With so many brokers all claiming to be top in their class and offering incentives to entice you to invest your money with them, it’s hard to separate the mediocre brokerage firms from the true professionals. While much of your choice will depend on your individual trading needs, following some basic guidelines can help you find the best broker for you.
Registration and Financial Backing
Legal registration and solid financial backing are the minimum that should be expected from a forex brokerage. In the US, forex brokers must be registered with the Commodity Futures Trading Commission (CFTC) as a Futures Commercial Merchant (FCM).
This registration means that the brokerage firm is government regulated, but it doesn’t tell you much about the firm’s financial backing. Because of the large amount of capital required to provide adequate leverage, forex brokers are usually connected to banks or lending institutions. The security of your capital depends in part on the reserves of that financial institution. If the market takes a serious downturn, that institution should have the reserves to cope with the many investors who will want to withdraw their cash.
Most brokers offer two basic types of accounts-standard and mini. For many, the amount of investment capital they have is the deciding factor in which type of account they choose. While standard accounts typically offers a variety of leverage options, these accounts require an initial investment of at least $1,500. A mini account can be opened for as little as $250 and offers the high leverage necessary to profit from such a small investment, but that high leverage also means more risk.
Rather than charging a commission like stockbrokers, forex brokers make their profit on the spread (the distance between the pips in the currency’s quoted price). Although fixed spreads are usually somewhat wider than the narrowest variable spreads, they can be safer over the long term. By choosing a broker who offers a fixed spread, you may not always have the highest possible profit, but you’ll have the advantage of predictability.
A Variety of Leverage Options
A variety of leverage options gives you greater control over how much risk you take with each trade. For instance, you can use less leverage when trading exotic currencies than when trading well-known, stable currencies. Although lower leverage means lower risk of a margin call (being asked to replenish the money in your trading account) it also limits your possible profit. However, this too depends on how much you’re able to invest. If your capital is limited, in order to turn a profit you’ll need a broker who offers high leverage, even if that’s the only type of leverage you can get.
Choosing between the dozens of types of trading software out there can become as complicated as choosing a broker. Ultimately, though, the measure of a trading platform is whether or not it meets your individual needs. Not all platforms cover all areas of the forex market, so make sure the platform will let you trade what you what. Another basic requirement is for the trading platform to show live prices that will be honored once you place the trade. Avoid platforms that show only estimated prices. Good trading software will also offer “limit” and “stop” orders that can be included with your entry order. Remember, a platform may sound ideal in a written description, but the only way to find out if it’s really for you is to get a demo account and try it out.
Trading Tools and Information
Most brokers provide their customers with at least some of the technical and fundamental analysis, market research reports, and other data necessary to make informed trading decisions. In fact, many trading platforms provide real-time charts, news, and data. Tools for technical analysis and for specific trading systems may also be included. Naturally, these extra bells and whistles aren’t worth paying for if you think you’ll never use them. Before considering the pros and cons of what a broker offers, draw up a list of the types of tools and data you believe you’ll need in order to trade and consider how much of what the broker provides will actually benefit you.
The forex market runs 24 hours a day and a good brokerage firm will offer support around the clock, too. You want to know that if you run into a problem with a trade you’ll be able to reach a live person in the brokerage firm immediately. Support that’s available only during “business hours” isn’t sufficient because business hours at the firm’s company headquarters may be overnight where you live, leaving you with no support during your own business hours.
What to Avoid
While being familiar with the attributes of a reliable brokerage firm can guide you to the best brokers, knowing the red flags that mark an unscrupulous broker can save you hassle and expense.
Opportunities that sound too good to be true
Although dishonest brokers claim they can, no broker can guarantee even the smallest profit. It’s also unrealistic to expect a profit of, say, $300 a day from an investment of a few hundred dollars, as some of the late-night infomercials promise. Likewise, brokers who claim they can eliminate the risk of financial loss are also attempting to deceive potential clients and should be avoided. Trading systems can increase the likelihood of profit and a good risk management strategy can limit losses, but there are no income guarantees on the forex market.
Sniping occurs when the broker buys or sells at preset points solely in order to increase his or her own profits. Needless to say, this isn’t going to do anything good for your investment capital. Before you settle on a broker, check with other traders to ascertain that the broker you’re considering isn’t known to engage in this practice.
Trading on the interbank market
The interbank market is a network of currency transactions performed between financial institutions and large corporations. While rates between these entities are usually better than they are for smaller investors, it’s not likely an individual will have the capital to trade on this market. Brokers who claim to be able help average investors trade on this market are often fraudulent or, at best, unregulated.
Choosing the right broker is a vital step towards turning a solid profit from your investment. As you search, take the time to consult with other traders and check on the brokers’ standings with the regulatory authorities. By taking a close look at the brokerage’s financial background, account types, trading platform, and other essential factors, you’ll be able to find a broker you’re comfortable working with and who’ll help you get the most from your investment.