Forex Trade – Intelligent Forex


Choosing a Forex Broker

Posted in Forex Brokers by intelligentforex on January 24, 2010

Trying to decide what forex broker is best for you is a difficult one, so this article hopes to bring to light some of the things that you need to consider.

With the advent of more FOREX retail traders in the market, competition amongst brokers has led to an increase in platform flexibility and features. Therefore, each broker over the past few years has tried to provide a better and easier way into the foreign exchange market for the beginner. I will pose some of the more obvious questions you need to find out from or ask your broker.

First and foremost are ‘spreads’ and how the broker deals with them. Spreads are important as the beginner needs to minimise his risk and reduce any costs when entering and exiting a trade. Usually, spreads are quoted by the broker as being ‘fixed’ or ‘variable’ for each currency pair. I have noticed that these days, spreads are always ‘variable’ and few brokers offer truly fixed ones. Although they may say EURUSD has a 3 pip spread, what they mean is that this is the minimum spread. You can be guaranteed that in times of high volatility, when prices are moving quickly, the spread will increase. Note also, that some brokers increase their spreads if the ‘lot’ size is lower – see the types of account below. This seems a bit strange as this certainly will not encourage new business for the broker!

One point to mention is that although this point is important for the beginner trader, as you get more experience, spreads become less of an issue when choosing a broker as they become less significant and more experienced traders will choose other features over spreads when considering what broker to choose. There are lots of websites listing broker details – so do your homework before choosing!

The next thing is whether the broker offers all three of the ‘standard’ accounts – regular, mini and micro. Regular accounts deal with full ‘lots’ ($10 loss or gain for each pip movement in the currency, if trading a USD pair) and therefore require the largest amount of starting capital of around $5000. Although mini accounts ($1 loss or gain for each pip movement) are now plentiful and commonplace, they still require a certain amount of capital to open that may be beyond some new traders. Micro accounts (Only 10c loss or gain for each pip movement) deal with such small sums of money that they are better than trading demo, but the risk is low when it comes to losing capital. Consequently, they require the least start-up capital in the region of only a couple of hundred dollars.

Various checks will be done when you open an account, and if the company is based in another country, you will need to fill in various tax exemption forms such as a W-8BEN before the account will be opened, don’t let this put you off!

Another check you may wish to do before considering a broker is to check their performance at the Commodity Futures Trading Commission website,http://www.cftc.gov, to ensure they are listed and have the required minimum turnover and liquidity. Any significant court cases will also be listed.

If you intend to execute ‘position’ or ‘swing’ trades, such that you will be holding overnight positions, you may want to check what rates of interest will be paid/debited from your account. This is sometimes hard to find on some websites, but can be very revealing as most brokers offer poor ‘carry’ interest if you are in a trade for a long period of time.

Check to see what currency pairs they offer – again, most companies offer most of the most commonly traded pairs but it’s nice to see how ‘established’ they are by seeing if they offer other trades such as gold, S&P, futures etc.

Unfortunately, something you can’t check is the kind of service the broker offers. Most will be ‘discount’ brokers, which basically means that they offer no trade advice or general help and if you speak to anybody on the trading floor about your trade, they will be usually be brief and ‘to the point’.

Try to find a broker who has downloadable free software that you trade from on your computer. The other way is to trade ‘live’ from a website, but I find this inflexible, especially if you continually need to click between screens as this usually requires the loading of a new webpage and makes everything quite ‘clunky’ even if you have a fast broadband connection.

Some brokers offer trading platform software and separate charting software, so you can use the best looking charts from one company and the platform from another – watch for variations in price quotes though!

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