’ll examine the criteria in order of importance.

Security

What is the point of opening a forex account if the funds we deposit will be unsafe with the broker, or worse yet, will be stolen and misappropriated? What is the logic of studying analysis and currency fundamentals if the profits that we make are pilfered by shameless crooks, or squandered by irresponsible individuals who cannot even manage themselves decently?

Would you hand over $500 on the street to someone who you have never met before? What if they were to offer you their brokerage services in commodities and stocks? You probably wouldn’t, because you’d expect some kind of independent confirmation of this individual’s claims with respect to his capability and authorization as a certified a broker. And the opposite course would be sheer folly, of course, since who doesn’t know the popularity of making a living from scamming people these days?

Strangely enough, when the “person” in the above paragraph is a website which offers to mediate currency trading, many people are a lot more trusting of the claims. The fine design of a website, the implementation of a trading software, the costs of creating a customer support staff convince many beginners that a company which makes these investments into creating the infrastructure for such an enterprise is unlikely to be run by thieves, crooks, liars, and their various other kinds.

Unfortunately, this attitude is a complete mistake. Fraud is a constant feature of business life. Employees, employers, and even auditors are known to have taken part in cases of massive frauds at the highest level of the corporate ladder. Who doesn’t know of Bernie Ebbers, and Worldcom? Are there still those who are ignorant of the story of the auditing firm Arthur Andersen, and Enron?

Thus, the first necessity for your choice of the right broker, is the safe and reliable track record of the broker firm. On the other hand, it is clear that the retail trader possesses neither the tools, the time, nor the expertise for determining which of the brokers are reliable, and which are not. Fortunately, the regulatory authorities in this country and in other financial centres of the world do their best for screening and weeding out the unreliable ones among the many decent firms. Our best course is to ensure that the broker we choose is a member of NFA, and is registered with CFTC in the US, and with other relevant authorities in other parts of the world.

Read more on fraud and regulation authorities in the end of this article.

And finally, to make the task even easier for you, we have reviewed some of what we believe to be the best and most reliable firms in the market. All that you need to do is to go and check out the relevant section here.

Initial Deposit

Unavoidably, the second most important variable in our equation for comparing brokers is the initial deposit requirement. Many traders prefer to begin their careers by risking very small amounts which leads them to seek the broker offering the lowest initial deposit requirement naturally. This reasoning certainly has its merits; however, the initial deposit requirement should in fact be one of the last considerations in choosing the best broker for you, unless you really have a very small amount of capital that you want to risk for forex trading.

A serious broker offering excellent services may choose to keep the initial deposit requirement relatively high (around $500, for example) to ensure that the clients are serious about their trading practices. In addition, forex is usually so volatile that a less than optimally capitalized account is highly likely to be wiped out during the ordinary fluctuations in the market. We have already discussed the difficulties associated with undercapitalization, and those who have read that article should have little trouble in understanding the reasons behind our deemphasizing the importance of initial deposit requirements.

It is self-evident that a beginning trader should only risk the amount that he can comfortably afford to lose. In that sense, the initial deposit requirement of the broker should never be more than what we can afford. On the other hand, beginning our career with a pittance like $10-50, and trading at 10:1 leverage cannot be considered a wise choice. Trading with such small sums is similar to trading in a demo account, and the emotional lessons gained will probably be of little value.

Spreads

Spreads are extremely important for forex traders, seasoned, or novice. Since the broker usually receives the compensation for its services by widening the bid-ask spread beyond the quoted values in the wholesale interbank market, a wide bid-ask spread represents a larger amount of money leaving your pockets and entering those of the broker’s. You pay this fee regardless of the profit or loss you make with your trade: so, there’s always good sense in ensuring that you choose the broker which offers one of the more competitive spreads in the market. Sometimes it may be advisable to open an account with a broker that charges slightly higher spreads in exchange for the safety offered by its long history and track record. But even in that case, a spread beyond three for the EURUSD pair, for example, is not a very good idea.

Deposits and Withdrawals

It is not a good idea to trade forex if you cannot withdraw your earnings with ease. Conversely, the broker must facilitate your termination of the account in case that you’re not entirely satisfied with the services offered, regardless of the reasons. This should be non-negotiable: since the broker is only the custodian of your funds, there’s no justification for any unreasonable delays or excuses when you make the request to withdraw your funds.

