How To Pick a Forex Broker That Is Right For YOU
How to pick a forex broker that is right for you? Strip away the myths and read about how to pick a forex broker that is right for you. Don’t trust reviews (I explain why later)…you have to do this yourself.
Below you will find some steps which will guide you through how to pick a forex broker that is right for you. Also, how to test that broker out, what you can and can’t trust, and along the way things to consider before handing over your money.
1. How to Pick a Forex Broker – ask YOURSELF the right questions
First off, it is important to have an understanding of what you need from your broker. This can narrow the field of brokers to a handful which suit your needs. Consider your resources, trading style and how you move your money around.
- One of the main things to consider is whether you want to do micro, mini or standard lot trading. If you have under $10,000 you should trade with micro lots. Therefore, if this is you, only look for brokers that offer micro (1K lot or 0.01 lot ) trading. Different brokers will also have different deposit minimums, so this is an easy way to narrow down brokers based on the funds you have available for trading.
Most micro account brokers offers accounts which only require a $5 or a $100 minimum deposit.
Also, some brokers impose a maximum on the amount of money you can have in a micro or mini account. That can seriously stink if the broker bumps your account up the next level and don’t let you trade in small increments anymore. For instance let’s say you open a micro account with $500. Since each pip movement is only $0.10 (approx) you can control your risk and only risk 1% of your account on a given trade (50 pip stop). You do well and soon your account is at $1000..and then BAM you account gets switched a mini account. Now each tick is $1 (assuming they no longer allow you to trade micro lots). With a $1000 account there is no way you can control your risk properly anymore. You can only risk 10 pips in order to keep your risk to 1% of your account per trade. That greatly restricts you trading style and forces you to trade more actively…and will likely wipe you out very quickly.
Make sure there is no limit on how much you can have in your micro or mini account, or that you can trade these smaller increments even when using a standard account. For the record, I recommend Micro lot trading for anyone with under $10,000 to deposit. Micro lots allow risk to be fine tuned and for position size to be managed precisely. In my opinion $10,000 is the bare minimum for trading mini lots. And $100,000 is the bare minimum for trading standard lots.
- Also, some brokers do not allow scalping. Scalping is trading in and out of the market very quickly for very small gains. If you want to scalp make sure the broker allows it. If unsure, email the broker before opening a demo account. If you are more into day trading, swing trading or longer-term trading this is not an issue.
- If you are doing a significant number of trades you will also want the broker to have tight spreads. The spread is basically the cost of trading so you want to keep those fees low (more on this below). Ask yourself how many trades you expect to do per day, per week, or per month? The more trades you do, the more spreads you will pay. If only do the occasional longer-term trade the spread is not a significant factor.
- You will also want to consider HOW you are going to fund and withdraw from the account. This is a big one…especially the withdrawal aspect as this is often where traders run into problems. Be sure to know how deposits and withdrawals are made (methods), processing time, and if there are any limits imposed. A common limit is that if you deposit by credit card you can only withdraw the same amount (or less) as the initial deposit. Therefore, you may wish to use a payment service such as PayPal or Skrill (money bookers) or one of the many other web payment services out there. Ideally you need a broker that provides a deposit and withdrawal method that works for your personal circumstance.
Now that you have determined some of the things that you want, we move to the next step which is what the broker can offer. There are so many brokers out there, and the market is largely unregulated (slowly changing as many brokers are now becoming regulated). This means that the trading experience can vary greatly from broker to broker. Choosing a broker is an individual process, as each broker will focus on certain things which will appeal to some traders but not others.
2. How to Pick a Forex Broker – does your broker offer this?
- Competitive Spreads: In forex trading there is generally no commission, instead traders pay a spread (difference between bid and ask price) when making a trade. Some brokers offer fixed spreads, while others offer a variable spread. For instance one broker may offer a fixed 3 pip spread on the EURUSD at all times. Another broker may offer a variable spread which fluctuates between approximately 1.8 pips during high volume times and 3.5 pips during low volume times. The spread that is paid can have a huge impact on profits, especially when day trading or doing lots of trades. The lower the spread the better. Sometimes that comes at a cost though…such being constantly re-quoted.
- Few Re-quotes: A re-quote is when you place an order and the price changes and you get “re-quoted”. I message pops up asking you if you want to proceed at the re-quoted price. To be honest this does not really bother me since I don’t scalp the forex market. But for scalpers this is an issue. That said, it can be annoying to anyone if it happens a lot. Also, constant re-quotes draw the listed quotes and spread into question. If a broker is showing a very tight spread, but constantly re-quotes, then they are not actually giving you that spread even though they are advertising it. Therefore, you want a broker that offers a competitive spread and actually lets you trade at the rate you see.
- Safety: One of the major concerns for a trader is being able to get their money out of their account. It doesn’t matter if you make a killing in the markets if your broker scams you or your money gets caught up somewhere.
I have had issues with regulated brokers, and have had great experiences with unregulated brokers. That said, regulated brokers are under more scrutiny than their unregulated counter-parts so definitely choose regulated brokers over the alternative.
