As we have mentioned before in order to make a trade you will need a broker. A broker acts as a middle man between you and the market. You instruct the broker to make your trade and they will execute it on your behalf.
There are thousands of different brokers available which makes it difficult to work out who to choose. You need to be careful because there are some brokers out there who are not what they seem.
Anyway here is a list of criteria that you need to go through in order to determine how to choose a broker:
• Regulation
Perhaps the most important factor in determining whether to choose a broker is wherever it is properly regulated. Please only choose a broker that is registered with a recognized regulator!
Look at this way. Why would a broker choose not to be regulated in the right way? Because they have something to hide.
When approaching a broker always ask who they are regulated by. In places such as the UK, US, Australia, Canada etc there are government run regulators such as the UK Financial Services Authority, US Commodities & Futures Exchange and the US National Futures Association (N.F.A.).
The point is CHECK!
• Reputation
The internet is a powerful tool. We know this because you used to read this wonderful article.
Check what other people are saying about a particular broker by searching on the internet.
The point is CHECK!
• Type Of Broker
There are different types of brokers. Some are execution only i.e. they will only act on your instructions and trade when you say. Other brokers will trade your account on your behalf.
Another way of looking at brokers is either market makers or direct execution brokers. The market makers 'make their own market'. They buy and sell from their clients and charge commissions and spreads accordingly. They profit or loose from their clients.
The advantage of the market maker is that they provide extra liquidity in the market and may even get a better price for their clients. However they tend to charge more for this service; it is their compensation.
Direct execution brokers (not market makers) will normally have faster executions, smaller spreads and trading costs.
If you are dealing in very short time frames then it is our opinion that you should use direct execution brokers.
• Spreads
Check the size of the spreads that the broker is charging. The spread is the difference between the BID and the OFFER price as discussed in previous articles in this blog. This will have a big affect on your transaction costs. A market maker will tend to charge higher spreads so compare the spreads across different brokers.
It is worth shopping around.
• Any Other Fees
Some brokers will charge smaller spreads but also a commission which is a percentage of the size of the transaction.
It is an interesting point because some brokers will offer commission free trading but actually they just charge higher spreads and the total charges are higher than a mixture of tighter spreads and commissions.
• Leverage
The amount of Leverage that a FOREX broker will give you is an important consideration as well. The leverage allows you to borrow money from the broker. This means you can control a much larger trade than you would normally be able to do. Typically brokers will have leverages of 100:1, 200:1 but some will even give up to 400:1. The higher the leverage the higher the potential reward and loss. High leverage MUST be used with a proper trading plan or it will kill your account!
• Types of Account
We have discussed before that brokers will offer combinations of normal, mini and micros accounts. If you are new to trading then find a broker that offers micro accounts as you can start with a very small account.
Although you should first start trading with a DEMO account; see below
The type of account will determine the minimum amount you need to deposit in order to open the account in the first place
• Trading Platform - Charting Package
When reviewing different brokers another important factor is the trading platform that they use and the charting packages that is part of it.
Many brokers will provide their own internet based trading platform but in addition a lot of brokers are also providing compatibility with MetaTrader, which is our recommended tool for trading the FOREX markets.
• Stop Loss Facilities
When trading FOREX you must manage your losses otherwise you cannot make a profit in the long run. To manage your losses you need a stop loss strategy and the broker has to provide the facilities. Ideally you need a guaranteed stop loss facility where the broker will exit your position at the price you have decided on.
With a normal stop loss the broker will exit at a price as close to the one you have stated as it can.
The disadvantages of the guaranteed stop loss are that the broker will charge a higher spread for the privilege.
• Demo Account
A key point to consider when you are a beginner is does the broker have a demo account facility? The demo account will allow you to trade with virtual money. Here you can learn how to trade, what to trade and make all the mistakes that you want before committing yourself to a real money account.
As you can see there are a lot of things to consider when choosing a broker. In the future we will review different brokers and rate them according to these criteria.
