Choosing a FOREX Broker

Just as in any other trading market, there are numerous brokers in the FOREX market to choose from. Here are a few things to keep in mind as you shop for one:

Choose a broker that has lower spreads. The spread is the difference between the price which currency can be bought and the price at which it can be sold at any given point in time. FOREX brokers don't charge commissions, so this difference is how they make their money; therefore, the lower the better for you.

Make sure that the broker is backed by a reliable financial institution. FOREX brokers are usually affiliated with large banks or lending institutions because of the vast amounts of leverage, or capital, that they need to provide. The broker should also be registered with the Futures Commission Merchants (FCM) and regulated by the Commodity Futures Trading Commission (CFTC). This information should be found on the broker’s website or that of the parent institution.

The broker should provide market tools and research. FOREX brokers usually offer many different trading platforms for their clients. These platforms often include real-time charts, technical analysis tools, real-time news and other data. Brokers also usually provide technical commentaries, economic calendars and other research information.

The broker should offer a wide range of leverage options. Leverage is the amount of money that a broker will lend you for trading. It’s expressed as a ratio of the total capital available to the actual capital invested; for example, a ratio of 100:1 means your broker is lending you $100 for every $1 of actual capital that you put up. Leverage is necessary in FOREX because the price deviations, which are the sources of profit, are so small, merely fractions of a cent. Lower leverage means lower risk of a margin call, but also a lower degree of profit. A variety of leverage options allows you to vary the amount of risk that you’re willing to take.

Make sure the broker you choose offers the tools and services that are right for the amount of capital that you have. Many brokers offer two or more types of accounts. The smallest is known as a mini account; requires you to trade with a minimum of, perhaps, $250, and offers a high degree of leverage (which you’ll need in order to make money with such a small amount of initial capital). The standard account lets you trade at a variety of different leverages, but the minimum initial capital required is around $2,000. Premium accounts, which often require significant amounts of capital, allow you to use different amounts of leverage and often offer additional tools and services.

Beware of Sniping and Hunting. This refers to brokers prematurely buying or selling near preset points in order to underhandedly increase profits. Of course, no broker is going to admit doing this. And since there are no blacklists or organizations that report such activity, the only way to determine which brokers do and which ones don't is to talk to other traders.

Make sure the broker follows strict margin rules. When you are trading with borrowed money, your broker has a say in how much risk you take. This is because you are required to sign a margin agreement when you open an account. This agreement states that since you are trading with borrowed money, the brokerage has the right to interfere with your trades, at its discretion, in order to protect its interests. Depending on your position in the market, this could cost you a great deal of money. Again, talk to other traders or visit online discussion forums to find out who the honest brokers are.