Forex Trading - Choosing a Forex Broker
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.