Q&A

5 Tips for Choosing Forex Trading Brokers


Jul.10.2014

So you've got yourself educated and learned all about forex trading. Now want to select the best forex trading broker.  This is actually the question I get the most from new Invest Diva members: "Which forex broker do you recommend?"

There is indeed an overwhelming (and growing) number of forex trading brokers and even the thought of picking only one of them could give you a headache. But the fact is, choosing the right forex broker for you needs a lot of consideration.Think of it as dating. With the advent of dating sites such as Tinder, Match, Catch, Splash, (sorry I haven't been in the dating scene for a while so not sure if I'm being accurate on this topic) you have millions of options not only to choose the right dating app, but also to find the love of your life. The good news is: Finding the right forex broker for you is MUCH easier than dating! However you do need to put some time to do your research and choose the best one  that is suitable to you and YOUR trading style.

There are many different forex trading brokers who offer online platforms for retail traders. Some of them have reliable platforms, and some don’t. Some charge a larger transaction fee, and some a smaller one. Some are regulated by reliable authorities, and some aren’t. The list goes on.

First, let’s clear up some misconceptions about forex trading brokers. If you find yourself thinking any of the following, question your assumptions.

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  • "This broker ranks #1 for searches related to forex trading in my geographic area, they must be reliable."  I’m going to let you in on a secret. A broker I worked closely with in Japan always showed up fist on Google on searched for "best forex broker in Japan" for years. But it’s not because they necessarily the best forex broker in Japan. It’s because they were one of the first forex trading brokers in Japan, they had an old domain that’s been in use since 1996, and because they did a decent job on search engine optimization. But nothing more outstanding than 50 other brokers targeting the same keywords. Fortunately for us, it appears Google put a lot of weight on those first two factors. Also, in today’s online-search-aholic society, it is important to remember that some of these brokers pay large amounts of advertising fees to the search engines so that they pop in front of prospective clients’ eyes.

 

  • “This company has hundreds of employees and is making millions, they must be good to trade with.” Yes, that firm is good at something, but it might not have anything to do with forex trading. They might be big because they know how to form the right kinds of partnerships, a skill that may not translate into forex trading success for their clients. I personally know a broker who only grew large based their own real estate investments. And to be sure, they then spent millions of those dollars in advertising to get more clients. The best forex broker for you might not be a giant firm. Bigger is not always better.

 

  • "This broker offers great discounts and free signals, they must be reliable." Sure we all love discounts and sales. Some brokers have discovered this secret, and use it to attract customers. But you have to be careful; every rose has a thorn. Sometimes the brokers use these promotions in order to push new traders into risky investments or into using unreliable products and signals, so it is important that you do your studying and know your broker before you take advantage of a promotion.

Would you hire an accountant because he looks good, offers you a bouquet of flowers, speaks well, or has worked for a lot of companies? How much do these traits have to do with the job of being an accountant? Likewise, you need to look beyond the superficial to select the right broker. Here’s how to do it.

Step 1: Decide what you need.

Do you need to trade only forex, or you want to have a larger portfolio including ETFs, bonds, commodities and stocks? Do you want to day trade, or invest long term? Are you retired and want to have a modest portfolio growth of 4% per year? Have you recently got a massive bonus and want to trade actively after working hours? Did you just sell your startup company to Facebook and are looking for something exciting to do everyday? Or maybe you recently got a divorce and want to put that alimony into good use. If you can't decide what type of trading/ investing is right for you, it is important start out buy educating yourself about different ways you can put your extra money into work.

Step 2: Do your research.

Once you know what you want, go through the forex trading brokers checklist. Here are the 5 most important factors to check:

  1. Regulated or Not You want to invest your money with an authorized broker. The level of security is the first and foremost characteristic of a broker. You don’t want to hand over your hard earned money to a company that only claims it’s legit, right? Invest Diva thinks being regulated by at least two strict international regulatory authorities is mandatory. This depends on the country the firm is located. In the U.S., a reputable forex broker will be a member of the National Futures Association (NFA) and will be registered with the U. S. Commodity Futures Trading Commission (CFTC) as a Futures Commission Merchant and Retail Foreign Exchange Dealer.

