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How to Choose the Right Forex Broker

Unlike binary options and other financial products, the Forex market is largely an Over The Counter (OTC) market that lacks a central marketplace. This essentially means that every trader has to work with a broker. A good broker can significantly increase your odds of success in the highly competitive Forex market. With Forex trading ever-growing in popularity around the world, choosing a reliable broker can sometimes mean sifting through numerous advertisements and conducting endless research.
However, armed with a few tips, you can be able to choose a reliable broker in today's competitive marketplace.

5 Tips for Selecting a Forex broker


1. Regulatory Compliance

Trading with a regulated broker is one of the most important considerations in Forex trading. Broker regulation helps to protect the trader's interests, including safety of deposits and ensuring easy withdrawal of earnings. A reputable Forex broker doing business in the U.S. should be a member of the National Futures Association (NFA) and be registered with the U.S. Commodity Futures Trading Commission (CFTC) as a Retail Foreign Exchange Dealer and a Futures Commission Merchant. NFA is a self-regulatory organization that deals with the futures industry in the country. It's tasked with the responsibility of developing rules, services and programs that help protect the integrity of the market, investors, and traders. CFTC, on the other hand, is an independent government agency whose mandate is to regulate options and futures markets in the U.S. CFTC's mission is to protect market users and the general public from fraud and abusive practices that are related to the sale of financial options and futures, and also to foster an open and financially-sound options and futures market.
You should check the ''About Us'' section on the broker's website to see whether they are regulated. Each country where Forex trading goes on has a regulatory body, and the broker should clearly state this in its website. You should be careful to avoid choosing a broker based on a flashy website since this does not guarantee that the broker is properly regulated.
As an aside, it's important for traders to note that financial regulation does not always guarantee perfect safety for traders and investors. The collapse of the U.S. subprime mortgage in 2008 is a true testimony that some clunkers slip through sometimes, despite having a strict regulatory framework. Some regulated brokers do flaunt the rules, though these are a minority.


2. Account details

Forex brokers have different accounts with different features. As a trader, consider the following features:

  • Leverage and margin-- Forex brokers offer different leverage levels including 50:1, 100:1, 200:1 and even 500:1. Leverage is a form of loan offered by brokers to margin account holders. For example, a 50:1 leverage means that a trader with an account size of $1,000 can hold a position valued at $50,000. Leverage is great when a trader is making winning trades since it magnifies his earnings by a big factor. In the same token, leverage can work against a trader when he is making losing trades since the losses are magnified by the same multiple. You should therefore choose the leverage level according to your risk appetite.
  • Commissions and spreads-- a Forex broker makes money through commissions and spreads. A broker that uses commission may decide to charge a specified percentage of the spread i.e. the difference between the bid and ask price for the forex pair. Other brokers might however decide to charge no commissions. These brokers, however, usually make up for the lack of commissions by charging wider spreads. In fact, be carefully when the broker advertises that they charge no commissions because some they might end up making up for it by charging much wider spreads. To understand how spreads work in Forex, consider a EUR/USD pair that has a quote of 1.3943-1.3946. This Forex pair has a three-pip spread, meaning that a trader that buys will pay 1.3946 USD for each Euro but can only receive 1.3943 USD for each Euro if he sells immediately. Wider spreads make it more difficult for the trader to make profits. Typically, popular Forex pairs such as EUR/USD have tighter spreads than less popular pairs.
  • Initial deposit-- many Forex accounts can be funded with very small initial deposits, sometimes as low as $50. This is due to the fact that the use of leverage increases the buying power by a large factor. Many brokers offer standard accounts, mini accounts and micro accounts for traders. This is one reason why Forex trading is so popular with new traders and investors.
  • Ease of deposits/withdrawals-- different brokers have different funding and withdrawal policies. Brokers might allow the trader to fund his account using a credit card, PayPal, ACH payment, wire transfers, personal checks, business checks, or bank checks. Some brokers charge a fee for this service.


3. Currency pairs offered

There are a great deal of currencies available for Forex traders. In practice, however, only a few of these are offered consistently by majority of brokers and hence have the greatest liquidity. The most popular currency pairs include EUR/USD, USD/JPY. GBP/USD, and USD/CAD. Some traders, however, prefer trading with currencies from their own countries whose characteristics and movements they might understand better. Whichever currency pair you would like to trade with, make sure that the broker has it on its platform.


4. Trading platform

The broker's trading platform is the trader's portal to the market. The platform should ideally have an easy-to-use interface as well as a variety of technical and fundamental analysis tools. You should check whether the trading platform has all the analytical tools that you plan to use. For instance, if you prefer trading off Fibonacci numbers, make sure the platform is capable of drawing Fibonacci lines. The platform should have clear ''Buy'' and ''Sell'' buttons, while some brokers also add a ''Panic'' button that closes all open positions.
You must also understand which policies the brokerage works with and how it goes about making the market. Trading over-the-counter or on spot markets is quite different from trading in exchange-driven markets. Ask the broker about its policies.


5. Customer service

Forex trading goes on 24 hours a day. This makes it necessary for the broker to have a reliable customer service representative available throughout the day. A good broker should offer live customer support either through telephone or chat instead of the ubiquitous and often frustrating auto attendant feature. Once you have settled on a broker, make a quick call to give you an idea of the level of customer service to expect. Ask the customer rep about the broker's policies and regulation, spreads, leverage, and other company details. You should also inquire how long they have been in the business and their trade volume. Larger brokers frequently offer better prices and execution.