The 4 Most Important Factors in Choosing a Forex Broker
Probably the one question I am most frequently asked by new aspiring forex traders is, “How do I choose a broker?” It is, indeed, a critical question, and having the right broker can be critical to your success (or lack thereof) as a trader. I had it easy – when I first started trading forex, there probably weren’t more than about 10 brokers to choose from for a small trader like myself. Now there are dozens, maybe hundreds. Well, following are what I consider the 4 most important things to consider in choosing a broker:
1 – Trustworthy, Honest
This simply has to be number one, because it doesn’t do you any good to make a fortune in your trading account if you can’t get your broker to give you your money when you want to withdraw it. The worst horror stories from traders are those where they relate that they opened an account with $500, made $10,000…but then when they tried to make a withdrawal, could never get their broker to give them their money. And, unfortunately, that very thing has happened to hundreds of traders.
So how do you find a reliable broker? I believe the best procedure is to read the comments in forex forums (like Forex Factory and Forex Peace Army) regarding the brokers you’re considering. Also, talk to people you know who are successful traders – most of them will be more than happy to recommend a good broker (I recommend mine all the time!). There are always good and bad comments, but you should still be able to get a pretty solid sense of whether a broker is essentially reliable. The other thing I recommend everyone do is, once you’ve opened an account, early on in your trading make a withdrawal request, just to see if you encounter any problems. With a trustworthy broker, there should be no problems and you should receive your money within 1-2 business days, within 5 business days at the most (that’s a week – if your broker takes longer than that to get your money to you, I’d recommend looking for a new broker).
2 – Spread is (Almost) Everything
The critical importance of getting good (i.e., small) spreads cannot be emphasized too much, but is often overlooked. The difference between just a 1 pip spread and a 2 pip spread can really add up over time. If you’re a scalper or day trader who makes an average profit of 10 pips per trade, then the difference between a 1 and 2 pip spread makes a 10% difference in your trading profits. Spread also effects the triggering of stop orders and take profit orders.
In the beginning of my trading, I lived with an average 2 pip spread on Eur/Usd, and 2-3 pips on Gbp/Usd and Aud/Usd – I just didn’t know any better. With my current broker, I now get less than half a pip on Eur/Usd, and half a pip to 1 pip on Gbp/Usd and Aud/Usd. Even on slightly exotic pairs, like Usd/Sgd or Usd/Nok, I don’t usually have to give more than 1 and a half pips at most. It makes a huge difference over time. Just one example – it’s a lot easier to scramble out of a trade at breakeven if I enter a trade and the market just “dies” on me, that is, just flatlines, going basically nowhere, to the point where I no longer wish to be in the trade. Just the slightest blip in price can enable me to get out at even or better.
There’s an excellent spread comparison tool at myfxbook.com that compares – live – the spreads from 60 brokers on the most commonly traded pairs. It’s not 100% accurate all the time, but it’s certainly close enough to give you a clear idea of whether a broker’s spreads are good or bad.
Another factor to consider, that’s related to spread, is whether your broker engages in the annoying habit of “requotes”. Requotes are when you bring up the order box for a market entry order, click buy or sell…but instead of executing your order instantly, the broker requotes the price spread. I’ve never had this problem with brokers I’ve used, but I’ve heard of traders who had to endure 2 or 3 requotes before finally getting their order accepted – and this often resulted in them having to enter 2-4 pips away from the entry point they were originally seeking. That can flat out kill your trading – if your broker requotes, find another broker.
Slippage – that is, the difference between your actual order fill price and the price where your order is placed – is the final factor in regard to spread. Personally, the broker I now trade with is great on slippage – that is, I don’t have to worry about there being much slippage, not more than 1 pip at most. In even the fastest markets, my stop orders are almost always filled exactly where I have them placed. But I’ve heard of traders experiencing slippage of several pips on almost every trade. Again, that’s something that can kill your trading success. A broker that you see a lot of slippage with is not a good broker.