Similarly, you, as the client, should have no headaches at all when depositing funds with the broker. Come to think of it: if the broker is not even capable of ensuring that your deposit process is smooth, how likely is he to guarantee a painless and satisfactory trading experience for you?

Margin Requirement

Margin requirement and leverage ratios are among the most important aspects that must be considered during the choice of the broker. For the beginner, the lower the leverage the better. Since higher leverage is only advisable for traders with a proven track record of profits and success, the beginner should be uninterested in the maximum leverage offered by a broker. Instead, since he must be allowed to get used to leverage on a step-by-step basis, the minimum leverage available is far more useful as a criterion.

For an experienced trader, evaluating the value of a high leverage option can be a bit more different. Since, by definition, successful traders use highly divergent techniques in their trades, there is no general rule for determining the optimal leverage ratio for a seasoned trader. However, for traders who plan to hold a position for long term, 10-to-1 may well be the highest sensible value.

In short, beginners should choose brokers that offer the lowest minimum leverage option, and the greatest customizability. With such a setup, it is possible to increase leverage gradually, in tandem with our improving and developing skills.

Trading Platform

In online forex trading, almost all activity is conducted through the trading software. Indeed, for a safe trading experience, this is also a must: in order to ensure that the broker doesn’t tamper with your trades, and misquote currency prices to you, you should always seek those offers which allow the greatest automation, and reduce human interference to the lowest level possible. This is only possible with a successfully implemented trading platform.

What should you look for when choosing the trading platform? Does it offer a wide array of charting tools and technical indicators for evaluating the price action? What about financial news? Is the interface clean and uncluttered? Since you may spend a long time looking at the graphics and examining charts, is the appearance of the platform physically pleasing and relaxing?

Are the servers of the broker reliable? Do you have connection problems in the middle of something important while using the demo account? How wide are the spreads during market volatility and news releases? Is slippage and misquoting a problem? Can you customize the platform to suit your trading needs and language requirements? Does the platform receive frequent updates and bug fixes?

These are the most basic issues related to the trading platform. Needless to say, an advanced, easy-to-use, and uncomplicated trading platform can make the task of the beginner a lot easier. But even the seasoned traders will find that using a well-crafted, well-maintained forex software can greatly reduce the element of stress during trading.

Customer Service

Software is prone to generating errors. This has always been the case and will remain so for the foreseeable future. When there are problems with the trading software, or delays, or issues with deposits and withdrawals, you will need to seek the aid of the customer service.

A friendly, patient, and helpful customer service can be a profit multiplier if used correctly. In those cases where the customer service is run by individuals with trading experience and understanding of economics and analysis, you can even hasten the learning process by asking questions.

Before opening your account, it is perhaps a good idea to read our reviews on customer service of various brokers to receive a preliminary impression of how competent the people are. While we cannot just pick a broker because its customer service department is professional, success in this department is certainly a promising sign for overall competence.

Account Types

Some brokers offer a large number of account packages. Others choose to offer one package with many customization options. In general, the number of account packages is not very important, provided that the broker offers a highly customizable main offer with adjustable leverage and margin requirements suitable to the needs of clients from different backgrounds and experience levels.

Currencies Offered

Finally, it is a good idea to choose a broker that offers the widest array of tradable currencies. In evaluating the currency pairs offered, you should try to make sure that different currency pairs of different classifications are available, instead of concentrating on just the number of the total offers. For example, if a broker offers three pairs of major economic powers, three pairs of emerging nations with floating currencies, three of fixed or pegged currencies, and three rare pairs (like the Saudi Riyal, or the Chinese Yuan), the offer is much better than that of a firm which offers 12 pairs all of which belong to major, developed economies.

Such details are especially important for the experienced trader, but the beginner can focus on the more important, basic aspects of the broker’s package before worrying about the intricacies of the various currency pairs on offer.

Beware of fraud when choosing your broker

Back to the Security issue. Sadly, there are still those who are ignorant of the story of the auditing firm Arthur Andersen and Enron and that is why we are discussing this subject in this article. Fraud is possible in any institution, regardless of the facade of honesty and decency maintained by the directors and managers, and the only way to protect yourself against fraud and scams is to ensure that the people with whom you partner are monitored by authorities and regulators. You may have a lot of confidence in your experience and knowledge of the history of swindling, and you can also trust your sense of smell when there’s a fishy odour emanating from the party, but we are all humans, and all of us can be cheated and fooled, regardless of the education level, background, or confidence possessed.

