How to find a Forex broker

How to find a Forex broker

If you’re thinking of venturing into the Forex exchange market, the first step is to find a Forex broker. Forex brokers offer investors the facility to conduct online Forex trading, as well as providing in-depth information on market trends. There are a large and growing number of forex brokers, and choosing the right one requires cautiously sifting through an overwhelming number of magazine and internet advertisements. In this article, we’ll look at five considerations when choosing a forex broker in today’s competitive forex marketplace.

There are some key aspects like regulation and capitalization which speak for the reliability and competence of the organization and which can be measured following certain objective criteria. But the real challenge in choosing a broker comes when you have to determine what attributes you are looking for. Along with the outstanding features, you might find a potential weakness, depending on what you need for your trading style.

Regulatory Compliance
Without a doubt, the most important thing your broker must have is proof of regulation. If you choose to do business with an unregulated broker, you are opening yourself up to a whole slew of potential problems. For example, if you have to dispute a trade or action facilitated by the broker, who do you turn to? If they are unregulated, you are going to have very little if any legal protection from fraud. Or if the broker goes bankrupt, will you lose your deposit? This has never been more of a concern than now, with entire countries going into default.

In the U.S., a reputable forex broker will be a member of the National Futures Association (NFA) and will be registered with the U. S. Commodity Futures Trading Commission (CFTC) as a Futures Commission Merchant and Retail Foreign Exchange Dealer. The NFA is an industry-wide, self-regulatory organization for the futures industry in the United States. It develops rules, programs and services to protect the integrity of the market, traders and investors, and to help members meet regulatory responsibilities. The CFTC is an independent government agency that regulates the commodity futures and options markets in the United States. The CFTC’s mission is to “protect market users and the public from fraud, manipulation and abusive practices related to the sale of commodity and financial futures and options, and to foster open, competitive and financially-sound futures and option markets.”

A flashy or professional looking website does not guarantee that the broker is an NFA member or under CFTC regulation. A broker that is a member of the National Futures Association and subject to CFTC regulations will state this and its NFA member number on its website, typically in the “about us” section and on each web page. Each country outside of the United States has its own regulatory body. Due to potential concerns regarding the safety of deposits and the integrity of the broker, accounts should only be opened with firms that are duly regulated.

When you try to find a Forex broker to facilitate your trades, being well-capitalized is of utmost importance. There have been brokers in the past that have had issues with their capital, and as such can be risky places to hold your funds. In fact, this was so pervasive over the last 10 years or so that even in the United States there were firms that held less than $100,000! If that’s the case and 1000 traders place a successful trade, how will all these traders get paid out?
The minimum capitalization required in the US is currently (Jan 09) at $ 10,000,000, and the trend is to gradually raise up to $ 20,000,000 over the next months. If the broker does not publish this information, it’s a warning sign that could mean a lack of solvency and should consider when you find a Forex broker.

Forex broker types
Forex brokers can be made up of two primary categories:

  • Market makers Market Makers (Dealing Desk)
  • ECN brokers

Market Makers (Dealing Desk): These types of brokers are known as counter-party brokers. In other words, they trade against their customers (traders). So when you buy, the broker takes an opposite sell position against you and vice versa. Sometimes, the market maker can also match your order against another of their clients. The bottom-line being that with a market maker type of broker, most of the trades are done in-house or with the broker’s dealing desk.

ECN Broker: The ECN, or Electronic Communications Network, allows trader to match orders with other traders electronically. The broker will not take the other side of the trade. So for example, if you are bidding the EUR/USD at 1.4056, and there is no seller there, you simply won’t get filled as there is nobody to sell it to you at that price. (This is rare, but it can happen.) Many people say that the ECN has no interest in the results of your trades, but this is not true. In fact, the ECN wants you to do well so that you will continue to trade as they make their money off of the commissions they charge for each trade. Because of this there is no markup in the spread to compensate the broker. You typically will see tighter spreads, but there will be an added transaction cost in the form of a commission for facilitating the trade.