    Strict international regulatory authorities include the following:

    NFA (National Futures Association)

    United States

    FSA (Financial Services Authority)

    United Kingdom

    FSA (Financial Services Agency)

    Japan

    FINMA (Financial Market Supervisory Authority)

    Switzerland

    ASIC (Australian Securities and Investment Commission)

    Australia

    DFSA (Danish Financial Supervisory Authority)

    Denmark

    AMF (Autorité des marchés financiers)

    France

    BAFIN (Federal Financial Supervisory Authority—in German, Bundesanstalt für Finanzdienstleistungsaufsicht)

    Germany

    FRA (Financial Regulations Agency)

    Russia

    Brokers that are authorized through the MiFID (Markets in Financial Instruments Directive) to operate in more than one country inEurope, but are not regulated through the authorities of those countries, are not considered acceptable!

  2.  Transaction Costs: Every time you exchange money and place a trade on a trading platform, you are subject to a transaction fee, whether you like it or not. These costs are usually the spread or a commission fee, which is, in fact, one of the ways most brokers make money. You didn’t think the brokers were hosting a charity party that will give you the opportunity to make money with no costs, did you? But different brokers have different business plans, and therefore different transaction costs.It is natural to look for the most affordable transaction cost for trading. However, if you are not a day trader or scalper, you can put less emphasis  on the commission fees.
  3. Minimum Account Size: If you are new to investing trying out the markets for the first time, it is important that you start with a broker that allows you to open an account of a smaller size that suites your disposable amount of money. There are typically three account sizes when it comes to forex brokers:- Micro- Mini- Standard (pro)The micro account is the smallest, followed by the mini account. They both deal with smaller amounts of currency, making them more user-friendly for beginners and those who do not want to risk a lot of money. The gains may be very much less in these accounts, and yet they remain popular with small-time investors and newcomers because of their accessibility. Both mini accounts and micro accounts give traders the opportunity to invest limited amounts of money without fear of being wiped out.
  4. Trading Platforms: It is important to choose a broker that offers the most up-to-date and user-friendly platform where you can easily view the charts, execute your analysis, compare currencies, use different indicators, and place orders. Finding the best U.S. forex trading platform is actually one of the harder things to do in the forex world. Many forex trading platforms and brokers do not accept U.S.-based traders, and the list of those that do not continues to grow. However, there are still several out there that do have platforms that accept U.S. traders, and some are even specifically designed for investors that come from the United States.What is the difference between MetaTrader and Mirror Trader? Watch Video
  5. Customer Service: Reliable and always-ready-to-help customer service is crucial for stress-free and enjoyable forex trading. Most brokers offer 24/7 online and phone customer service. You don’t want a customer service operation that pushes you into large investments or into buying the broker’s products. You can test your broker’s customer service by pretending that you are a forex newbie and asking all sorts of questions about trading, the firm’s products, and the company. Brokers may be kind and helpful during the account-opening process, but have terrible "after sales" support. If they sound sketchy, simply move on to the next broker!

Step 3: Open demo accounts and play around

Once you know what you want and have worked hard on identifying a number of candidates to host your trading activity, it is time to play hard! Pick at least two brokers that fits most of your criteria and open up demo accounts. Trade in different market environments. Learn all the different features of each trading platform. If you have questions, don't be afraid to ask. Most demo trading platforms are very similar to their live counterparts, but not exactly the same. There may be a difference in speed of execution, slippage, and platform reliability (most of the time live accounts are more reliable than demo accounts).

Summary

The level of security is the first and foremost characteristic of a broker. You don’t want to hand over your hard earned money to a company that only claims it’s legit. Other important factors to check before opening a live account include but not limited to execution and slippage, trading platforms, customer service, and minimum account size. Many of this also depends on your trading style as well. For example if you only want to test-drive forex trading, it would be important for you to choose a broker who allows you to open an account with $50 or something. If you are a short-term trader, slippage would become an issue.

If you need to explore these factors more extensively, enroll in the Forex Coffee Break Education Course today and explore over 100 videos that cover everything you need to know about forex trading in the most fun, straightforward and entertaining way.

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