How to select a forex broker
Most recently, I wrote about how to avoid getting scammed while buying forex products. Finding a good forex broker is even more important.
I currently have active accounts with several brokers. I won't name those brokerages in this article. Actually, I won't mention any other brokerage names in this article. My purpose in writing this article is to help you select the forex broker that is right for YOU, not to tell you which broker you should chose.
If you've have already picked a forex broker that you are completely happy with, then you're done. If you are having trouble deciding which broker to trade forex with, please read on.
From my perspective, choosing a forex broker is a personal decision. First, you need to make a list of what you want from a broker. Some things you will absolutely require, others will be things you want, but can live without.
There are so many factors to consider. There is no way I can list them all, but here are some of the major ones:
What country is the forex broker regulated in? Is the broker regulated at all? Some aren't. Some will claim to be "self-regulated." That means they are unregulated, but they aren’t honest enough to admit it. There are a few unregulated brokers that aren't too badly rated. The problem with this is how do you know they won't go bad later? Regulation doesn't guarantee that a broker is a good broker, but at least gives you some recourse if things go terribly wrong. Also, remember that some countries have better regulations than others.
Does the broker allow clients from your country? Not all brokers allow traders from all countries. There was one well-rated brokerage in the UK that I really wanted to open an account with, but they aren't legally allowed to have accounts from residents of the USA.
What country is the brokerage located in? Many brokerages are multinational. Just because they are regulated in one country doesn't mean their primary offices are there. Since I live in the USA (most of the time - "Ni hao!" to all my friends in Guangdong Province), I prefer a forex brokerage that is both based in and regulated in the United States. This saves me the effort of getting my passport out of the safe if something strange happens and I feel an overwhelming need to pay them a visit to express my annoyance in person. Don't trust the brokerage if it claims to be regulated, check them out yourself on the regulator's website to be sure. There are a lot of "Swiss Brokers" that are about as Swiss as the Swiss cheese that I buy at the grocery store (which is made in Wisconsin).
Can you use a downloaded trading platform, or do you need a web-based trading platform? If you trade from home or have administrator access on your work PC (and your boss doesn’t mind), then you can install a trading platform like MetaTrader. If you can't install software where you will be trading from, then look for a broker with a web-based forex trading platform. If you plan to trade with automated EAs, you'll need a broker that has MetaTrader. There are other platforms that allow autotrading, but there aren't nearly as many products available to work on them.
Does the broker permit your trading style? This is very important if you plan to newstrade or scalp. Some brokers might suspend you. Others will cancel your winning trades (but never your losing trades). Certain extremely unethical brokers will decide that your trading style has caused them "damages" and will confiscate as much of your account as they feel like.
How low can you go? Some brokerages allow you to open an account for $1. Some brokerages allow you to trade nanolots (1 cent per pip of xxxUSD pairs) or even lower. On the other end of the cost spectrum, there is one very well-rated brokerage which requires $50,000 to open an account. If you want to live test EAs or other trading systems, nanolots are a good way to do it without risking a lot of money. If you have plenty of money to trade with and are just looking at changing to a better forex broker, this won’t be that big of an issue for you.
Do they offer swap-free (Islamic) accounts? Followers of the Islamic faith are forbidden to charge or pay interest. People who want to hedge a trade with a negative swap pair also would like to avoid paying interest. Whether for religious or hedging reasons, be careful - many "swap free” accounts have a daily fee that can cost significantly more than you would pay for swap interest.
For typical accounts, how are the swap rates? It's normal to charge a little more on negative swap than what a trader gets paid for positive swap, but some brokers use this as another way to squeeze even more money from hard working traders. Some brokers charge negative swap both ways on some or even all pairs. If you rarely leave trades open for very long and can avoid the time that swap is charged, this won't affect you. For those who trade specifically to collect interest, this could be one of the most important factors in picking a broker.
How can you move money in and out of your account? Some brokerages only do wire transfers and charge some pretty high fees for the privilege. If you plan to move several thousand dollars every time, this isn't too bad. If you want to withdraw $50 or $100 at a time, then a $25 or more wire transfer fee really cuts into profits. Look for a brokerage with ways to fund and withdraw that are acceptable to you. Don't wait until you've made some money and then find out that it's difficult and expensive to get your profits. When you first fund your account, put a little extra in and test the withdrawal process with the extra money just to be sure you can get money back out. Personally, I like a brokerage that has free withdrawals by check. Sure, it takes a few days longer, but I don't have to pay any fees.
