Choosing the right Forex broker in 7 steps: Part 1
Is your broker honest?
When you decide to enter the Forex business, there are several steps you should take.
First, you must learn the basics of trading and the financial world. You can get some of this wisdom here on our site, reading our Forex strategies, and also the daily and/or weekly analysis. Second, you have to set aside some funds and open an account with a broker. But before you throw all your hard-earned money on one broker, you should evaluate and compare different brokers with minimal live accounts. Only then can you open an account and fund it reasonably. Picking a broker is not that simple; there is a process to the madness and we are going to help you understand how to choose a broker that´s right for you.
Honesty is the first rule when it comes to choosing a broker. There are different types of brokers, some of them are more reliable than others. Some brokers will lose your account in different ways, such as price manipulation, stop loss hunting or simply refusing to return your funds. Therefore, before you open a live account you should do some research about their credentials... are they licensed and if so then where are they registered? I am not implying that all brokers in the first world countries are angels or that all the brokers in developing nations are not, but from what I´ve seen some of the dodgiest brokerages are registered in countries like Cyprus, Mauritius, Cayman Islands etc. So you would be better off if the broker you opened a real account with is registered with one of the following regulatory agencies:
The Commodities Futures Trading Commission (CFTC) and the National Futures Association (NFA).
The Financial Conduct Authority (FCA) and Prudential Regulation Authority (PRA).
The Federal Financial Supervisory Authority ( BaFin)
Autorité des Marchés Financiers (AMF)
Swiss Financial Market Supervisory Authority or (FINMA) and Association Romande des Intermédiaire Financiers (ARIF).
Hong Kong –
The Hong Kong Securities and Futures Commission (SFC).
Commissione Nazionale per le Società e la Borsa (CONSOB)
The Australian Securities and Investments Commission (ASIC)
New Zealand -
The Financial Markets Authority (FMA)
The Danish FSA
If there is misconduct, or if your broker declares bankruptcy, you might be entitled to a reimbursement. That comes from the broker obligatory safety deposit, which is a prerequisite in order to get a license from the regulatory authority. The reimbursement depends on the individual country´s financial regulation. Some of these brokers might have operating offices, call centers or even headquarters in other countries in order to cut costs, but the country where they are licensed is what matters, so don´t get put off by foreign accents. There are many good brokers that are licensed and registered in other countries, but as always be assertive when first checking. When you open a live account, you should make a small deposit and then withdraw it to see how fast the broker is with these procedures.
Broker or introducing broker (IB)?
Are you better off with a broker or with an introducing broker?
The other step in choosing a broker is to decide if you want to open an account with a prime broker or with an introducing/carrying broker (IB). You can check the legal section on their website and/or call the company and ask them if they are a prime broker or an introducing broker. There are advantages and disadvantages to both. When you open an account with a prime broker, you sign a contract directly with the broker so you don´t have to go through the third/middle party if there are issues. When you open an account with an IB, the funds and securities are deposited at the prime broker. Primary brokers usually offer lower spreads because one of the ways which the introducing brokers make profits from is by adding 0.2-2 pips to the spread provided by the broker. An IB might be very reliable, but there´s little to nothing the IB can do if you don´t want to move your account from that primary broker for certain reasons (i.e. bad performance).
On the other hand, being with an introducing broker has its benefits. Many prime brokers only accept clients with large capital, so if you have limited funds the best way is to go through an IB which collects the funds of many small clients and then deposits them with the prime broker. The prime broker may have relationships with different brokers so you´ll have a choice of the broker or platform which is suited to you. Some larger IBs have departments of attorneys, accountants, administrators, IT hosting companies, and data providers which can help their clients. This can be very useful to small retail traders who cannot negotiate with the prime brokers on their own, therefore lacking legal protection. Right now the small clients of AlpariUK are wishing they had traded through an IB, because AlpariUK has bankrupted after the EUR/CHF cap removal by the SNB and the liquidation company (KPMG) has decided to chase the negative balances caused by that event. The clients cannot negotiate this by themselves or take legal action because it would be very expensive for them, but if they had traded with AlpariUK through an IB then the IB legal office would take care of it. An IB can often help with a capital introduction as well.
Your trading style
Does the broker suit your trading style?
Many new traders adapt their trading style, according to the broker´s operating style, when it should be the other way around. You should find a broker that suits your trading style. Therefore, you should read reviews, ask and try out different brokers so you can find the one that suits your trading style best.
Scalpers – If you are a long-term trader, then the spreads are not that important for you, but if you are a scalper the spreads can make the difference at the end of the day. You have to find a broker that allows scalping first of all and offers low spreads most importantly.
News traders- There are many traders that trade the news as soon as it publishes or even before it if they think they can anticipate the market reaction. But we know that the market gets very itchy and volatile in the few minutes before and after the news, so if you are this kind of trader you want to choose a market execution broker that executes the trades quickly. There´s always some slippage when the market is volatile, so brokers with the smallest slippage are the best for news trading. Besides that, you would want a broker who doesn´t freeze the screen or widen the spreads too much during news times.
Exotic traders-There are many people who live in countries which use minor currencies, therefore they might have a deeper knowledge about that country’s economic status, politics etc., so obviously they prefer to trade their currency. Not many brokers include exotic currencies in their platforms and those who do have extraordinary wide spreads, so these types of traders have to more thoroughly check the background of brokers in this industry.
This is the first part of this article which includes the first 3 steps: Broker security, Broker or Introducing Broker (IB) and trading style. These are very important aspects of the broker selection process, but the other four steps are equally as important and they are: Fees, Platforms, Reliability, and Extras.
We will publish the second part in a couple of weeks so check our website to keep updated on new articles.
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