* = Importance from * to ***
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Regulation
The Forex market is an
unregulated market meaning there is no central exchange.
However, forex brokers themselves are regulated. In the US they
should be registered as a Futures Commission Merchant (FCM) with
the Commodity Futures Trading Commission (CTFC) and a member of
the National Futures Association (NFA).There are other
regulatory bodies as well. Like ARIF and SFDF from Swiss. You
can verify a broker’s status with the NFA and ARIF from there
websites. If you do not find the broker you are interested in
listed with the NFA, look for another broker that is listed and
has a clean record.
Reputation
Unlike brokers acting on other
financial markets, Forex brokers are attached to banks or
lending companies because they require large amounts of capital.
Brokers need to be registered with a regulatory authority such
as the Commodity Futures Trading Commission (CFTC) for US
companies or the SFC (Securities and Futures Commission) for
Hong Kong.
If the broker is part of a large group of companies, you can be
more confident since it will be watched by the group itself.
Nevertheless, this is not a 100% proof strategy, as we all
remember Refco, one of the largest Forex and commodity brokers
in terms of capital, going into liquidation. ? So finding out
how long the broker has been established on the Forex market
constitute an important criterion. The longer the broker has
been active on the market, the more chance you will have to
gather feedback from traders who have used their services.
Trading Platform
Good trading software will show
live prices that you can actually trade at, not just indicative
quotes. It will offer Limit and Stop orders, and ideally will
let you attach these to your entry order.
One-Cancels-Other orders are another useful feature - they mean
you can set up your trade and then leave the software to get on
with it. And the most important feature of all - can you
actually understand the platform? Having all the bells and
whistles is of no use if you can't use them, so again, get a
demo account and give it a go.
· How reliable is it during volatile periods and news
announcements?
· How many currency pairs can you trade?
· Do they offer automated trading?
· What other special features does it have? e.g. Trading from
the chart, complex orders, trailing stops, etc.
Execution of Orders
How fast are orders executed?
Is it possible to execute automatic trades?
What is the maximum amount you can trade before you need to ask
the broker for a price?
Does the broker trade against its clients? (Management of
pre-market stops, etc.)
Types of Accounts
Individual investors may choose
between different types of accounts:
Demonstration accounts or
"demo accounts"
They allow you to test the trading platform and the related work
environment. Free practice accounts are a great way to
experience Forex trading since you can truly put yourself in the
shoes of a trader with a live account. The demo account is of
course set up with fictitious money.
Mini accounts
Choose a mini account if you are just starting on the Forex
market. It is possible to use leverage higher than in a standard
account but as we will see later, using leverage is not
necessarily a wise move when starting trading on the Forex.
Standard accounts
These accounts are the real thing. The minimum capital is higher
than the mini account and the leverage is less important. The
bank account where your money will be placed is also not to be
neglected and it is advisable to choose a broker who uses a
well-known and well established bank. Some brokers also offer
the possibility to open an account in various currencies: euro,
dollar, yen, etc. Beware: if you decide to trade in a currency
which is not that of your own country, you need to take into
account the exchange rate between your national currency and the
currency you decided to trade with.
Currency Pairs
Find a broker that offers the currency pairs that you are most
interested in trading, or at least a good variety to choose
from. Currency pairs tend to have different breathing patterns
and especially when starting out, you want to have a good menu
of selections.
Spread
Because currencies, unlike futures and stocks, are not traded
through a central exchange, the spread can be different
depending on the broker you use, so it's well worth checking a
few out before you open an account.
Most forex brokers publish live or delayed prices on their
websites so you can compare spreads, but check if the spread is
fixed or variable. A fixed spread means exactly that - it will
always be the same no matter what time of day or night it is.
Some brokers use a variable spread, which might appear to be
nice and small when the market is quiet, but when things get
busy they can widen the spread, which means the market must move
more in your favor before you start to make a profit.
Fixed spreads are generally slightly wider than the variable
spreads are when at their narrowest, but over the long term
fixed can be safer.
