Risk Disclosure

"Forex trading can involve the risk of loss beyond your initial deposit. It is not suitable for all investors and you should make sure you understand the risks involved; seeking independent advice if necessary"

Binary Options

Friday, October 16, 2009

Chosing a Forex Broker

When searching for a Forex broker to facilitate your trading there are a number of important factors to consider.
  • Be certain that they are a registered financial concern based in their country of origin. There are many brokers who operate out of the major cities of large countries; but are registered in some small obscure country whose financial laws are inadequate to protect traders. Lodging a complaint with financial regulators in their city of origin will not help as they are not regulated by that country.
In the United States the Forex market is regulated by NFA and CFTC and by logging on to http://www.nfa.futures.org/basicnet/ we can obtain the facts about the Forex Company. We can search for the firm by name to ascertain if there have been or are any pending complaints against the firm.

Recently the NFA have instituted changes that have had a detrimental effect on our ability to trade the market successfully.
  1. These changes affect the placing of market orders like one cancels the other (OCO) used to bracket a trade.
  2. Certain contingent orders like stop losses and limit orders will be affected by the new FIFO rules.
  3. Hedging a strategy used to trade the same currency pair both long and short has been completely outlawed.
These new regulations have made it more difficult for traders to control risk and place pending orders.

Some brokers have instituted temporary measures or fabricated solutions which could back fire against them.

Others have simply instituted the changes to the detriment of their clients, whilst many have recommended that their clients move their funds to a reputable offshore broker regulated by European or British financial authorities.

Until these archaic and draconian measures have been removed by the NFA it will not be possible to recommend any of the US Brokers
  • We also need to check the net reserves of potential brokers as client funds are not always protected in the event of insolvency.
  • There are many websites dedicated to monitoring the activities of the numerous forex brokers world wide. A check on one of these sites can help ascertain whether your potential broker has a good reputation or not.
  • A word of caution here, there are few if any Forex brokers who do not have allegations of misconduct posted on these websites. Many of the complaints are posted by reckless, unsophisticated, uneducated or malicious traders.
Whilst there is no doubt there are certain brokers who are charlatans and crooks, simply out to relieve the unwary public of their hard earned cash there are also reputable brokers who offer a good service to traders with fair and honest dealings who are slated by traders who lose their money.

  • Client service is also of vital importance when choosing a Forex Broker. This is a market that runs 24 hrs a day 5 days a week, and being able to obtain trading assistance via phone, chat, or email at all hours is paramount.
  • Another important consideration is the trading Platform the broker uses. This could be propriety software unique to that broker or a popular trading program like Meta Trader.
Some of the factors to consider are:

  1. Is it professional user friendly charting software? Here we need to determine how easy it is to place orders and customize the charting to suit our needs.
  2. Do they offer demo accounts? Most new traders want to be able to familiarize themselves with the workings of the platform before trading real money on a live account. Experienced traders also use demo accounts to test new trading strategies before implementing them on their live accounts.
  3. Is order execution fast and efficient? Only by placing trades can we determine if the order execution is efficient. What we need to watch for is the time lag between placing the order and broker execution.
  4. Do they have an adequate number of indicators? Trading indicators are used to assist us in our daily trading decisions so we need to be certain that we have all the indicators necessary for us to make those decisions.
  5. Is their chart pricing reliable? The only way we can check pricing is by comparing prices with other reputable brokers. If there are repetitive price spikes that do not appear on other brokers charts then we need to be wary.
  6. What are their charges? Most brokers do not charge a commission on trades so be certain you are dealing with a commission free broker.
  7. Are their spreads competitive? Brokers charge a spread fee. (This is the difference between the buying and selling price) Spreads can vary from broker to broker so be sure the spreads are competitive.
  8. Here we also need to consider if our broker is offering fixed spreads or multi bank liquidity feeds. Many brokers choose not to use liquidity providers and take the other side of the trade, effectively trading against you. Others offer anonymous order execution and therefore have no dealing desk or interest in whether you make or lose money on each trade.
  9. Can the software be customized to sit your needs? Many traders use customized indicators or automated systems to trade so be certain that your trading software can cater for your trading needs.
  10. Is price feed reliable? When trading forex real time pricing is vital. Brokers who are frequently off line or who have numerous price freezes should not be considered. What is the minimum account size? Here you need to determine if your broker can cater for the amount of capital you are willing to risk.
  11. What is the minimum transaction size.Transaction size is relevant to the amount of capital you invest in your trading account. There are standard accounts, mini accounts, and micro accounts available. It is financial suicide to open a standard account with a small amount of capital. Rather opt for a broker who can offer a mini or micro account to suit your capital.
  12. Do they cater for your trading style? Many brokers take a dim view of scalping, and penalize traders for the activity, often only raising the issue when the trader tries to with draw their profits.
  13. Most brokers these days widen their spreads when there are major high impact news releases and consider all pending orders market orders which could be detrimental to the trader. If you are a fundamental news trader you need to consider if the brokers rules will suit your trading style.
These are some of the factors necessary to consider when opening an account with a Forex Broker.

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