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Due Diligence required when choosing a forex broker – 6 quick pointers

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If you are going to trade foreign exchange pairs in the world’s largest market, you must have a business partner that you can trust with your hard-earned cash, namely a forex broker that passes your due diligence search tests. Whether you are just looking for a “hot backup” or just beginning to dip your toe in the market, there are a multitude of brokers that would love your patronage, some offering benefits that seem too good to be true from far off places. Unless they happen to have a nearby office or conduct a seminar in your area, you may never see your “partner” face-to-face. The selection process is therefore slightly more difficult, but time invested upfront will pay dividends.

If you are a beginner, you will need to spend some time educating yourself in how the business of trading forex operates. Like any other business, it has its own language and buzzwords. In order to make a prudent choice of a broker, you will need to review many websites for potential choices, scan reviews and testimonials, and check in with your local regulator to make sure nothing suspicious is afoot with any of your early picks.

After you have acquired a basic understanding of terms, how brokers organize their websites, and what others might be saying, then the process is similar to any other straightforward decision-making exercise, which usually consists of these six steps:

  1. Definition: Specify as best you can what you are looking for in a broker, as in location, experience, product offerings, etc.;
  2. Select Alternatives: Search the market with the intent of finding 5 or 6 brokers that appear to meet your selection criteria. You will find that there are many websites that will help you with this search, including Forexfraud.com;
  3. Evaluate Alternatives: The real work starts here. There will be key areas of comparison that must be made in order to rank your prospects. For each one, you will also need to dig deeper to verify their legitimacy, location, operating licenses, reputation, regulatory standing, management team, deposit policies, capital adequacy, and anything else that you feel is relevant. If a broker’s website withholds valuable information, you might want to reconsider;
  4. Make Your Choice: It is now time to choose. It is wise to document how you made your choice, too. You never know when you might need to repeat this process, if and when you decide a change is needed or you want to have a second broker as insurance;
  5. Implement Your Decision: Your broker of choice will have an application process and may even allow you to have a free access to a demo practice system before a deposit is required. In any event, there is no need to go “all in” initially. Start small and test the service. Be aware that demo systems will always execute orders immediately, since no market entry is required. Once you are pleased, you can always add more funds to your account;
  6. Monitor Your Chosen Broker: This step is the one that most traders forget about, but it is as important, if not more, than the other five steps. You need to keep a keen eye open for the first 3 to 6 months to see if anything seems odd or out of place about your broker. Marketing is one thing, but sometimes everything changes after your deposit is made. Make a small withdrawal request and see how quickly Customer Service responds. The forex brokerage industry is extremely competitive. Financial dynamics can change quickly that could put you at risk. Follow the news about brokers, and then react if necessary.

The entire selection process is sometimes referred to as “due diligence”. The amount of time that you will invest will depend on your nature, your tolerance for risk, and whether you go with a major brand name or prefer to link up with a smaller group that is more responsive to your needs. In any event, there are many top-of-the-line brokers, as well as small to medium sized ones, that provide great service, but there are also quite a few shady operators, the reason why we stress due diligence so much in this article. If you are tempted to use an offshore broker, one located in some far off exotic locale, be aware that your odds for dealing with a “shady” type increase dramatically. Trying to enforce your legal rights in a foreign jurisdiction will be futile in most circumstances.

From a basic review process perspective, however, here are six more pointers to consider when choosing a broker, assuming that you are now at the last stages of completing “Step 3” in the above decision-making process:

  1. Regulation and Security: The first box that needs a checkmark is whether your prospective broker is regulated, especially in one of the major markets. Major regulators are the National Futures Association (NFA) and Commodity Futures Trading Commission (CFTC) in the U.S.; the Financial Conduct Authority (FCA) and Prudential Regulation Authority (PRA) in the U.K.; the Australian Securities and Investment Commission (ASIC) in Australia; and oversight groups in Europe include ESMA and CySEC. Get acquainted with your local regulator, too, and be sure to review the “Security” section on each broker’s website to ensure that they are focused on blocking hackers from compromising their operations;
  2. Transaction Fees and Charges: While brokers primarily make their money off forex spreads, there may also be a multitude of separate fees and charges that also apply to transactions and other special services. Review websites tend to make a good comparison of these costs and spread differences, which may depend on your platform selection, too;
  3. Deposits and Withdrawals: Your intended broker should have made best efforts to ensure that deposits and withdrawals are easy and hassle free. Be advised that payment processors are independent of your broker and may cause delays, but requests should be turned around quickly. Deposits should also be segregated from operating funds and deposited in Top Tier banks to ensure their safety and immediate availability;
  4. Trading Platforms Offered: Perhaps, all you want is MT4 and be done with it, but many brokers will also offer their proprietary platform, which has been designed to support the more experienced trader, thereby giving you another level to aspire to, as you “learn the ropes”. Does the broker maintain a dealing desk or is he only STP, or a “Straight-Through-Processor”? It can make a difference in spreads, execution times, and your overall trust in your broker. At the end of the day, you want a platform that is user-friendly, gives you quick access to information, and is reliable;
  5. Operating Characteristics: The demo system is one thing, but when you “Go Live”, real market conditions can affect execution times and spreads. Do you get many “re-quotes” or what is called “slippage”, when inordinate delays apply to your orders being executed? Do fees and spreads correspond to marketing materials? Are there other service delays or system outages that do not make sense? Be aware that markets can go wild when major economic releases or news hit the press. Spreads can widen with slow execution times for all brokers;
  6. Customer Service: Lastly in this list is Customer Service. Live-Chat, email, and telephone are standard these days, but response times can vary, depending on the broker’s commitment of internal resources. Many shady types cut back in this area, causing delays and support from agents that are not well educated as to the aspects of the platform or various service offerings. If withdrawal requests are delayed or if a service rep starts pressuring you to increase your deposit, then you might want to reconsider and start another search.

Once again, these areas are only “the basics”. Other aspects could include how many forex pairs are offered, what type of leverage, what other products are available, i.e., mirror trading for example, how broad is their learning center, and what type of online market commentary and signals are provided. Experiment with the online chat service to see how quickly and knowledgeable they are when answering your questions about these other capabilities.

Concluding Remarks

Choosing a forex broker can be a headache, but the process is straightforward and can be an easier task, if you decide to go with a major brand name with years of experience and a great reputation. If you wish to go offshore or work with a smaller, yet more responsive broker, then the process requires more time, since the odds of dealing with a “shady” operator or an outright scam are much higher.

As a general rule, you can never invest too much time upfront in your selection process. Although the retail forex industry has changed a great deal from the “Wild, Wild West” days back in the nineties, the Internet can easily enable virtual fraudsters to ruin your day. Always stay skeptical, especially of offers that seem too good to be true, but at the end of the day, take pride in your process, don’t be a victim, and enjoy trading!