Simple Steps For Picking A Good Broker
One topic I always get a lot of questions about is forex brokers.
Specifically I get asked about which brokers are good, reliable, honest and so on.
Unfortunately, I can’t recommend a specific broker for legal reasons. I could end up getting sued if someone has a bad experience with a broker I suggest.
However, I can share a simple process to help you find a suitable forex broker.
It should eliminate the bad actors and give you the best chance of getting a broker who’s both competent and honest.
So let’s start with the most important thing …
The first thing to check is if your prospective broker is regulated -- or not.
A good broker must be registered with the local regulating authorities. Being registered doesn’t necessarily mean the broker is honest and competent, but NOT being registered is a major red flag. An unregistered broker should be ruled out from consideration immediately.
In the U.S., a reputable forex broker will be a National Futures Association (NFA) member and will be registered with the U. S. Commodity Futures Trading Commission (CFTC) as a Futures Commission Merchant and Retail Foreign Exchange Dealer too.
Any broker who’s a member of both organisations will state this on their website, typically in the “About Us” section. Other countries have their own regulatory bodies, of course. I’ve listed the most common ones for you:
- United States: NFA, CFTC
- Canada: BCSC, CIPF, OSC
- United Kingdom: FSA UK
- Switzerland: SFDF, ARIF, FINMA
- Sweden: Swedish FSA
- Denmark: Danish FSA
- Spain: CNMV
- Japan: FFAJ, FSA Japan
- Hong Kong: SFC
- Australia: ASIC
- Dubai: DMCC, DGCX, DFSA, ESCA
Make sure your prospective broker is registered in any jurisdiction in which it’s operating.
So what about commissions and spreads?
Many “brokers” advertise that they charge no commissions. Since they don’t work for free, these “brokers” are actually dealers, meaning that instead of commission-based income, they instead make their money with wider (and usually fixed) spreads.
So what’s a spread? It’s the difference between the bid price and the ask price for a given currency pair.
The bid price is where you can sell that pair right now, and the ask price is where you can buy it. Dealers make their money by buying from you at the lower price and selling to you at the higher price.
For example, a EUR/USD quote of 1.0942 - 1.0945 has a 3 pip spread (945 - 942 = 3 pips). A fixed spread broker will keep that spread at 3 pips in all but the most volatile market conditions. (In cases of extreme volatility the spread will get even wider to compensate the dealer for additional risk).
A spread of 2 or 3 pips may not seem like much profit for the dealer, but it adds up quickly over hundreds and thousands of transactions.
Be aware that the wider the spread, the harder it is for you as a trader to make money.
In the EUR/USD example I used above, the price has to move 3 pips in your favor before you break even on a EUR/USD trade. With a 5 pip spread, getting to break even requires a 5 pip move, and so on.
Real brokers follow a different business model.
A broker who applies commissions will not offer a fixed spread. A commission-based broker will instead feed you quotes from a variety of dealers competing with each other. (This competitive spread is almost always much smaller than a fixed spread as the bid/ask spread you see is based on aggregated data from multiple dealers, not just one.)
The end result here is that you pay for your trade at both kinds of brokers, even the ones who are actually dealers advertising “no commissions”.
The next topic to look at is the ease of deposits and withdrawals.
Each broker has specific account withdrawal and funding policies which may be influenced by their jurisdiction and internal business practises.
You might fund your account with a credit card, PayPal, wire transfer, bank check or other online payment mechanism such as Skrill.
Which one is most convenient for you?
Also pay attention to any fees charged for deposits or withdrawals. Obviously you want lower fees and the fastest service here.
Diversity of trading instruments is also important.
Here at The Pattern Trader, I trade in as many as 28 currency pairs from the 8 major currencies. I also trade the precious metals (XAUUSD and XAGUSD) although US-based brokers don’t offer spot such gold and spot silver contracts. (This is likely due to pressure from the futures industry in the US, which prefers not to have competition for their gold and silver futures contracts.)
So make sure your broker offers all 28 pairs. Not having access to all 28 pairs will limit your ability to make trades in the most promising markets as opportunities unfold.
The next point to consider is communication.
Is the broker’s customer service any good?
The forex market trades 24 hours a day for 5.5 days a week, so your broker’s customer support should be available on the same basis. How easy is it to speak with a live person? How fast do they reply to your emails?
Consider making a quick phone call to assess the quality of customer service on offer, including the representative’s ability to concisely answer questions regarding spreads, leverage, regulations and company specifics.
There’s a potentially controversial area to consider too.
Online forex broker reviews are both good and bad.
They can provide helpful information about complaints, particularly if the same type of complaint keeps popping up as you read through reviews.
For example, pay close attention to reviews about cancelled profits or denied withdrawals. These are major red flags. It’s entirely possible for one trader to be mistaken (or lying) about a particular problem. But if you see a pattern from several traders then it’s best to look at another broker.
Good reviews can be very helpful about identifying ‘problem’ brokers who are dishonest or incompetent.
However, there are a lot of unnecessarily negative reviews from newbie traders who are their own worst enemies. These traders choose to blame the broker instead of their own rash decisions, so don’t take every negative review as the unvarnished truth.
Conversely, beware of reviews which are too glowing. Some brokers submit anonymous promotional reviews to boost their image and ranking on review sites.
The bottom line is that reviews can be a very helpful screening tool when choosing a broker, but judge them objectively to filter out dishonesty, advertising or trader (not broker) error.
Now pick your top two or three brokers and open a demo account at each firm.
Put on some trades while learning the features of each trading platform (most brokers will use standard platforms such as MetaTrader or cTrader but a few use proprietary software.)
Enter a few immediate execution orders and see how they get filled.
Enter a few pending orders (both stop and limit orders) and check their execution too.
Place as many trades as you realistically can to see how well each broker executes them and provides feedback on any problems that might crop up.
If everything checks out, and each broker’s online reputation in the review communities seems sound, you’ve probably made a solid choice.
Has this helped you feel more confident about picking a broker?
Are there any other factors you think should be considered?
Let me know your thoughts …