Written by Robert McKinley

How to Choose A Forex Broker

Forex trading is done through Forex brokers or dealers. A Forex broker is an entity (individual or company) that buys and sells currencies per a Forex trader's orders. Since you will need a broker to trade Forex, you should do some comparison work before you choose one. Let's start with some basics:

Does the broker provide 24 Hour Support?

Since Forex is a 24-hour market, 24-hour support is very important. So make sure you can contact the broker 24 hours a day should you need support.

You should also check on the quality of support by assessing the expertise, general manners, and overall responsiveness of the broker's representatives. One way to do this is to contact their help desk either by phone, chat, or email (or all three) and notice how promptly and effectively they respond to you.

The Broker's Online Trading Platform

Good Forex brokers try to make your trading experience on the Internet as easy as possible. The core element in their effort to do so is their "Trading Platform." This is the sofware they use to enable you to place your orders easily and quickly. The part you will see is what is displayed to you on your computer screen.

Here are some things you should look for:

• Real-time currency exchange rate quotes
• An account summary that shows the following items:
  • Your current account balance
  • Realized and unrealized profit and loss
  • Available margin
  • Any margin that may be locked in open positions.

Trading platforms are, typically, either Web based (Java), or client-based programs you can install on your computer. So ...

1. Since Web based trading platforms are hosted on your broker’s web site, you won’t have to install any software on your own computer and you’ll be able to log in from any computer with an Internet connection.
2. With client-based trading platforms, which you download and install, you can only trade on your computer.

Most brokers prefer Java-based software programs because they consider them to be safer and more reliable.

Mini and Micro Accounts

Most brokers offer both Mini Accounts and Micro Accounts. These accounts are a good way for new traders to get started in real-money trading after they have become somewhat experienced and comfortable trading in a free demo account. Check with a few brokers to see what money requirements they have for these two accounts. But be sure to practice first in a free demo account before you risk real money.

Features and policies to look for:

• Available Currency Pairs: At the very least, the broker should offer the seven major currencies (AUD, CAD, CHF, EUR, GBP, JPY, and USD).
• Transaction Costs (Remember, transaction costs are calculated in pips.): The fewer pips the broker charges per trade, the more profit you the trader can make. So be sure to compare the pip spreads for each broker. A bid/ask spread of 2 pips, is better than a spread of 3 pips.
• Margin Requirement: Lower margin requirements produce higher leverage while also creating a potential for bothhigher profits and losses. So be wise about margin percentages and remember that while a low margin requirement can appear to be very attractive when trades are working in your favor, it can also hit you hard when trades are going against you.
• Minimum Trading Size Requirement: Lot sizes can vary from broker to broker, though, typically, a "micro lot" is 1,000 units; a "mini lot" is 10,000 units; and a "standard lot" is 100,000 units. There is also something called an "odd lot" that is offered by some brokers, which allows the trader to set the size of the lot.
• Rollover Charges: Check the broker's policy on Rollover Charges. For a review of what rollover charges are and how they work, see "How Forex Works."
• Margin Account Interest Rate: Typically, a broker will pay interest on the money you have in your margin account. The interest the broker pays can fluctuate according to national rates. The main point here is that while your money is in a margin account, it accrues interest. Therefore, you may want to compare interest rates from broker to broker and also check on their policies regarding margin account interest. Most brokers don't allow traders to accrue interest unless their margin requirement is at least 50:1 (2%).
• Trading Hours: Virtually all brokers are open for business during the hours of operation of the global Forex market, which are 5:00 pm EST Sunday through 4:00 pm EST Friday.

By way of review, keep the following in mind while you're looking for a good broker:

1. Low Spreads: Remember, the "spread is the difference between the buy and sell price of a currency pair. The lower the spread, the better.
2. Low minimum account reqirements: This is especially important for new traders and/or those who do not have large amounts of cash to put at risk in the Forex market.
3. Instant automatic execution of your orders: This is very important. When you place an order, you want it to execute NOW, not at some later time when the market might be quite different than when you placed your order. So make sure you choose a "WYSIWYG" (What-You-See-Is-What-You-Get) broker so that the price you see when you place your order is the price you actually get.
4. Free charting and technical analysis: Free professional charting services that will allow you to trade directly on the charts is a good thing, as is free technical analysis. So look
5. Leverage and margin accounts: Leverage can work for you or against you. If you are new to Forex trading and you choose to trade in a low-margin (high leverage), real-money account, the chances are good that it will work against you. So the wise approach is to practice in a free demo account until you feel experienced enough and feel comfortable enough to try your new skills in a real-money account. Even then, you should proceed with caution when choosing the amount of leverage to use. Some say that a good rule of thumb is to not use more than 100:1 leverage for Standard (100k) account or not more than 200:1 for Mini (10k) account.

Finally, here are some other things you may want to consider:

• If you are considering a broker in the United States you can check to see if the company is registered as a Futures Commission Merchant (FCM) with the Commodity Futures Trading Commission (CFTC) and if it is an NFA member. These two entities were created to protect the public against fraud, manipulation, and abusive trade practices.
• You can also check the registration status of a broker with the CFTC and membership status with NFA. Additionally, you can inquire about any disciplinary history the broker may have by calling NFA at (800) 621-3570 or by visiting the broker/firm information section (BASIC) of NFA's Web site at http://www.nfa.futures.org/basicnet.