By: Michael Hiller
There are so many things to think about before trading on the Forex market. It is the biggest market in the world, with the most potential for gain. However, with that comes the most potential for devastating loss as well.
Among the different issues you need to consider prior to jumping into the Forex market are personal goals, flexibility in capital, trading strategy, and many others. In this article, the focus is the different aspects to look at when choosing your Forex broker.
The FX broker you choose can of course have a huge impact on the success of your Forex trades. Here are some criteria to consider before choosing a Forex broker:
- Foundation: It is no surprise that the number of online Forex brokers is growing rapidly. For this reason exactly, you need to check and double check a brokerage before signing anything. Forex brokers do not stand alone; they are almost always associated with some large bank or lending institution. This is of course a result of one of the basics of the Forex market; high leverage. Most Forex brokers offer at least a 100:1 leverage, which usually means very large sums of money. It is therefore important to research who and what is backing the brokerage and how strong its foundations are, before deciding to trade with them.
- Legitimacy: Due to the growing number of Forex brokers mentioned above, it is also important to verify the legitimacy of a brokerage before signing any contracts. Every Forex broker must be registered with the Futures Commission Merchant (FCM) and regulated by the Commodity Futures Trading Commission (CFTC). It is important to check on the Forex broker’s website for any additional financial information and statistics about the brokerage. If it is not there, check on the parent company’s site, and if you cannot locate this information, this should raise a red flag.
- Competitive Spreads: After determining the integrity of the Forex online broker, now you need to evaluate the quality of their offering. Forex brokers make their money using spreads. A spread is the difference in pips between the buy and sell price of a currency. The difference in spreads between Forex brokers is comparable to the difference in commissions taken by stock market brokers. It is of utmost importance to find a Forex broker with the smallest spreads, which will ensure maximum profit for the trader.
- Resources: In today’s Forex market, the average FX broker offers a wide variety of services. The actual trading is done using the Forex broker’s trading platform, which must be tested and evaluated before deciding on a Forex broker. It is important to ensure that the platform competes with the market standard of including real time charts, integrated technical analysis tools, live news and updated market data, and sometimes support for trading systems. Some Forex brokers also offer technical and fundamental analysis as part of their service, as well as economic calendars, and other useful tools. Try to get the most out of your Forex broker; it will make all the difference.
- Leverage Flexibility: One of the biggest advantages of the Forex market is of course the leverage. In no other market can you make a $200,000 transaction with as little as $500 balance in your account. However, large leverage is not always the right choice for all traders. The higher the leverage, the greater the risk. So if you have limited capital, higher leverage will increase your opportunities, but if capital is not an issue, lower leverage is the way to go. The important think to verify is that the Forex broker offers different options based on your trading needs.
- Account Types: Similar to leverage, the account type you choose very much depends on your trading needs. To read all about the different account types, click here. When choosing a Forex broker, it is important to make sure that they offer different types of trading accounts.
- Lenient Margin Rules: Since Forex trading offers you the unique opportunity to trade with someone else’s money (the leverage is a loan for all intents and purposes), you do not have complete control over your own transactions. Since the risk you are taking is with the funds that belong to the brokerage, your Forex broker can determine just how much risk you are allowed to take. So if a brokerage has strict margin rules, you might encounter a sharp decline in one of your positions, and before it gets a chance to recover and make you some profits, your Forex broker could have made a margin call, liquidating your account. This will result in great losses for you. It is important to ensure that the Forex broker’s margin rules are not too strict.
- Demo Account: This might have been first on the list if it was in order of importance. Before risking your own money, it is absolutely crucial you trade with a demo account. There are people who will argue that a demo account is no indication of your success when trading real money, and they might be right. The platform might be more developed with real trades, and natural pressures might cause major differences in the results. However, demo accounts are the best option a trader has to test a trading strategy and evaluate how they are as a trader. It might not be perfect, but it is better than the alternative of jumping straight into the deep water.
- Emotionless Trading Features: One of the guiding principles in successful Forex trading is “Leave emotion out”. You need to trade in a cold and calculated way so as not to let your emotion get the best of you. This is done by setting yourself Stop-Loss and Take-Profit points in the Forex broker’s trading platform and under no circumstances deviating from them. Most modern Forex brokers offer these features, just make sure your Forex broker is one of them, and not stuck in the last century when it comes to Forex trading platforms.
- Accessibility: This is not something unique to Forex brokers or even the Forex market. Just like any other service or company, before you sign a contract with a Forex broker, test out their customer service and support. Are they accessible? If you have a problem whether it is technical or general, is there someone there whose sole job is to provide you with better service? If not, this should yell to you to stay away. When it comes to Forex brokers and their service, the difference between high and low quality customer support can cost you thousands of dollars and sometimes more. This must be examined well before signing up with a Forex broker.
The Forex retail market is always growing and understandably so. It has the greatest potential for profit out of any global market. However, don’t rush into it, check your Forex broker against the above criteria, establish a trading strategy, examine the market using technical and fundamental analysis, and always remember “The trend is your friend”.