Here’s how to pick a forex broker that is right for you. Below you’ll find steps guiding you through how to pick a forex broker. 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. Determine What You Need From a Broker
Have an understanding of what you need from your broker. This will narrow the list of potential brokers down to a handful.
For example, consider whether you’ll be trading micro, mini, or standard lots. If you have under $10,000 you should trade with micro lots. Therefore, 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 offer accounts that only require a $5 or a $100 minimum deposit. Though, deposit more than this if you hope to succeed. 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.
If you are going to be day trading, consider if the broker allows 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 swing trading, or longer-term forex 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 cost of trading, so you want to keep those fees low. 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 method typically produces 2 to 7 trades a day. Commissions must also be considered. Some brokers have very low spreads but higher commissions. Others have low commissions and higher spreads. Find a balance by considering both these factors when looking at trading costs.
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 to the same card. Therefore, you may wish to use 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. 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. The Broker Should Meet These Minimum Criteria
Competitive Spreads: The lower the trading fees the better, as discussed above. The spread and commissions both contribute to the cost of a trade. Compare the trading costs at various brokers on MyFXbook. Be sure to check the “Include Commissions” box so the total cost of the trade is factored into the calculation. From experience, if something looks too good to be true, it probably is. Brokers need to make money. If they don’t they face bankruptcy and all your capital is at risk. The comparison tool is not perfect, and occasionally misses including the commission or something like that, but does provide a good overview.
No 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. Re-quotes are a problem. 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. 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. My favorite forex broker never re-quotes, and you simply transact with the prices that are available by placing orders wherever you like.
Another thing to check is where you can place orders. Some brokers don’t allow you to place to limit or stop orders within a certain number of pips of the current price. This is ridiculous. A broker should allow you to place orders wherever you want, even in the middle of the spread.
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 the broker goes bankrupt.
I have had issues with regulated brokers. That said, regulated brokers are under more scrutiny than their unregulated counterparts. 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. Ask about some of the topics covered above. This is to make sure they are listening to you and they seem to know what they are talking about. Also, look for brokers with live chat or phone support so you can get quick access to help if something goes wrong. Test out the customer support by sending emails and trying out chat/phone support before you make a deposit.
Most global brokers will not open accounts for US residents due to US laws. US residents are limited to trading with brokers regulated in the US. If you are in the US, focus on brokers regulated in the US. Some global brokers may accept US residents, but many won’t.
3. Consider Reviews…With a Grain of Salt
While reading about forex brokers in forums, on websites, and in reviews can be of some value, it can also be inaccurate. Unscrupulous brokers may post their own reviews to give an air of legitimacy.
Another issue I have seen is that people will bash a broker simply because the person lost money trading. Since 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.
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. See if you can find actual people in groups on Facebook, Google Plus, or LinkedIn (or other community/network) who have traded with the broker.
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 for yourself.
4. Test Out The Broker You Choose
Open a demo account with brokers you are considering. Demo accounts are not 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:
- Read all the fine print when opening an account. It’s boring, but it is important stuff. If you have questions, send them an email. How they respond is part of your test. You want a broker that is willing to talk with you.
- Test out customer support.
- Always make a small initial deposit with a new broker.
- Trade for a while.
- Make a withdrawal.
- If everything goes smoothly, proceed with the rest of your deposit.
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. Some bonuses are okay, but before accepting it, at minimum, get clarification on how the bonus is distributed and if it will affect your withdrawals in any way.
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. 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 small 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 is available on all trading accounts. Multiple withdrawal and deposit options. Regulated in several locations around the world. For more information on this broker, read my review: FXOpen Review and My Experience. Not available to US residents.
Oanda: A reputable broker, regulated in multiple countries. Good spreads for a non-ECN broker, meaning no commissions but higher spreads than an ECN broker. Lots of funding options. Offering MetaTrader and their own 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. More info http://www.oanda.com.
TD Ameritrade thinkorswim: A good platform for analysis. Decent spreads. A couple different account types for smaller and larger customers. Methods of funding are limited to wires, cheques, transfers (no web-based payment services). Huge multi-service broker that is regulated. Thinkorswim is a trading platform, but TD Ameritrade also has other platforms available. A viable option for US traders. More info: https://www.thinkorswim.com.
HotForex: My experience was decent. They have numerous deposit and withdrawal options. Good spreads on some accounts but commissions are higher than FXOpen. They are regulated. Good customer support. Multiple platform options including MetaTrader4. Fairly new company. You can check them out here: http://www.hotforex.com.
If you have traded with a broker, and at minimum made at least one withdrawal and traded with them for a while, leave a note about them in the comments section. Include what country you are from and the style of trading you do.
By Cory Mitchell, CMT
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