5 Factors To Consider When Choosing A Forex Broker
When venturing into currency trading you need to have an account with a Forex Broker. To make a Foreign Exchange trade you need to have access to the live market, and that’s exactly what your broker offers you. Your chosen broker will provide you with a platform allowing you access to liquidity, live market price charts and the ability to manage and control your trades. Arguably the biggest benefit brokers offer the average trader is leverage. Without leverage there would most likely be no retail trader out there today. Leverage is more often than not abused by retail traders, not realizing higher leverage does not only mean higher profits, but higher risk as well.
Leverage in the Forex Market
In forex, investors use leverage to profit from the fluctuations in exchange rates between two different countries. The leverage that is achievable in the forex market is one of the highest that investors can obtain. Leverage is a loan that is provided to an investor by the broker that is handling his or her forex account.
Leverage allows the trader to control much larger sums of currency in the market than they would without it.
100:1 Leverage example:
For every $1 the trader has in their account they can control an equivalent of $100.
There are multiple things to take into consideration when choosing a broker. Lets take a look at 5 of the most important factors.
Reliability Is Factor #1
Finding a trustworthy broker platform might not be as straightforward as you think. The Forex marker operates around the globe, meaning there is no global regulation. Each country has their own Regulations a broker needs to comply with. Due to this factor some brokers are still on the unregulated side. Do your own research! Find out where the company is situated and which regulations they need to have in order to provide their service to clients. Brokers located in the United States should be regulated and registered with the Commodity Futures Trading Commission (CTFC) and/or the National Futures Association (NFA). Each country has its own regulatory body.
It’s always a smart idea to get current clients’ views on the selected broker. User feedback on Forex Forums can give you some valuable information that might change your views. All brokers will have some kind of bad review from an ‘unhappy client’, thus being important to consider the overall feedback from multiple clients. The Forex market is an extremely competitive market and its no uncommon for competitors to bad mouth other brokers.
As we all know the FX market runs 24/5, Monday through Friday. The last thing you want is the broker to be offline during certain hours due to technical errors etc. This might be extremely rare, but it does happen with lower class brokers. Broker client communication is very important and should not be overlooked. Make sure they offer a wide variety of support 24/7, including but not limited to; live chat, email and phone.
Be sure to have a look at the pairs offered by the broker. Every traders’ needs differ, but any top class broker should have all of the majors pairs (USD against EUR, JPY, GBP, CHF, CAD, AUD) with some exotics and cross pairs.
Last but not least you should test their charting software and execution times. Every trader wants instant execution of orders without slippage.
Charges and Fees
Traditional broker do not charge a fee or commission on trades. They make their money from the different between the bid and the ask price, referred to as the spread. The average spread ranges from 1 – 3 pips depending on the currency pair, broker and marker conditions. The spread can make more of an difference than you know in the long run. Depending on the pairs you trade the spread might be more important to you than others. Commission should only be charges on ECN or direct market access accounts with spreads ranging from 0 – 0.5 pips.
Minimum Account and Lot Size
Depending if you are only starting out, or an experienced trader, the minimum account and lot size might be an important factor to you. Some brokers only offer standard accounts which require deposits of up to $10k. If you are new and starting out you should consider a broker that offers mini accounts, allowing you to deposit as little as $100. Mini or micro accounts offer small lot sizes ranging from 0.01 – 0.1, which is perfect for a newbie trader to test the waters.
As mentioned before leverage allows a trader to control more money in the market compared to what is in their account. Leverage range from 50:1 – 1000:1 depending on the broker as well as your country law. US traders are only allowed a 50:1 leverage. A leverage of 400:1 is beneficial if proper money management rules are followed.
The Final Word
There is without a doubt a huge variety of Forex Brokers out there. Some being more creditable than others. Do your research before making your final decision, as it can mean the difference between a pleasant or unpleasant trading experience! I would personally not deposit my hard earned money with an unregulated broker, and neither should you.
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