Spreads are extremely important for Forex traders, seasoned, or novice. Since the broker usually receives the compensation for its services by widening the bid-ask spread beyond the quoted values in the wholesale interbank market, a wide bid-ask spread represents a larger amount of money leaving your pockets, and entering those of the broker’s. You pay this fee regardless of the profit or loss you make with your trade: so there’s always good sense in ensuring that you choose the broker which offers one of the more competitive spreads in the market. Sometimes it may be advisable to open an account with a broker that charges slightly higher spreads in exchange for the safety offered by its long history and track record. But even in that case, a spread beyond three for the EURUSD pair, for example, is not a very good idea.

Deposits and Withdrawals
It is not a good idea to trade forex if you cannot withdraw your earnings with ease. Conversely, the broker must facilitate your termination of the account in case that you’re not entirely satisfied with the services offered, regardless of the reasons. This should be non-negotiable: since the broker is only the custodian of your funds, there’s no justification for any unreasonable delays or excuses when you make the request to withdraw your funds.
Similarly, you, as the client, should have no headaches at all when depositing funds with the broker. Come to think of it: if the broker is not even capable of ensuring that your deposit process is smooth, how likely is he to guarantee a painless and satisfactory trading experience for you?

Margin Requirement
Margin requirement and leverage ratios are the second most important aspect that must be considered when you find a Forex broker. For the beginner, the lower the leverage the better. Since higher leverage is only advisable for traders with a proven track record of profits and success, the beginner should be uninterested in the maximum leverage offered by a broker. Instead, since he must be allowed to get used to leverage on a step-by-step basis, the minimum leverage available is far more useful as a criterion.
For an experienced trader, evaluating the value of a high leverage options can be a bit more different. Since, by definition, successful traders use highly divergent techniques in their trades, there is no general rule for determining the optimal leverage ratio for a seasoned trader. However, for traders who plan to hold a position for long term, 10-to-1 may well be the highest sensible value.
In short, beginners should choose brokers that offer the lowest minimum leverage option, and the greatest customizability. With such a setup, it is possible to increase leverage gradually, in tandem with our improving and developing skills.

Account Types: The extent of capital you plan to invest would dictate the type of account you will open with a brokerage. As an investor, you can choose a mini, standard or macro account. For a mini account, you need to make a minimum deposit of $200, while for a standard one, you may need to deposit about $1,000 with your broker. Check whether the Forex brokers you are considering provide the facility of a mini account.

Platform: Every broker offers a platform that enables investors to receive information such as live quotes, graphs and charts, open positions, net exposure and current profit and loss status. Check whether the Forex brokers in your list are offering this data. Moreover, ensure that the technology offered is user friendly and enables you to carry out transactions fairly fast.

Customer support
One of the most important thing you should check in a broker is the support service. Forex is a 24-hour market, so ideally, the broker you choose should offer support at anytime. Does it has support in your language?

Which medium is used to contact the help desk: email, chat, or can you speak by phone to a live person? Do the representatives seem knowledgeable? How they respond to your questions can be key in gouging how they will respond to your needs in a real situation.

While trading you can run into technical problems. Therefore try to anticipate those critical situations and simulate those questions and requests to your broker. You can do this while experimenting on a demo account.

The website should already explain things clearly, but be sure to check the quality and efficiency of their support before opening an account.

The Forex market is the largest market in the world, and individuals are becoming increasingly interested in it. But before you begin trading it, be sure your broker meets certain criteria, and take the time to find a trading strategy that works for you. Remember, the best way to learn to trade Forex is to open up a demo account and try it out. In our broker reviews section, you’ll find a number of the safest brokers in the market analyzed according to each of the categories established in this section. We have made every effort to make sure that you find the most realistic assessment of each firm’s offerings, so that you can form your independent judgment on their suitability your purposes. We hope this article could help you to find a Forex broker and regardless of your decision, we wish you the best luck in your new career.

  • Andy

    Where can we find the broker’s capitalization? Do they declare it on their websites?

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  • Arould

    If you are beginner then it becomes very important for you to be familiar with some of the key technical terms like capitalization, regulatory compliance and ECN brokers and many more. I must admit that learning about these key technical terms went on to become one of the most special cornerstone of my forex trading career. I find modern trader’s approach highly questionable as most of them prefer trading without having to bother about getting educated about these key technical terms. I find this factual report very interesting as it reveals a lot about the modern trading practices followed by the brokers.

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