Chapter 7
Guidelines for selecting a Forex broker
You should always remember that wherever there is big money involved there
will usually be a lot of scam around. Forex market is not an exception. There
are hundreds if not thousands of Forex brokers that will offer you their
services. Most of them will probably be legitimate brokers regulated by some
financial authority, but some will not be and you should be aware of that.
There have been a lot of bankruptcies in the industry (brokers, mega banks)
that caused traders and investors billions of dollars. Nobody is immune from
that. Even the most reliable brokers can go bankrupt. You have to know, that
a broker is a businessman, not your friend. He expects to make money from
you by charging you spread. Now, if he goes under the water he will take not
only spreads, but all of your deposit with him. You should be concerned about
it and do a thorough research before choosing a broker. This chapter aims to
single out important aspects that you should take into account before you
open a real account with some broker.
Find out whether a Forex broker has not had legal issues in the past
You surely do not want to open an account with some company who regularly
has troubles with financial regulators and gets fines for abusing their
functions as brokers. CFTC and NFA are the most popular financial regulators
that watch how brokers manage their businesses. Do some research on your
broker to find out whether has had any trouble with these institutions in the
past. If the answer is positive you should seriously consider not opening an
account with the broker.
Is your broker regulated at all?
Maybe this point should have been the first one. If your broker is not
regulated you do not even have to search whether it has had any trouble with
financial regulators, because the fact that he wants to do business in some
shadowy way without being regulated makes me doubt whether the broker
will not cause damage for his clients. Transparency is the key quality that you
should expect from your broker. If he is not regulated, his intentions are
concealed and he is more likely than not be a financial crook. Do some
research on internet to find out what authorities regulate your broker and if
none, stay away from him.
Size of spreads add up
Number of pips in currency pairs is very important for short term traders. In
fact, most traders are short term, so that’s even more important for you to do
a review of brokers who offer the smallest spreads. You see, every broker has
to get liquidity from other financial institution (a bank usually) so that he can
offer leverage to his clients. If your broker deals with mega banks and has a
lot of customers he can get a lot better spreads than other Forex brokers. If
banks get a huge turnover from some broker a month they would definitely
offer the broker better spreads and this will translate to much smaller costs in
trading for the customers of that specific broker. It is very important for day
traders, to say nothing of scalpers. Daily ranges are not that big in currencies
and if spreads are larger than 5 pips it causes you to increase your stop loss
orders and decrease your take profit targets. So, find a broker that offers the
lowest possible spreads.
Bigger leverage may not mean better broker
The fact that a broker offers a possibility to use huge leverage might not be a
good sign. You see, trading currencies or any other securities is a risky
business and every broker has to let their customers know that. For example,
Oanda broker offers 33:1 leverage to their customers by default. That is much
better than 100:1 as you automatically reduce your risk. Now, 100:1 may not
be that bad, but some brokers will tell you they can give you 500:1 or even
1000:1 leverage. This kind of leverage can cause you to lose all of your money
in a matter of split seconds. You won’t be able to withstand any market move
that maybe against you. Any leverage that is higher than 100:1 may cause a
trader strong psychological pressure while trading and he should avoid that.
Are mini and micro accounts available?
You should not give in to hype that brokers allow you to use demo accounts
to practice your skills. Demo accounts give you an illusion that you can trade
under real market conditions. You need real money to trade under real
market conditions. Therefore, it is much better to try your skills on a mini or
micro account than keep on trading demo money. Mini and micro accounts
are very good if you do not have big capital and they might be the best choice
to trade with the money that you can afford to lose. Of course, you may play
around with a demo for a few weeks before opening a mini or micro account,
but that will not help you to see whether your strategy works or not, because
real trading is absolutely different from demo trading. So, a broker that offers
a mini account could be a better choice than the one who doesn’t.
What do the customers say about that specific broker?
That is very important! The best picture that you can get about a broker might
come through a customer who has used the broker’s services in the past. A
broker himself might lie on how good his services are, but his customer might
paint a completely different picture. You should trust more what customers
say, rather than brokers. There are a lot of forums and websites that
specialize in this area and you can read broker reviews which are done by
traders who have used services of specific brokers. If there are a lot of bad
reviews you may want to avoid the broker.
What about broker help desk?
Help desk that will allow you to chat with representatives of a broker and ask
a lot of questions will show you how much they care about their customers,
how transparent they are and how fast they respond to problems that arise.
Some brokers have terrible help lines. They might not solve some problems of
their customers for weeks. I have experienced that myself. You may wait for a
week to get an answer to a simple question. That is not good. “The customer
is always right” should be the motto of every Forex broker and if it is not, you
may want to search other broker to trade with.
If you have gone through all the points mentioned in the chapter you will
probably be able to open a live account with a reliable broker. Good luck with
that!