What currency pairs does the broker have available? Some only have a few, other have a huge range of choices. If you only want to trade the major pairs, this shouldn't be a problem for you. If you like trading anything that moves, look at brokers with broader offerings. Some brokers even offer non-forex products on the same trading platform. Keep in mind that some brokerages have fewer pairs on their demo accounts than on their live accounts. Some also have fewer pairs on mini accounts than on regular accounts. If this information isn't listed on their website, you'll need to contact them to ask.
I'm sure there are at least a dozen things I left out. As you can see, some of these features will be very important to you, and others you won't care about at all. Everyone's list will be a little different.
Break your list into 2 pieces. First, the list of things you MUST have. Any broker that doesn't meet these requirements is one you will not consider at all. Take everything on your second list and put it in order of priority for you.
Now comes the hard part. There are broker comparison tables out there, but finding one with all of the features you want listed will be hard, if not impossible. The other way to approach this is to call up FPA's broker reviews, sorted by rating. Start with brokerages that are 4 or 5 star rated with a reasonable number of reviews. Skim through the reviews and make sure there are no significant problems getting money out of the account. Then check the broker’s website, make sure they can open an account for someone from your country. If so, then see if they meet the absolute requirements of your first list.
Depending on your list, you may find no 4 or 5 star brokers that meet your absolute requirements (when I picked my primary broker, I didn't). If so, go through the 3 star brokerages. Your goal should be to find several brokerages that meet not only your absolute requirements, but also many or all of the desirable features second half of your list.
This is so important I'm going to repeat myself. Exclude any brokerage with complaints about significant problems getting money out of accounts. Why work hard trading forex to make your fortune if you can never withdraw any profits? By significant problems, I don't mean that one person whined about a single withdrawal taking a few days longer than expected. I mean people who seriously tried to withdraw money, made many attempts, and it took much longer than it should, or (worse yet) they never got the money. If you have some strange urge to send your money away with absolutely no chance of ever getting any of it back, mail it to me and I promise never send it back to you.
Unless your standards are very low, you probably have a short list of brokerages now. Reread the reviews and examine the websites of each of your candidates to make sure there isn't anything about any of them that you can't live with. Then rank them by how well they meet the requirements of your second list.
Now comes the time to open demo accounts for the best 2-4 brokers on your list. Demos don't perform exactly like live accounts, but will let you get familiar with the trading platform(s) your candidate brokers offer. Unless a brokerage will let you open an account with less than $10, I would personally avoid any brokerage that says to skip demo trading and go straight to live trading. A legitimate forex brokerage should give you a chance to learn how to use their trading platform without risking real money if you accidentally press the wrong button.
Check the website of each of your candidate brokerages to see how informative it is. See how many different ways there are to contact support and try them all. Ask all sorts of questions and see how quick and complete the responses are. Make sure to get all possible information about how to add money to your account and how to withdraw your money. Be aware, some brokers do require more information to process withdrawals than deposits. Have a scanned copy and photocopies of your ID ready to send to the brokerage if these will be needed either to open the live account or to withdraw your money from it.
Now it's time to open a real account.
Pick the one broker from your candidate list that you are the most comfortable with. Deposit a little more than their absolute minimum to open an account. Place a few trades of the smallest amount they permit over a day or two.
Can you remember what you need to do next? That's right! Try to withdraw a small amount of money and see if this is easy or not. If they give you significant problems, close the account, withdraw all of you money, and move on to the next broker on your list.
Assuming the brokerage has passed all the tests you have given to them so far, trade small quantities with them at first. Treat the new brokerage the same way you would treat a new trading system and use the most cautious levels of risk management at first. If all goes well, scale up until you are
trading as you normally would. Watch out for large , excessive spreads, frequent requotes, and all the other stupid broker tricks that somehow end up making traders lose a few extra pips here and there. If you encounter too many problems like this and the staff at the brokerage can’t fix them, then close the account and try the next broker on your list.
Remember, good brokerages can go bad. Well-regulated brokerages can go out of business with little or no warning. Never let your guard down. Double-check all of your account statements. Keep an eye on the reviews for your brokerage. If you see complaints about withdrawal problems, try withdrawing some of your money to see if it's a real problem or just an impatient person who likes to complain. If your brokerage is regulated, check the regulator's website at least once a month to see if there are any new issues.
There is no single perfect forex broker for everyone. If everyone followed a broker selection system like this, then the worst brokerages would quickly go out of business, and the rest would soon realize that they need to work very hard to earn and keep the respect and business of forex traders.
I look forward to seeing what features others consider to be important when selecting a forex broker.
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- 05-27-2008, 12:12 PM #1
How to select a forex broker
Last edited by Pharaoh; 09-28-2009 at 06:58 PM. Reason: Updates
- 05-28-2008, 01:30 AM #2Private
- Join Date
- Mar 2008
- Seattle, WA
- 05-28-2008, 02:19 AM #3Private
- Join Date
- Mar 2008
- Seattle, WA
What a great contribution, P.
