One of the most important factors that determine a forex trader’s success is the forex broker they choose to do business with. With so many shady brokers and conflicting reviews out there, it’s not always easy to know who to trust and what to look for.
To aid you in your search, we have compiled a list of the ten most important questions you should always ask before choosing a forex broker. In addition, you may want to check out our forex broker reviews page:
1. Are they regulated?
This is the first and most important question that should be asked and not something you should compromise on. The fact that the forex market itself is loosely regulated opens the door to all kinds of scammers. You want to choose a broker that is under the regulation and supervision of the appropriate authorities.
2. Are they well capitalized?
Make sure that the forex broker you choose is well capitalized. This typically makes them more stable and less prone to bankruptcy, which means your funds are safer.
This is especially important if you’re looking for a forex broker in the U.S., since they are not required to keep customer funds segregated from company funds and customer funds are also not insured under the SIPC (Securities Investor Protection Corporation).
3. Do they offer low spreads?
The spread is the difference between the purchased price of a currency and the price at which it can be sold at any point in time. Forex brokers do not work according to commission like stock market brokers do. They make their fee off of the spread.
Spreads can vary based on the currencies you’re trading and what type of account you open. It is also important to realize that because the market fluctuates, spreads are not always guaranteed. During times of high liquidity, spreads are generally lower. When liquidity dries up, the spreads typically widen.
Lower spreads ultimately save you money and help increase your trading profits. Your broker should publish real-time spreads for all traded currency pairs and should also indicate when they are wider due to market events such as news releases.
4. What is their trading platform like?
Some brokers offer their own proprietary forex software in the form of a web-based or desktop trading platform. The user interfaces of these platforms are designed to be very intuitive, making trade execution very simple. You also want to make sure that the platform is stable, fast, and offers charting capabilities that meet your needs. It’s often a good idea to first open a demo account with a prospective broker to see if the trading platform meets the above criteria.
For more advanced traders, and especially for those who prefer to use automated trading systems, it’s important to use a broker that offers the popular MetaTrader trading software. Fortunately, due to its popularity, you’ll find that most brokers offer MetaTrader to their clients free of charge.
5. Do they offer realistic and modest margin/leverage?
The amount of margin is important. Margin is used to leverage your money. A broker that allows you 50:1 leverage is more valuable than one who only allows 20:1. However, higher leverage is not always better. Firms that offer leverage over 100:1 are encouraging you to trade big which can quickly deplete your account balance and shatter your confidence.
If you can’t earn a lot of pips with a low leverage account then you certainly can’t generate good returns using higher leverage.
Recent CFTC regulations have put a limit on the amount of leverage that U.S.-based brokers can provide to their clients. U.S. based brokers can now only offer up to 50:1 leverage. Overseas brokers, however, are still offering higher leverage.
6. How is their customer support?
Customer support is something that most traders overlook when checking out a new broker, yet it’s just as important as all the other criteria. If issues arise on fund deposits or withdrawals you want to be certain that they will take care of you. After all, it’s your money.
Customer support should be easily accessible via phone, email, and/or live chat. If you don’t speak English, the broker should provide support in your language.
If you have a question or need assistance, the support staff should be prompt, courteous, and most of all, helpful. Always remember that you are the client and the broker needs your business. You should be treated with respect. Brokers with poor customer support should always be avoided.
7. Do they provide real time quotes?
The majority of traders involved in the Forex market are day traders, many of whom are scalpers. Can you imagine the effect on their bottom line if they were to receive anything except up to the minute information?
When choosing a broker, one of the first things you should do is make sure they offer real time quotes. Compare the quotes to other brokers offering real time quotes on their sites. You can also compare them to real time charting services and quote services not connected to a particular broker.
Your entire Forex strategy may depend on the accuracy of this information, so it is in your best interest to choose a broker that offers real time quotes.
8. Do they offer a demo account?
Demo or simulated trading is a great way to use the forex broker’s software and tools in real time without risking any real money. Many of the best forex brokers in the market today offer excellent demo accounts.
A demo account gives you a chance to try out the broker’s trading platform to see if you like it. It also lets you become familiar with entering orders, managing positions, and executing trades, before risking any real money. Demo accounts perform as real accounts; the only drawback however, is that they are missing the psychological component that comes only with trading real money.
9. How much money does it take to open a real money trading account?
Account types vary considerably between brokers. The most popular type of account for new traders is the mini account because of the low initial capital requirement to get started. You can open a mini account with as little as a few hundred dollars. Some brokers even offer micro accounts that you can open with less than $100.
Standard accounts are also available for more experienced traders with a moderate deposit, and finally premium accounts for larger initial deposits. These types of accounts are best left to experienced traders, since the market can be so uncertain and very risky for new traders.
10. What is their reputation?
The best way to find out more about a potential forex broker is to find out what other traders are saying about them. You can visit online forums and read customer reviews. You can also check out our forex broker reviews page for more info.
While it’s important to do your research, we also caution you to take each review with a grain of salt. Remember that online forums are a place where everybody can post their opinions.
Often times you will find posts from new and inexperienced traders who have lost money due to their own trading inadequacies, but would rather blame their broker for their trading losses. You typically won’t hear as much from traders that are actually happy with the broker since they don’t have any reason to post in an online forum.