How to Choose Your Forex Broker
Without a reliable broker, even the best traders may have a limited chance of success. Every trader I know has at least one horror story about his/her broker. What happens if you try to sell your position because the value of your holdings is quickly depreciating only to find out that your broker’s server is down. By the time they fix the problem you may be out of 100’s even 1000’s of dollars. This is especially true when trading currencies.
When choosing your broker, you’ll need to take into account several factors. You also need to understand that while one broker may be an excellent choice for one form of trading it may be a terrible choice for another form of trading. If you are not happy with the service and performance that you receive from your broker you should look for another one. It is not worth your time or money to be loyal to someone whose service isn’t working for you.
There are literally hundreds of brokers that you can choose from. When it is time to choose your broker, take the time to get informed about several prospective brokers. Although you can always change your broker later it is often a frustrating experience, so try to do everything in your power to make sure that you do it right the first time. By choosing your broker carefully you will save yourself valuable time and money.
Your forex broker should have the following properties:
Low Trading Costs
Although brokers do say that it is not in their interest that you lose your money, you need to remember that they make profit whether you win or lose. Equities and futures brokers make their profits on commissions that traders pay to them for every trade they make. Forex brokers make their profits from spreads. Spread is the difference between bid price (the price you sell at) and ask price (the price you buy at). Every currency quote has these two numbers displayed.
For example, a EUR/USD quote of 1.5701 / 1.5703 means bid(sell): 1.5701 and ask(buy): 1.5703, a spread of 2 pips. Didn’t you notice that every time you enter a trade, you start with a negative balance account? Well, that is the spread your broker is earning from you. If you would buy and sell immediately 1 lot EUR/USD, then you would make a loss of $20: as you would buy at 1.5701 and sell at 1.5703 → $100,000 x (1.5703 – 1.5701) = $20.
More trades you do, more money your broker makes. This is why many brokers that cater to currency traders prefer traders who make many trades during the day. They even hold courses that teach you how to scalp in and out of positions all day long. Although this approach has worked out for some traders who were trading highflying Nasdaq stocks in the late ‘90s for a currency trader it is a sure way to slowly lose all of his money.
Here is an example of the danger of such a strategy. Let’s say a trader has $2,000 in capital and is using 1:5 leverage to buy/sell $10,000 per trade and let’s say that he trades 20 times daily as some of these courses and strategies teach. Average spread being around 5 pips he would spend $5 per trade. At 20 trades per day this would equal $100 per day in spreads. It is five percent of the trader’s capital each day just in spreads. 20 trading days a month and it would equal 100% of trader’s capital each month. You are better spending your money anywhere else.
The importance of spreads depends greatly on your trading style and your trading strategy. If your strategy generates several entry signals per day and you are using relatively tight stops in order to limit your losses, then spread size is very important to you. With such trading style the difference between a broker that has average spread of 4 pips and a broker that has an average spread of 8 pips is of huge importance. 5 trades per day can mean $40 per day, $800 per month, $9,600 per year if you are trading in $10,000 per trade. Adds up quickly, doesn’t it?
Some forex brokers will request, in addition to the spread, a commission per trade. For example they may ask 5$ for every lot you want to trade. One would normally assume that brokers asking for commission are in any case more expensive than the other “commission-free” ones.
Well, that is not always the case, as brokers asking for commissions offer typically much lower spreads than the “commission-free” ones.
For example assume that we have a broker A that requests for trading the major currency pair EUR/USD 3 pips and a broker B that requests for trading the same currency pair 1 pip plus 5$ per lot. Which would be the costs for trading 1 lot EUR/USD? With broker A the costs would be $30 per trade (3 pips x $100,000), with broker B the costs would be $15 per trade (1 pips x $100,000 + 5$)!
So don’t automatically disregard the brokers requesting commissions. Sometimes they are cheaper than the “commission-free” ones! In the table below you can find the trading costs of several forex brokers at the time of this writing.
Fast Execution of Market Orders
In order to successfully place a trade you need to be able to get the most favorable price at any given time. This is especially true for market orders. When trading currencies, prices move extremely fast and by the time your order gets filled it may be at a price that is very different from the price you were trying to get, which was exactly the price displayed at your monitor at the time you place your order.
The losses we suffer in case such a scenario occurs are known as slippage costs. Even the brokers that normally provide fast executions occasionally may take longer to fill your order. High trading volumes may affect the speed of their executions and when prices move quickly your limit orders may become outdated.
Appropriate 24-hour Customer Service
You should be able to contact the customer service even if the brokerage firm has technical problems and lots of clients call the customer service at the same time. Further you should be able to contact the customer service by different ways, 24-hour phone service as a must-have. Think about the possibility, that while you have an opened position your internet connection fails. In such case you need somebody on the phone being able to let you know what is happening with your trade.
High System Reliability
If you find out that the brokerage system is down too often, then you have to choose another brokerage. You cannot afford that after you enter a position, the brokerage system fails! For the same reason you need stable computer equipment, you also need reliable brokerage system.
High Company Reliability
If you do not completely trust your broker, you won’t feel comfortable transferring your funds to those guys, so that you can start trading. Of course, there is no 100% guarantee in life, but you can minimize possible risks. First you will request that the brokerage company is regulated by a governmental agency from a country of your trust. Brokerage companies are usually regulated by the US agencies CFTC and NFA, sometimes also by agencies from other countries such as FSA (UK), SFBC (CH) or ASIC (AU). Would you trust a brokerage company which is not regulated or even one which is regulated by an offshore island? Second you will request that the brokerage company is over five years in the market. And third that it has offices in several places around the world, desirable of course also in your residence country.
you can find a list of brokers that are appropriate for forex trading on : Best Forex Brokers