Top do’s and don’ts when choosing a Forex broker

February 19, 2016 09:40

Choosing the best Forex broker to meet your needs, is a bit like choosing a bank - just much more complicated. There's certainly numerous brokers vying for your attention with a multitude of offers. Who do you trust your money with? What should you look at? What should you ignore?

The important stuff

Regulation

If you are looking for one and only one factor to consider when choosing a forex broker - stop here. Regulation is the single most important factor.Look for a Forex trading broker joined to at least one reputable regulatory authority in your region. Why? Because licensing to a regulatory authority is expensive. If the brokerage is licensed, it means they are not planning to go anywhere and are serious about their business.

Regulated Forex brokers usually offer safety-orientated benefits that you won't get from less serious brokers. But be aware that while benefits like a Negative Balance Protection Policy are helpful for minimising risk - they do not protect you against it.

Reputation

There are plenty of Forex trading brokers out there. In fact, low entry barriers for opening a brokerage mean several hundred new ones spring up each year.

But the other side of the story (the part you usually don't get to hear or want to be part of), is that many of these brokers shut down within their first few years of operation.

To avoid losing your money in a broker's collapse, choose a reputable one with at least 10 years experience - better still 15 years. This will considerably narrow your choice, because there's only a handful of top Forex brokers who meet this criteria.

Yes, reputable Forex brokers may have higher spreads or not offer the hottest bonus. But will you really care about these points when your non-regulated or non-secured broker, goes bust and takes your money with him?

Software / platform

The most popular trading platform out there, is MetaTrader 4 (MT4). It has:

  • desktop, mobile, web and now MAC versions
  • a huge number of plug ins, automated trading systems, etc
  • offers varied innovative versions like MT4 Supreme
  • has a community of traders you can follow if you don't want to actively trade yourself.

The Forex broker you choose has to support MT4, even if you don't think it's important right now.

It's true, you might not need all these things today, but are you sure you won't need them soon? Are you certain you don't want to test that automated trading system that's perhaps been making 20% per month for the last year?

If your broker does not support MT4, you should understand that you will eventually want to switch to one that does. Changing a broker is a huge headache and a lot of paperwork - avoid it by making the right choice from the start.

Instruments

Forex financial trading is the world's most liquid and volatile market, so having the flexibility to change your trading strategy is critical. You can look at instruments as opportunities - the more a Forex broker offers, the more chance you have to adapt. Choosing a Forex broker with few instruments - gives few future options. And as previously noted - changing brokers later is a hassle best avoided.

Global but local

Nothing beats the support and service you get from talking face-to-face - especially when there's a problem.

Even if you plan to trade online and never visit the office, having a broker office in your country is a huge advantage. Here's why. If the broker has invested in a local office in your country, it means there's plenty of clients there and the broker is interested in serving them.

This generally means you will get better service, including:

  • better ping to trading servers (since they are located close to your country)
  • better response to your requests (broker wants to keep reputation in your country)
  • available support in your language
  • personal offers
  • trading in your currency, which eliminates international transaction charges
  • you can visit the office and get help from a real person.

Look out for a broker who has the office in your country and given the regulation is OK, consider this as a very good reason to choose them.

Global presence is good because it indicates the size of the trader and of course, the bigger the better for safety. But this is the lesser consideration.

Offline education

Forex and CFD education is generally always important, because it helps prepare you for the ins and outs of successful trading. Offline education is a valuable decision point for choosing a broker. However, online education is not (see under What to ignore for more about online education).

With local education on offer, you can visit the broker's office for a face-to-face Q&A in your language. Meeting your broker in person, also allows you to judge their authenticity or otherwise for yourself.

A local office will generally offer Forex study materials in your language too. For example, there's not much available in Romanian about how to trade Forex and CFD, but there are several brokers who speak the language and even provide educational activities geographically close by.

What to ignore

Bonus offers

Bonus is without doubt one of the Forex broker's most advertised features. All you have to know is that:

  • bonuses come with conditions attached; and
  • these conditions are usually not set to add customer value.

One practical advantage that bonuses supposedly give you, is additional leverage. However, be aware that this offer is aimed at getting you to trade higher volume than you may want or need to. You can read more about why this should not attract you in the next section.

So why do brokers advertise bonuses, if accepting the offer clearly puts you at a disadvantage? Well, because it works. There are only a few people like you (those who actually read articles like this before they make the decision). Most people are happy to make the choice when they see BONUS!!!

In fact, when you see BONUS!!! it should make you cautious. Is that broker trying to hide unreputable regulation behind it?

Leverage / margin

Fact: most unsuccessful traders use high leverage (otherwise called margin). Don't get sold on promises of leverage of 1:500 or 1:1000. This is irrelevant, as you should rarely need to use leverage above 1:100. And if you do, then your trading strategy is probably quite risky and thus unstable.

Most of the bonuses given by brokers just increase your leverage, so you should ignore them too.

As long as your broker provides 1:100 leverage, you're fine. Most of the European brokers provide leverage of 1:100 and above. However, US brokers provide just 1:50 and that will not be suitable for some traders.

Online education

Again, all education is valuable. But, online education is not a reason to choose a broker. Why? Because education offerings are abundant. Just google free Forex training and you'll find webinars, articles, videos, FAQs, tutorials - there are thousands of materials online. Most of this stuff is provided by brokers for free and you don't have to be their client to use it.

However, as mentioned above, you should be looking at brokers who provide offline education (seminars, training sessions) in your city and language.

Trading conditions

Spreads, pips and commission represent the price you pay for the service. Going for the cheapest offer is not recommended and certainly not a reason to choose a broker. Why? Because brokers offering the lowest spreads are usually focused on getting as many traders as possible, to meet their costs. They are not concerned with the quality of their provided service or support to you - you are just another number. It's better for you to pay a little more for these conditions. Get your expected quality of service by basing your Forex broker choice on the important stuff.

Minimum deposit amounts

Don't necessarily look at the minimum deposit amounts. If you are serious about trading, you will be putting in at least a few thousand USD/EUR and there are very few top Forex brokers whose minimum deposit amounts are above 1000 USD.

If you just want to test this theory with a small deposit - get a demo account and see how long your money lasts.

In fact, the more the minimum deposit amount is - the better and bigger clients this broker has. You want to be in good company, right? And you want to get the services that the big guys get? The opposite applies too - a broker offering a minimum deposit of 10 USD, will probably have a lot of small clients and no time to serve you the way you deserve.






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