Choosing A Forex Broker

In the past, currencies were traded on the phone, and banks prefer audio contact between counter parties as a means of building trust even today, but the individual trader will have all of his needs satisfied simply by opening an account with an online forex broker. Once one decides to trade currencies, the first requirement will be the opening of an account.

There are many brokers to choose from, and consequently there’s a lot of competition for customers among the various firms. What this means is that there’s a wide array of different offers suitable to everyone’s expectations, and it’s a good idea to carefully screen the brokers’ terms and conditions before coming to a final decision and committing capital. Calls to the customer service, questions about the financial status of the firm, its registration status are all valid and the prospective trader will find that in most cases the reliable brokers have no problem about supplying this kind of information.

The forex market for individual clients, termed the retail forex market, is a relatively recent development. In the early days of retail forex some brokers would misquote prices, and engage in unethical practices by exploiting their knowledge of clients’ trades (such as the infamous stop hunting). There were even scandals, and bankruptcies due to fraud, the largest and most memorable of which is the collapse of commodities and futures broker Refco in 2005.

Fortunately, the retail forex market has come a long way since those days, and there are many regulated brokers with open and clean business practices. There are a number of firms today with records going back to about ten years or more, and the prospective trader will not have much difficulty in finding one that matches his needs among them.

Account types

But before a brokerage firm is chosen , the first decision to be made will be about the type of account and the amount of leverage that we like. The previous chapters have discussed leverage and undercapitalization, and the new trader should make sure that he understands these subjects before deciding on the type of his new account. Some firms offer maximum leverage of up to 400 times the deposited margin, and there are differing minimum deposit requirements at different forex brokers. In general mini-sized accounts (those typically offered to beginners) offer leverage at a maximum of 100, and the minimum deposit size is around 100 USD. There are also firms that don’t have a minimum deposit requirement, and the trader is free to decide how much (or how little) he wishes to risk on his early encounters with the forex market.

If you’re new to forex, it’s a good idea to embark on your trading journey by opening a mini account. As we discussed before, success of the trader is measured in pips, not the actual dollar amount gained or lost, and it’s absolutely possible to have a very good idea on how successful you may be with a standard account by first trading small sums in the mini.

The forex market is diverse, and both the cautious trader, and the rodeo rider are likely to find account packages that suit their tastes. Remember that the market isn’t going anywhere, you can take your time and examine as many brokers and account offers as you like before you decide to participate in this rewarding, educating and engaging market.

Final Word

Trading the forex market is no riskier than trading stocks or commodity futures. Apart from the usual risks that are present in every market (the broker going bankrupt, natural disasters disrupting electronic trading, and so on) the risks related to leverage, and capitalization that give the forex market a bad name are controlled entirely by the trader, and there’s no reason to be wary of trading forex once you’re making sure that you don’t risk more than what is sensible, and are employing proper money management methods.

In choosing a forex broker, as with a stock broker, or commodities broker, the trader is strongly advised to stick to those regulated by the authorities: In the US, CFTC (Commodity Futures Trading Commission) and NFA (National Futures Association) enforce the rules and regulations that forex brokers must abide by, and the trader should always make sure that his broker is regulated and controlled by these institutions. Of course, even the most stringent regulations will not work very well in a nation of which the financial infrastructure is not well-developed; a broker based in a place like Cyprus, or Ukraine is obviously not the best choice if we want to ensure that its conduct is carefully scrutinized.

The broker trading against clients is always a worry in minds of the beginning and experienced traders alike. To minimize the risk of this happening, it’s possible to only choose those brokers that offer the no-dealing desk, and straight through processing options. The NDD (no dealing desk) ensures that trades are fully automated, minimizing the risk that the broker will misquote prices and widen spreads unfairly through deals mediated by phone operators. STA (straight through processing) ensures that there are no manual interventions in the electronic process as customer trades are routed from the client’s software to the banks and liquidity providers.

Key Points

• Beginners should start by practicing in a demo account
• Profit and loss should be measured in pips rather than dollar amounts.
• Traders should stick to reputable, regulated brokers.

Further Reading

• Forex Broker Reviews
• Forex Brokers in the UK
• Forex Brokers in South Africa