Choosing a good Forex broker can be as complicated as Forex
trading itself. For that reason, investors should do their
homework as diligently as they would for a trade. Here are
some tips to keep in mind to make your research and choice
easier.
In the U.S., any worthwhile Forex broker will be registered
as a Futures Commercial Merchant (FCM) with the CFTC
(Commodities Futures Trading Commission). Finding one
doesn't end the need for research, it's just the bare
minimum you should require.
Since Forex trades are highly leveraged (in effect, the
broker 'lends' an investor up to 99% of the money required
to make a trade), the broker you select should be
associated with a firm with deep pockets.
Forex accounts are not FDIC (Federal Deposit Insurance
Corporation) insured, so you can not expect the U.S.
government, or anyone else, to bail out the brokerage firm
or reimburse you if the market turns sharply downward.
Large institutions, with ample capital to withstand
downturns in the market, and rapid drains on their deposits
if clients withdraw en masse, are crucial to your financial
peace of mind.
Beyond those rock bottom basics there are many options.
Since the Forex markets trade 24 hours per day all around
the world, you may want to trade after normal business
hours in your home country. Whether your broker resides in
the same country (usually, for language and legal reasons)
or not, you want one who will pick up the phone when you
call.
Forex trading has moved into the Internet age, but it is
still very much a phone-based business. Getting a broker on
the phone at any time of the day or night can mean the
difference between profit and loss. Sometimes, big profit
or loss.
Since Forex brokers don't work off standard commissions the
way stock or bond brokers do, you need to research the
firm's spreads. Forex trading is always done in currency
pairs. A spread is the difference between the bid and ask
price - what the broker pays to buy versus the amount they
sell a currency for.
Some brokers will offer fixed spreads on all trades, which
has the advantage of predictability. It's a kind of fixed
'commission'. But that may or may not suit your trading
style or your budget, since they tend to be larger than
variable spreads.
Any broker will offer a standard account to a qualified
client. Typically you have to fill out an application form
that states you have adequate capital and understand the
risks involved in Forex trading. Standard accounts trade
currency in standard lots of 100,000 units. You can't buy
100 euros for $150, you have to buy 100,000 euros.
Since that's a very large investment for the average
trader, brokers offer leverage. Professional traders use
leverage as well, of course. In other words you put in, say
1% of the total, the broker puts up the rest. That has huge
profit (or loss) potential, but it entails significant
risk. So be aware of a broker's margin call policy.
Many brokers today will offer some form of 'mini' account.
Instead of trading in standard lots, they trade in smaller
units, such as 10,000. This lowers the investment required
from, say $2,500 to only $250. Most clients can easily meet
that minimum.
But that lower leverage requirement limits the potential
for profits. That may or may not suit your investment
needs. Only you can decide.
You'll want a broker with software that provides you with
the research and other trading tools you will need to be
effective in Forex trading. Forex investing is much more
complex and volatile than even stock or bond trading, which
is already not simple when done well.
Be sure to use the trial accounts offered and make several
'fake' trades in order to test out the software and
research available. You need real-time prices - Forex moves
very fast - and lots of technical and fundamental analysis
information at your fingertips.
There are websites and forums where specific brokers are
discussed, but take what's said there with a grain of salt.
Just as with complaints about vendors on eBay or Amazon and
other large Internet trading arenas, a few bad remarks
shouldn't ruin the reputation of honorable brokers.
Beyond all that, the factors become a little more difficult
to judge. Above everything, you want to feel you trust the
person on the other end of the line. They are not there to
be your friend or listen to personal complaints or trade
tips. But you should get the sense that they are competent,
professional and ethical.
Take your time to research. After all, your decision will
affect ALL your trades.
----------------------------------------------------
From London, Nick now lives in Stockholm with wife Lena and
Gunnar a Border Terrier. He likes long forest and lakes
walks, is learning Swedish and loves making money from
investments that are as cunning as a fox and go up even
when the markets go down! He runs
http://www.forex-master-trader.info which promotes a system
called Forex Trend Trader and offers a free Forex for
Beginners email course.
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