· How tight is the spread?
· Is it fixed or variable?
· Is it larger for mini accounts?
Initial Deposit
You should look for a forex broker that has a low initial
deposit. It is not a matter of the amount you should start
trading with, but if a broker wants many thousands just for you
to open an account, it is questionable. The ideal initial
deposit requirements should be $300 to $500 or less.
Customer
Service
Forex trading hours vary depending on what currencies you are
most interested in trading. With that in mind, it is important
to find a broker with 24 hour customer service. The forex
markets can be wild at times. If you had a question about order
execution or a closed order, you should be able to get your
question answered no matter what time it is.
A good test of a forex broker’s customer service ability is to
contact the support desk and ask some questions by phone. Keep
notes on how responsive they are to your questions and what
attitude they have about answering them. Remember, you are
trusting these people with your money. You need to feel
absolutely comfortable that all your needs will be addressed.
Leverage
Leverage allows you to multiply your position on the market:
with a leverage of 100:1, you will use $100 on the market for
each $1 of your capital. All brokers offer 50:1 leverage
minimum. Using a 100:1 or even a 400:1 leverage is not
necessarily an advantage, because the more you increase your
leverage, the more you increase the risk. To sum up, leverage is
not a determining factor when choosing your Forex broker, since
all brokers do offer sufficient leverage for all types of
trading.
Margin
It is the deposit required to open or maintain a position. If
you experience high losses, your margin deposits available
decreases in order to control your position. In any event, your
risk is limited to the size of your initial capital. When your
margin deposit goes down to a low percentage, your broker will
have to close your positions still open so as to ensure a
positive balance on your account. Each broker applies his own
"margin call" policy, i.e. the operation consisting in closing
your positions. You therefore need to check what margin you need
in order to hold your positions, as well as whether it is fixed
or variable.
Rollover Policy or "TOM-NEXT"
(Tomorrow Next Day)
A position is said to be "rolled over" when it is being held
overnight. In this case, you pay or receive what is called a
rollover fee. This fee is calculated by the difference in the
interest rates that apply to the two currencies in the currency
pair you chose to trade in. Each currency bears an interest rate
imposed by central banks. For instance, 3.75% for EUR or 5.25%
for USD. This rate is applied at the end of each day to your
open positions. If, for instance, you purchased EUR/USD at 15:00
on Monday, you will see a loss displayed on your order since the
EUR rate is below that of the USD. If you had a seller's
position, a profit would have been added to your position. These
rollover fees are neglectable amounts in the short and middle
term, but they can add up in the long term. The way brokers
manage these interest rates varies. You therefore need to check
whether these interest rates are indeed applied to both profits
and losses, if you need a minimum size in order to hold your
position or if there are special conditions applicable.
Slippage
The quote difference occurs when market volatility increases: as
quotes change very quickly, by the time you place an order and
it is executed, the quote has already changed again. Either the
broker makes you pay the last quoted price or not your asking
price, or your order has not been executed. Some trading
platforms do have a tolerance threshold: if the real price
difference is less that X pips, your order is being executed at
the real price. This phenomenon is common during economic
statistics. You therefore need to select a broker whose data
flows are fast enough, so that you are quickly informed of price
changes and your orders executed rapidly.
· What is the broker's policy on slippage?
· What sort of slippage can you expect in normal and fast moving
market conditions?
Commission
This term "commission" designates a fixed sum of money taken
prior to a position being opened. Most brokers offer
commission-free trading. Should a broker ask for one, you need
to check whether or not he offers additional services
(marketplaces news, economic analysis, etc.). So, how do they
earn a living? Saying that brokers offer commission-free trading
is only partially true, since they get paid for their services
partly through spreads. Their "commission" is therefore
proportionate to the size of your position. Brokers also have
additional internal mechanisms at their disposal to earn money
but this does not fall within the scope of this page. You can
use the commission and spreads comparative table in order to
help you retain the broker most suited to your needs.
