How to Choose The Best Forex Broker
Choosing a forex broker is a big decision and if you are new to trading it can seem like a tough decision. There are hundreds of brokers out there, all telling you they are the best. The truth is, most brokers are all the same. They offer the same trading platforms and the same trading pairs. In this article, we will explore what’s important to look for when choosing a forex broker to trade with.
More than $6 trillion of forex is traded on average each day. Unlike the stock market where a stock is traded on a single exchange, currencies are traded between banks, brokers, individuals and on dozens of independent exchanges around the world. Forex is truly international and regulations differ from country-to-country.
Most countries have an independent government-appointed agency to regulate financial services provided within the country. For example, in the United States, a 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. However, there are not many retail forex brokers left in the US due to prohibitive regulations that make it uncompetitive to trade with a US broker.
When you trade Forex you will have the ability to trade with leverage. The amount available depends on your broker, some brokers offer just 1:50 while others offer as much as 1000:1. Leverage is essentially a loan from your broker to help you trade bigger positions. For example, using 1:500 leverage, with an account size of just $1,000 you can hold a position that is valued at $500,000. Leverage is a double-edged sword. When the market moves in your favour, you get to profit as if you really do have a trade worth half a million Dollars. However, you also lose like you have a trade for half a million dollars and that can very quickly destroy your $1000 account balance. With leverage, losses are also greatly magnified.
Forex brokers make money by charging commissions and marking up on spreads. A commission is a fee applied to each trade and depends on the trade size, the bigger the trade the higher the fee. Some brokers advertise not to charge commissions, that means in order to make money they markup on the Bid and Ask prices. This makes the difference between the Bid and Ask price wider and means that you enter a trade further away from your break-even point and are further away from becoming profitable.
Most brokers offer close to one-hundred trading pairs. However, most traders stick to the major pairs such as EUR / USD, USD / JPY, GBP / USD and USD / CHF. Many brokers also offer CFD trading on precious metals, energy products such as oil, stock indices and cryptocurrencies. An emerging trend is to offer CFD trading on stocks. Each asset class may be subject to a different fee structure from your brooker so it’s worth double checking the trading costs.
In order to trade Forex online you need access to an application to submit your orders. That might sound high-tech but it’s really not. Most brokers offer the same trading platform, the notorious MetaTrader 4 platform. You need to be familiar and comfortable with your platform and it might be worth testing driving a few options. You want your trading platform to be equipped with the tools you need to trade and be easy to use.
Forex trading is a 24-hour market and your broker’s customer support team should be available any time of the day. When you run into a problem you need someone to be available to you. If your trading platform freezes while you’re in a trade, you don’t have the time or patience to wait for an agency to become available. It must be easy to speak with a real person rather than a chat bot. Before choosing a broker, give them a few tests and see how quickly they respond and how well they respond to your inquiry. Respect is also very important in the relationship you will have with the broker you will entrust with your hard earned money.