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Choose Your Forex Broker Carefully

Apr 25, 2008
When you start trading in foreign exchange or Forex, you need to choose a broker or brokerage firm that is registered with the proper regulatory bodies. If you don't, you could find yourself in dire straits.

If you are in the United Kingdom, look for Forex brokers who have registered with the Financial Services Authority, or FSA. You can check out UK-based Forex brokers on this website as well, located at fsa.gov.uk

Another thing you'll need to check on is that your broker provides you proper support. At minimum, you should have 24-hour telephone and e-mail support. In addition, before you choose a particular broker, you'll want to contact several brokerage firms' help lines, to make sure they are prompt and courteous. Ask them some questions about their service and see how quickly you can reply. You should also make sure they answer your questions to your satisfaction. This will give you a good picture of whether or not their help is satisfactory, should you need something later. Of course, a company's quality can also change after you open the account versus before, so this is not always the best indicator.

Another way to check out Forex trading firms is to go online and do a search with a particular trading firm name and the word "complaint," to see if anything comes up that is unsatisfactory about a particular firm. You can also check out the Better Business Bureau's website and type in the company name to see if any complaints have been filed against them.

If you intend to trade in foreign exchange with your own computer, make sure your broker offers online trading facilities. You'll also need to be able to see your Forex quotes in real time. It will be of no help to you if trades are not kept up to date so that you know what you'll be paying when you open a trade. It will obviously do you no good if the quote on your particular broker's website for a trade is 30 minutes old.

Of course, you'll also need to make sure that you can view your own account in real time, including any used and unused margins you have.

When you place an order for a trade, you have to be able to buy or sell at the currently quoted price. Simply put, your broker must use a "what you see is what you get" display, also known as a "WYSIWYG" display, pronounced, "wiz-ee-wig".

In general, there are two types of online access. Each has its own advantages and disadvantages. The first, web-based software, is hosted on your broker's website. With this type of software, you can log into your account from any computer as long as you have Internet access.

The second type is a client-based software program that runs on your own computer. With this type of software, you'll only be able to log into your account from your computer. (Technically, you can install software and other computers, but this is usually not allowed with brokers' terms of service.) Client-based systems have an advantage because they are usually faster than those that are web-based. One disadvantage for Mac users is that usually, these are only available for Windows platforms.

You'll also need a fast Internet connection, either broadband or DSL. Dial-up is not fast enough, so that by the time you open your Forex trade, most often the quote will have changed from the quote you have displayed.

You'll also need to find a broker that has both micro and mini lots. You can open accounts that trade with the smaller lots for just a few hundred dollars. Some brokers also offer fractional sizes, called odd lots, so that you can create your own trading unit size. In addition, you'll need to make sure that your broker offers trading pairs in all seven major currencies, including AUD, CAD, CHF, GBP, JPY, EUR and USD.

Next, look for a broker that offers the smallest bid/ask spreads. Normally, this is five pips, but some brokers offer spreads that just have three or even two pips. Next, ask about your broker's margin requirement. This can be anything from a quarter of a percent to about 5%. Remember that smaller margins mean that you need to deposit less money, and they'll also give you greater leverage, but they have a disadvantage; your losses may also be greater.

How does your broker calculate rollover charges? These are charged to your account when you're trade rolls over to the next trading day instead of being closed at the end of that trading day. These rollover charges are based upon the difference between the interest rate of the base currency's country, and that of the quote currency's country. For example, if the currency pair is CHF/USD, the rollover charges will be based upon the interest rates' difference between the US (for USD) and Switzerland (for CHF).

Finally, make sure that your brokers trading hours coincide with international Forex trading hours.
About the Author
Ian Armstrong is an avid Forex enthusiast.

Ian strongly recommends Easy-Forex as a trading platform and forex broker. See an objective, results-based review of "Easy Forex" at Easy Forex Review
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