3 – Reliable Trading Platform
It’s essential to trading success that you use a broker whose trading platform is reliable. What that basically means is that you can count on it to always be up and running. Imagine this nightmare scenario: You place a quick market entry order, but before you’re able to enter take profit or stop loss points on it, your trading platform goes down, and stays down and inaccessible for several minutes, possibly even an hour or more. I don’t even want to think about what kind of whopping loss might result.
Fortunately, this is another factor that can easily be determined simply by doing a little research into comments on brokers in any number of forex trading forums. If trading platform problems exist with a broker, you’re almost certain to find traders complaining (loudly) about it in a forex forum, so definitely keep an eye out for those kind of comments.
4 – U.S. Regulated or Not?
Some traders recommend only trading with brokers that are regulated by U.S. government rules and organizations, the thinking being that such brokers should at least be basically honest, and that should you have a problem with them, it’s easier to get help in resolving the problem.
I am not one of those traders.
Honestly, I despise the current U.S. trading regulations on forex trading, specifically the margin requirements (as much as ten times higher than what you can get with an offshore broker), the no-hedging rule, and the, in my not-so-humble opinion utterly idiotic FIFO rule.
Current margin requirements mean that U.S.-regulated brokers offer no more than 50:1 leverage. Well, that’s fine if you’ve got plenty of capital to work with, but I started my forex trading with a whopping $50 in a micro account – with 50:1 leverage, I never could have gotten off the ground. And one of the things I have always most liked about forex trading is the opportunity it offers the “regular guy” (or girl) to start out with just a small amount of money and still have a reasonable chance of gradually making themselves a fortune.
The worst, most useless and annoying, U.S. regulation? In my opinion, it’s the FIFO rule. FIFO stands for “first in, first out”. The rule basically says that if you have multiple positions in place, and you go to close one, you must close out the one you first entered. I often have multiple positions on in a given currency pair, where I’ve bought or sold additional lots at different price levels. Want to be annoyed (AND lose money!)? Try this: A market suddenly starts moving rapidly up or down, and you want to close out part of your positions quickly, either to take profits or minimize losses. You click on a position, hit “close order”, but instead of your order being closed, a screen pops up reminding you of the FIFO rule – that you can only choose to close out the first position you entered (even if that’s NOT the one you want to close out) – and then, as the market continues to move, costing you more and more money, you have to take the time to scan through your list of positions to FIND the one you entered first. I had this happen to me exactly once – I have never traded with a U.S.-regulated broker since. Instead, I enjoy the freedom of trading with a broker who offers me the ability to trade the way I want to, rather than the way the government wants me to.
Again, there are many traders who only feel comfortable trading with a U.S.-regulated broker, and who ask me, “How do you know your money is safe if the broker isn’t regulated by the U.S. government?” My reply? What, like U.S. government agencies are the ONLY regulatory agencies in the world that can be trusted?? Like there are NO honest brokers anywhere in the world unless they’re under the governmental thumb of the U.S.?? MY question is, “What makes the United States feel it has the right to regulate every brokerage firm in the entire world?”
The bottom line is, if you’re more comfortable trading with a U.S.-regulated broker, then do that. If you’re more comfortable trading with an overseas broker that offers less cumbersome trading rules, then go with that.
I hope this article has been helpful for you. What I most hope you take away from this article is the simple importance of considering important factors to your trading and doing simple research in choosing a broker. As always, these are just my thoughts and opinions – I’m not God. If you’d like to take a look at the brokerage firm I use, just email me and I’ll be happy to direct you to them for consideration. I wish you all the success in the world in your trading.
Jack Maverick is a writer and active currency (forex) trader and educator, who writes regularly for Winners Edge Trading. You can contact him at https://plus.google.com/u/0/103534926809963693894/?rel=author and find his latest novel, the psychological thriller “A Cross of Hearts”, on Amazon at http://www.amazon.com/Cross-Hearts-J-B-Maverick-ebook/dp/B006GHJ0ZC/ref=sr_1_5?s=books&ie=UTF8&qid=1392904532&sr=1-5&keywords=A+Cross+of+Hearts