How To Choose A Forex Broker

We have had people ask us how to choose a Forex broker for online forex trading. Let’s say that you are just getting started in online forex trading and you don’t even know how to choose a Forex Broker. Or, perhaps you have been trading foreign currency for some time, but you want to check out what other forex brokers are available. Maybe you’re not happy with your current forex broker and you want to find a new one. Here we will discuss in detail what we think you should know about choosing a forex broker. Also, you can check out our recommended brokers section to see some of the forex brokers that we feel are worthwhile. Also, you can download our free Forex Broker Checklist to use for your broker search.

Low Spreads or Transaction Fees for Online Forex Trading

Transaction costs are calculated in pips. The lower the better. The spread is the difference between the Bid and Ask prices. While most forex brokers don’t technically charge commissions or fees for their services, they get their piece of the action by the spread. The higher the spread, the less money you will make on any given transaction. Generally, spreads are currently between 2-5 pips on average. Be careful of forex brokers advertising 0 pip spreads. They are likely charging fees in some other way. Read the fine print.

Leverage Options and Margin Requirements

Leverage can be a good thing, or a bad thing, depending on how you use it. Better brokers will have different leverage options, meaning a selection of leverage ratios. Perhaps a 400:1 leverage ratio is too high for you. Do they have a 200:1, or 100:1 option? 400:1 is great leverage, but remember, while it can help multiply your profits, it can just as quickly multiply your losses. The higher the leverage, the higher the risk. The lower the leverage, the lower the risk. Perhaps if you are just starting out, you'd like to start with 100:1 leverage. As you get more experience and can take bigger risks for bigger rewards, are you able to move it up to 200:1, or some other ratio. You need a forex broker that can offer the leverage values you want.

Of course, you also need to remember that lower leverage means lower risk of a margin call, but it also means that you will get a lower profit. Basically if you have limited capital, you might want to make sure that your broker offers high leverage. If capital is not a problem, you can rest assured that any broker that has a wide variety of leverage options should be sufficient. Different leverage options let you vary the amount of risk you are willing to take. For example, less leverage (and therefore less risk) may be preferable if you are dealing with highly volatile currency pairs. The lower the margin requirement (meaning the higher the leverage), the greater the potential for higher profits and losses. Margin percentages vary from .25% and up. Low margin requirements are great when your trades are good, but not so great when you are wrong.

Most online forex brokers pay interest on a trader’s margin account. The interest rates normally fluctuate with the prevailing national rates. If you decide to take an extended break from trading, or if you use good money management techniques and maintain a good free margin balance, the money in your margin account will be accruing interest. Keep in mind that most forex brokers do not allow you to accrue interest unless your margin requirement is at least 2% (50:1).

Forex Brokers Customer Service

Almost nothing is as valuable as good customer service, especially with online forex trading. Even if you don't use it, you should have access to some minimum service requirements. Does the Forex broker have 24-hour support? Can you contact them by phone? Email? Chat? When you talk to them, do the people seem knowledgeable? If you can't get a hold of them right away, or if you email them, is their response time short? Contact several brokers and ask them questions. Find out which of them works best to help you and answer your questions, or even to help train you in forex trading. If you don't feel that warm fuzzy from a given broker, move on to the next one. A word of caution... service might be better before you open and fund a real money account. If you find that to be the case, withdraw your money and move on to a new forex broker.

Quality of the Forex Broker

If you get a personal recommendation by a friend for a great forex broker, definitely check them out. In any case, you want to make sure you have a quality broker. Forex brokers are not required to be registered or regulated with any agency, since the Forex market is labeled as an “unregulated” market. However, the better brokers will typically be registered as a Futures Commission Merchant (FMC) as well as being regulated by the Commodity Futures Trading Commission (CFTC) and a member of the National Futures Association (NFA). The CFTC and NFA were made to protect the public against fraud, manipulation, and abusive trade practices. The NFA has a basic Forex Online Tutorial, as well as a quick primer about trading in the foreign currency market.

The quality brokers are usually affiliated with large banks or lending institutions because of the amount of capital they have available. All this information is available if you do your research. Just make sure your forex trading broker of choice is backed by a reliable institution.

