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’ll find some steps which will guide you through how to pick a forex broker that is right for you. You’ll also learn how to test that broker out, what you can and can’t trust, and questions to consider before handing over your money.
1. How to Pick a Forex Broker – ask yourself the right questions
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.
- Consider whether you’ll be trading micro, mini or standard lot (more on what these mean in a moment) forex 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 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. You will need to deposit more than this though if you hope to succeed.
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 lot sizes even when using a standard account. 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.
- Some brokers do not allow scalping. Scalping is trading in and out of the market very quickly, with trades only lasting a couple minutes or less (sometimes seconds). 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 the broker must have tight spreads. The spread is part of the 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 doing the occasional longer-term trade the spread is not a significant factor. The 2-hour-or-less day trading strategy typically produces 2 to 7 trades a day.
- You will also want to consider HOW you’re going to fund and withdraw from the account. The withdrawal aspect is often where traders run into problems. 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 or one of the many other web payment services out there. Bank wires are always an option, but get expensive if you have a small account. 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 2 pip spread on the EURUSD at all times. Another broker may offer a variable spread which fluctuates between approximately 1.5 pips during high volume times and 2.5 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 (discussed below).
ECN forex brokers charge commission on each trade, but generally provide much lower spreads. With some ECN brokers you can get the spread down to almost zero. Paying the commission is typically worth it to save even 1 pip on the spread. For longer-term traders this isn’t a big deal. For day traders, an ECN broker with a typical spread near zero (0.1 or 0.2 pips on major pairs like the EURUSD) is highly advantageous.
- Few Re-quotes: A re-quote is when you place an order, but then the price changes and you get “re-quoted”. A message pops up asking you if you want to proceed at the re-quoted price. For day traders this is an issue; the delay can ruin your entry point and trade, or keep you in a bad position longer than you need to be, resulting in a bigger loss. That said, it can be annoying to anyone if it happens a lot. Also, constant re-quotes draw the advertised 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; as a general rule choose regulated brokers over the alternative.
- Customer Support: If you need help with something you want your broker to be there . To make sure they are, send a few emails through to customer service asking about something. 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.
3. How to Pick a Forex Broker – don’t always trust reviews or other people’s opinion
While reading about forex brokers in forums, on websites and in reviews can be of some value…it can also be 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 about 95% of people who attempt short-term 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.
Ultimately I don’t (completely) 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 for a couple months, make a withdrawal and if all is well then continue trading, potentially with a larger account.
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 by following 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.
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”
Lots of brokers offer some sort of account opening bonus. While it seems nice, it can complicate things down the road when you go to withdraw funds. Be sure to read all the fine print…as 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 you have accepted a bonus the broker may not allow you to withdraw any money since some of the money in the account is theirs. There is always a catch. 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.
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 of capital. 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.
FXOpen: A high quality broker offering some of the best ECN trading I have seen. A low commission is paid on ECN account but the spread is usually almost zero on major pairs. Micro accounts are offered, as well other traditional accounts with low spreads if you don’t want to pay ECN commission. Micro lot trading available on all trading accounts. Multiple withdrawal and deposit options. Regulated in several locations and highly reputable. You can check them out here: http://www.fxopen.com/ (For More information on this broker, you can read my review: My Favorite Forex Broker and Why). Not available to US residents.
Oanda: A reputable broker. Excellent spreads. Lots of funding options. MetaTrader and internal platform. Micro trading capability.Great customer support. Have Canadian, US, European and Asia Pacific branches, so you can deal with someone closer to home. http://www.oanda.com.
FXCM: Bigger spreads than FXOpen. FXCM does not offer live support on micro accounts, so if you are a small account you won’t get much help. Deposit and withdrawal process is good, 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 or visit http://www.fxcm.com. Available to US residents.
TD Ameritrade thinkorswim: Good platform for analysis. Decent spreads (bigger than FXopen). No commission on $10K+ lots, but they charge a 10 cent commission on 1K (micro lots). Considering the bigger spreads, this extra fee makes them very expensive. 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 or visit https://www.thinkorswim.com.
HotForex: My experience was decent. They 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.
By Cory Mitchell, CMT
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