Although the retail online trading segment of the forex market is a development of the 90’s, these days there are already hundreds of forex brokers of various sizes offering their services to clients and despite the recent economic crisis, growth continues unabated. Unfortunately, due to the lack of a regulatory body that controls these various institutions, many fraudsters consider the retail forex business a most profitable environment for their nefarious purposes. To avoid the troubles associated with such people, we advise you to work only with regulated, licensed firms, many of which will be reviewed on this website.

The authorities that regulate the institutions in your area will depend on your geographical location. While the CFTC and the NFA regulate commodity brokers in the US, the same function is performed by the FSA in the UK. Let’s see the various regulatory bodies, and what membership with them implies.

Forex Regulation in the US

The regulatory bodies in the United States are the CFTC and the NFA. The CFTC determines the rules regulating the commodity brokerage industry, and its stated mission to investors, trader and the public from unethical practices in the commodity and financial futures and options markets. In addition, the CFTC is responsible with creating the regulatory environment that will foster a free market environment that fosters competition. The CFTC has the authority to close any unregulated entity in the retail forex industry.

The NFA is another regulatory body that enforces adherence to certain capital requirements, and maintenance of a sound financial structure by its members. It also requires that member firms actively supervise their employees, agents and affiliates to prevent fraud and unlawful activities.

Since not all forex brokers are members of the NFA, it is important to seek those that offer the added transparency of membership, in order to minimize the risks associated with fraud and similar illegal acts.

Forex Regulation in Australia

The Australian Securities and Investment Commission (ASIC) regulates forex trading in Australia. All legitimate brokers providing retail forex services must be registered with this body which enforces capital requirements. Australian law requires that any foreign exchange broker acquire an Australian Financial Services License or be licensed with the Reserve Bank of Australia.

Forex Regulation in Switzerland

Our advice for beginning traders is to be wary of forex brokers which are only active in Switzerland or are only registered with Swiss Authorities. Many scammers have been exploiting the reputation of Switzerland as a banking centre by registering their fake companies with the Swiss authorities who are very lax about the regulation of the retail forex industry.

The main regulatory body in Switzerland is the Swiss Federal Banking Commission (SFBC). But many scammers choose to register their firms with one of the private regulatory institutions such as Organisme d’autoregulation fonde par le GSCGI, Polyreg and Association Romande des Intermédiaires Financiers, as these bodies only concern themselves with money-laundering issues, and are generally very lax on customer protection.

It is expected that the Swiss Federal Banking Commission will bring all forex brokers under its own supervisory structure by establishing a body similar to the US NFA, but until that plan is in effect, retail customers of forex brokers in Switzerland are basically unprotected against fraud.

Forex Regulation in the United Kingdom

Forex brokers are regulated by the Financial Services Authority (FSA) in the United Kingdom. Apart from its usual supervisory duties, FSA rules require that client deposits be segregated from the funds and accounts of the brokerage firm. In other words, in case of bankruptcy due to fraud, or mismanagement, the customers funds are safe. The advantages of this requirement are self-evident.

Forex Regulation in the EU

In the EU, retail forex brokers are regulated by the authorities of the nations in which they are operating. So far, there is no central regulatory body which supervises the activities of retail brokers on an EU-wide scale. Standards vary from nation to nation, but in general it is a good idea to choose brokers regulated by the institutions of nations like Germany or France, over those located in Greece, Portugal or Hungary, for obvious reasons.

Conclusion

In our broker reviews section, you’ll find a number of the safest brokers in the market analysed according to each of the categories established in this section. We have made every effort to make sure that you find the most realistic assessment of each firm’s offerings, so that you can form your independent judgment on their suitability for your purposes. Regardless of your decision, we wish you the best of luck in your new career. This was the last part of our free course for beginning forex traders.

Find the most suitable broker for you right now in our forex broker reviews section >>

Previous, part 8 << Forex Trading Psychology

Go to part 1 << Learn Forex Trading

Forex Lessons in this Forex Trading Course:

Lesson 1: How to read a currency quote

Lesson 2: What are Forex Pips, Lots, Margin and Leverage

Lesson 3: Forex Order types – Mechanics of Online Forex Trading

Lesson 4: Currency Pairs and Their Characteristics

Lesson 5: Fundamental Analysis vs Technical Analysis

Lesson 6: Forex Technical Analysis

Lesson 7: Forex Fundamental Analysis

Lesson 8: Forex Trading Psychology: The Four Demons of Trading Psychology

Lesson 9: Choosing the Right Forex Broker