Forex Brokers Trading Tools and Research

Better brokers have trading tools available for their account holders to aid them in their forex trading. Also, most brokers will have some form of research available or displayed directly on their trading site. A good broker will have real time charts and prices available, current news and data, technical analysis tools, and possibly support for 3rd party forex trading systems. And you should always make sure they have a practice trading account or free trial so you can test their trading platform and service.

Online Forex Trading Platform

Most, if not all, Forex brokers allow trading over the Internet. The backbone of any online forex trading platform is their software system and as such is very important. Get a feel for the forex trading options that are available by trying out a trading demo account at different online brokers. Their forex trading platform should include the ability to view real-time currency exchange rate trading quotes, an account summary showing your current account balance with realized and unrealized profit and loss, margin available, and any margin locked in open positions.

Here is an example of a trading platform called MetaTrader:

Metatrader Online Forex Trading Screenshot

Most forex trading platforms are either Web based or a client-based program you can install on your computer:

Web based trading software is hosted on your broker’s trading site. You won’t have to install any trading software on your own computer, and you can log in from any computer that has an Internet connection. These are preferred by most brokers, who think they are more safe and reliable. Java-based software tends to be less vulnerable to attack from viruses and hackers during transmissions than "download and install" software.

A client-based software program, or one that you download and install, will only allow you to trade on the computer it is intalled. These typically run faster, but most forex trading programs are operating system specific. For example, most brokers only offer their trading platform application to run on Microsoft Windows.

Forex Brokers Available Currency Pairs

Make sure that the prospective broker offers, at minimum, the seven major currencies (AUD, CAD, CHF, EUR, GBP, JPY, and USD).

Minimum Trading Size Requirement

The size of one lot may differ between forex brokers, spanning from 1,000 to 100,000 units. A "standard" lot is 100,000 units. A "mini" lot is 10,000 units. A "micro" lot is 1,000 units. Some online forex brokers even offer fractional unit sizes called odd lots allowing you to choose how many units you want to trade per lot. Pick a forex trading broker that meets your trading size requirements. If you are only starting an account with a couple hundred dollars, you'll want to find a forex broker that allows mini lot trades.

Rollover Charges, Interest, or Swap Fees

Rollover refers to the process of closing open positions for today’s value date and opening the same position for the next day’s value date at a price reflecting the difference in interest rates between the two currencies. This is also known as Interest or Swap Fees.

In the online forex trading market, rollover is required because all trades must be settled in two business days. In accordance with international banking practices, forex brokers automatically roll over all open positions for settlement to the next date at 5 pm EST. Rollover involves exchanging the current position for a position expiring the following settlement date. For example, for traders who execute on Monday, the value date is Wednesday. An exception occurs when a position is opened and held overnight on Wednesday; the normal value date would be Saturday, but because banks are closed on Saturday, the value date is actually the following Monday. Due to the weekend, forex trading positions held overnight on Wednesday incur or earn an extra two days of interest. Trades with a value date that fall on a holiday also incur or earn additional interest.

Rollover interest can provide an added stream of profit or loss to a trader. As an example, a trader that believes the Great Britain Pound's exchange rate will stay roughly equal to the Japanese Yen's for the next year, will buy the GBP/JPY pair since the Pound has a higher interest rate and will accrue rollover interest. An account would be credited around $20 a day for a standard GBP/JPY lot. If this trader’s prediction comes true and the exchange rate is the same a year later, he would earn a year’s worth of interest on the position. Since there are around 365 interest bearing days in a year, that one standard lot of GPY/JPY could potentially earn $7,300 (365 × $20).

For the most part, over long term trading transactions, all the interest earned by or paid to forex brokers holding any open positions will essentially equal out. Thus the average trader can essentially ignore any Rollover or Swap Fees. Advanced traders will try and use swap fees to their advantage, earning the interest rather than paying it, when holding open positions.

Forex Broker Trading Hours

Nearly all online forex brokers align their forex trading hours of operation to coincide with the hours of operation of the global Forex market: 5:00 pm EST Sunday through 4:00 pm EST Friday. Online forex trading occurs 24 hours a day between Sunday evening and Friday evening, so you will want to select a forex broker that will let you trade during all market hours.