- Customer Support: If you need help with something you want your broker to be there to help out. To make sure they are, send a few emails through to customer service asking about something when you start up an account. This is just to make sure they are listening to you and they seem to know what they are talking about. Also make sure the broker has live chat or phone support so you can get quick access to help if something goes wrong and you need to speak with someone quickly. Test out the customer support by sending emails and trying out chat support before you make a deposit.
While reading about forex brokers in forums, on websites and in reviews can be of some value it can also be totally inaccurate. Brokers may post their own reviews and what I find more often is that traders bash brokers simply because they lost money at trading. Since it is true that about 90% of people who try trading lose money, it is no wonder so many traders blame their broker. It is much easier to blame someone else than accept personal responsibility.
So ultimately I don’t trust reviews. The best way to test a broker is to read what you can on the broker’s website to make sure they offer what you need. Then open a demo account. If you like what you see, make a small deposit, trade, make a withdrawal and if all is well then continue.
Just like trading, avoid taking short-cuts. Do your own due diligence and do not blindly trust someone else’s opinion. Reviews and information on a particular broker may be a starting point, but ultimately you need to test that broker out for yourself.
4. How to Pick a Forex Broker – personally “test out” the broker(s) you choose
Open a demo account with brokers you think you will like–brokers that offer what you personally require. Demo accounts are not exactly like live-trading, but you will get an idea of the spreads, customer support and if you like the platform. If you like the demo account and everything else is in-line (see above) then proceed to open a live account but follow these steps:
- Always make a small initial deposit with a new broker
- then trade for a while
- then make a withdrawal
- If everything goes smoothly then deposit more next time and continue to work up until you feel comfortable the process is reliable.
I also recommend using several brokers at once, this way not all funds are tied up with one broker in case something does go wrong.
Each broker is different, so if I like what I see and read about a broker I will try them out with a small amount and work up.
Be sure to read all the fine print when opening an account.
5. Don’t Take the “Bonus”
This is not really a rule, but something which should be addressed. Almost every broker offers some sort of account opening bonus. While it seems nice up front, it can complicate things down the road when you go to withdraw funds. Be sure to read all the fine print on bonuses and take it if sounds ok, but remember nothing is really free. The broker is not going to give you a bunch of free money unless they think they can make it back. If your trading track record is spotty don’t accept the bonus because if you begin to lose money, and have accepted a bonus, the broker may not allow you to withdraw since some of that money left in the account is theirs. Ask questions and read all the fine print. If it sounds to good to be true, it probably is. If you think the bonus will complicate things send a note to the broker when you open your account that you do not want a bonus (if that is what you choose).
How to Pick a Forex Broker – My Experience
Below are some brokers I use currently or have in the past. This is not an endorsement. Like I said above–do your own research and test out a broker with a small amount. I have made few notes on each broker, but please realize these are subject to change…so don’t take my word for it. Also, this is not a comprehensive list and I encourage you to research brokers on your own.
Remember, I recommend using multiple brokers.
HotForex: I recently started using Hot Forex as one of my brokers mainly because they offer very tight spreads. My experience has been good. They also have numerous deposit and withdrawal options. Also, micro lots can be traded on any account, so you can grow your money while precisely controlling risk. They are regulated. Good customer support. Multiple platform options including MetaTrader4. Fairly new company. You can check them out here: http://www.hotforex.com.
FXCM: Slightly bigger spreads than HotForex. FXCM does not offer live support on micro accounts. Deposit and withdrawal process is ok, but has limited options. Standard accounts can trade micro lots which allows risk to be controlled precisely no matter what account is being used–this is a big positive. They are regulated. Multiple trading platforms including MetaTrader4. Read my FXCM Broker Summary on Investopedia to find out more.
TD Ameritrade thinkorswim: Good platform for analysis. Great spreads. No commission on $10K+ lots, but charge a 10 cent commission on 1K (micro lots). Methods of funding are limited to wires, cheques, transfers (no web based payment services). Huge multi-service broker and regulated. Thinkorswim is a trading platform, but TD Ameritrade also has other platforms available. Great customer support.Read my TD Ameritrade thinkorswim Broker Summary on Investopedia.
Forex-Metal: Lots of funding and withdrawal options. Spreads are fairly high on standard account (which allow micro lot trading) compared to HotForex for example. They are regulated. MetaTrader Platform. In business since 2007. Full broker summary coming soon. https://forex-metal.com/home
ForexYard: Spreads are quite high on standard accounts (all accounts allow micro lot trading). Multiple trading platforms including MetaTrader4. Lots of funding and withdrawal options. They are regulated. US residents can’t open accounts. I, and a few other traders I know, have had issues with withdrawals on a couple occasions. http://www.forexyard.com/
Oanda: A very reputable broker. Excellent spreads. Lots of funding options. MetaTrader and internal platform. Micro trading capability. I have received great customer support when I needed it. Have Canadian, US, European and Asia Pacific branches, so I(and you) feel a little safer dealing with someone closer to home. http://www.oanda.com/