subject: Do You Know The Truth About Choosing the Right Forex Broker? [print this page] Do You Know The Truth About Choosing the Right Forex Broker?
As you read the rest of this article, please remember that I've been where you are now or were recently!
Have you talked with anyone you know who is trading? Are they trading in the Forex Market? I know that when I first heard about this I was really excited about how easy the advertisements made it sound. Little did I know at that time that up to 95% of individual traders are only borderline successful and most loose their entire account in the first 6 months. Obviously, I didn't want to join that awful number, so I started with research. First I would need a broker. Now, I'm not new to trading, I've been trading stock options for almost 5 years off and on and I have two separate brokerage accounts. But, neither one of the accounts will support the Forex Trading market the way I would need.
I read about the differences between what are called Trading Systems and Trading Robots. They both seemed to have their merits but the robots would require a specific kind of account, where the systems were manual and did not require that level of trading access. In other words, robots are only compatible with one type of trading system.
Since I didn't want to be one of those "losers", I decided I would probably want to try both types of trading with separate accounts. This way I could keep track of which method was most successful. I also wanted to start with a very small amount of funds.
After all, how many of your friends or family members have teased you about your ideas on investing. Almost all of mine did. Can you relate? I finally just stopped talking to almost anyone. Who needs all the naysayers anyway? Some of them are still whining about not finding jobs yet.
Did I tell you I like to be more proactive? But I'm also careful, and I hope you are too! Ok, on with the checklist. I knew I would need something more than just a regular broker for this. I like to make a kind of table of boxes with headings for all the following questions across the top and the names of the brokers down the left side. Then start reading the websites and answer the following questions...
1. How are they licensed?
All legitimate brokers are licensed and regulated under the authority of their local (or country) of origin. For instance, the National Futures Assoc. (NFA) and Commodity Futures Trading Commission (CFTC) are the regulating authorities in the US. A broker based in Switzerland must conform to the regulations of the Swiss Federal Dept of Finance (the FDF). And, yes, you will be trading a "commodity", namely money or more specifically currency.
Why is this important to you? A regulated Forex broker must provide financial reports to the regulating authorities of their origin. There are fines and they could lose their license if they do not. This allows you, as an investor to dispute a resolution when you believe that the trade was not executed fairly. Now, this probably won't be important to you unless someone recommends some off the wall name company you've never heard of. Most of the mainstream companies are licensed properly.
2. What are the trading rules of each broker?
Each broker has a set of rules that must be followed in order to trade in their platform. These features can be benefits to you depending on how you plan to trade. Some robots use what is called fractional trading. Some systems, actually the best systems, are firm about money management. This is a very good thing as far as I'm concerned. I have no intention of losing all my funds on one trade!
Fractional trading is when you are allowed to trade in uneven lots or units. For instance 100 units versus 92.5 units. This would be like buying 1.2 shares of stock instead of one or two full shares.
This is something to think about because some systems and some robots let you set your money management to 2% or 5% of your account. This way you are not risking your whole account on one trade.
Next there is the "spread". The smaller the spread allowed the better the situation is for some systems or robots. The spread is the difference between what the broker must pay for the currency and what he will sell it to you for. It always very close to the buy or sell amount, sometimes as small as.001. Obviously the smaller the trading spread the better it is for us.
The last concern we have is how fast and how consistent the broker is in the speed and execution of the trade. I know when I'm trading an option, it's really important that I get filled NOW, when I hit the button. But, sometimes the broker has so many orders coming in that the lag can cost me pennies on the trade and I have to reset my buy or sell price. Maybe you don't think that pennies are important, but sometimes it can mean the difference of a profit or a break-even trade. It takes time to reset a trade and even though it's only a minute or two it can make a difference.
3. What is the cost per trade, or per contract?
We know the broker must be able to make money also, but how do they stack up against each other? I want the best of all worlds if I can get it. Obviously, the least cost to me, but do I have to make any trade-offs to get this? Each broker will list their fees and terms of the trades.
4. What kind of trading do they allow?
Some brokerage houses are not set up to handle Forex robots. There is a certain level of trading platform needed for a robot because they trade mostly automatically. The robot must be able to access your account. If you are using a system instead of a robot you have more flexibility.