I have actually spent the last month researching Fx brokerages for my own account and for others' I intend to trade with POA. Even with my roughly 35 separate criteria (!) you have pointed out a couple of things I hadn't thought of.
A few other points I am considering include:
1. Is the firm a or an ECN?
(I don't think I can bring myself to work with a )
2. If it's a , how do their spreads compare with other brokerages and/or the interbank market?
3. Does their platform allow the trader to place limit orders INSIDE THE SPREAD? (This one is extremely important to me, even though I'm not a scalper. Restrictions that place limit orders far away from the spread, cut into the trader's profitability to an unacceptable degree!)
4. What is their point; and how do they determine what will be liquidated when it is reached? (Of course, that won't happen to ME.
5. Another important one for many people is: Do they accept IRA accounts?
I'd say these are the major additional issues the average retail trader would want to know. Generally, if the trader has an account of at least $20,000, they are going to qualify to use brokers that offer better terms. Some of the brokers with better terms require $25,000. Others $50,000. Others $100,000. If a person is trading with $100,000, they can pretty much call the shots, and should not be going through a broker that accepts smaller accounts because the terms won't be as generous.
I hope this additional information is helpful. I can tell you that, because I will be managing others' accounts of varying sizes, I have spent MANY hours performing this due diligence. MB Trading is among my 5 top domestic (U.S.) picks; but there are others that have a slightly different set of advantages and acceptable disadvantages. When I'm finished with my research, I expect to offer my findings out as an Introducing Broker (...that is, until I no longer have to work my second and third jobs! Then I will post the information on the FPA website. But by that time, the array will have changed so much, I'm sure I'll have to do the research all over again to be current!)
In the meantime, I hope this info will be helpful to people.
Best wishes and happy trading!
Last edited by dances with Forex; 05-28-2008 at 02:28 AM.
- 05-28-2008, 06:51 AM #4
As far as which countries have the best regulations, I read somewhere that Canada actually insures the balance in your account against the broker going out of business (but not against losing trades). I think if the Swiss get through their current regulatory fiasco, they will probably be pretty good. I'm not sure about the rest of Europe.
NFA in the US and FSA in the UK are ok. At least they provide you with some method to complain if your regulated broker starts doing strange things. Maybe one of our UK based traders can give some more info on comparing the NFA and the FSA.
Some of the countries in Central America and the Caribbean have regulations that are worth about as much as the paper they are printed on. Others may actually have solid regulations (no, I don't know which ones in that region are good and bad). If you are thinking of opening a forex account anywhere that used to be a port of call for the pirates of the Caribbean, check the regulatory agency carefully to make sure they really have some sort of enforcement authority and have actually used this authority at some point. Otherwise, you may find your broker has run up the Jolly Roger and seized all your pips.
- 05-28-2008, 07:17 AM #5Recruit
- Join Date
- May 2008
- 05-28-2008, 08:55 AM #6Recruit
- Join Date
- Feb 2008
firstname.lastname@example.org as a private mail.
- 05-28-2008, 11:08 AM #7
Until a "perfect" brokerage emerges, don't believe anyone who says "I know what brokerage is just right for you" without knowing what you need in a brokerage. Even if we could select the current "best brokerage" in existence, it won't be the right brokerage for all traders.
- 05-28-2008, 11:57 AM #8Private
- Join Date
- Mar 2008
- Seattle, WA
...however (following Pharoah's comments to sinexhomebiz) any brokerage that accepts $100 accounts is generally going to have a number of things working against you, just to make their efforts worthwhile. Still, trading with $100 is worth doing, if it's just to learn how to trade in preparation for better days.
- 05-28-2008, 03:09 PM #9Private, 1st Class
- Join Date
- Dec 2007
- 05-28-2008, 03:38 PM #10
Seriously, what good would that information do you if I mentioned one that wouldn't accept traders from your country or failed to meet some other absolute requirement you have? And if I name one that's somehow completely perfect for you, what about the hundreds of people that the broker I name won't be perfect for?
Since I haven't used SNW, I don't know which brokers to use (if that's really somebody's ONLY requirement) other than the ones Felix has mentioned.
I'm not handing out easy answers. If you want those, ask any IB and they'll be happy to tell you whatever you want to hear (at least up until the time you put your money in the account at their brokerage). I am providing a method for traders to try to find the best broker to fit their needs. If you think this is a waste of time, I suggest you could better use your time opening accounts at randomly selected brokerages and testing our their trading potential.
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