How To Choose The Best Forex Broker
The forex market is the largest financial market in the world. Since the forex market operates without a central marketplace, you need to choose a forex broker who would help you execute your trades suceessfully. A number of brokers offer trading platforms today and, therefore, choosing the best forex broker is a challenging task. The five key aspects that you should consider when choosing a forex broker are discussed in this article.
#1: Regulatory Compliance
The most important aspect to look for in a broker is the proof of regulation. Working with an unregulated broker can cause a great deal of problems for you. To give you an idea, imagine that you want to dispute a trade facilitated by the broker you are working with. In the case of an unregulated broker, you cannot approach the regulatory authority at all. This is to say that if you choose to work with an unregulated broker, you will not get any legal protection. Another reason as to why you should not work with an unregulated broker is that you will lose all your money if the broker goes bankrupt.
Again, a flashy website does not ensure that the broker is reliable. You should make sure that you choose a broker from a country where the regulatory environment is strong. Each country may have its own regulatory authority, but what you need to find out is how strongly it is enforced in the country. As a general rule, you should choose to work with only with a regulated forex broker that has established operations in a country and where the regulations are strictly enforced.
#2: Account Offerings
The account offerings vary from one forex broker to another with respect to the following:
A) Leverage and Margin
The leverage offered by forex brokers ranges from 50:1 to 200:1. Leverage is the loan extended to you, a margin account holder, by the broker. For example, if the broker is offering you a leverage of 50:1, it means that you can hold a position valued at $50,000 in case you have deposited $1,000 into your trading account with the particular broker.
Leverage works in your favor, if you are holding a winning position. This is because it greatly enhances the profits that you can earn from a trade. On the other hand, it magnifies your potential losses if you are holding a losing position. Therefore, leverage has to be chosen with extreme caution.
Commissions and Spreads
Forex brokers make money through spreads and commissions. Brokers that charge commissions often offer a specified percentage of the spread, which is the difference between the Bid and Ask prices of the currency pair you are trading, that is available to them. Some brokers do not charge any commissions, but they make money by offering wider spreads.
To give you an example, brokers may offer you a fixed spread, say three pips, (pip refers to the minimum price change unit in forex) or variable spread depending on the volatility in the market. If the broker is offering you a EUR/USD quote at a three pip spread of 1.3943 1.3946 and you are buying a position at 1.3946, it means that you have already lost three pips because you can sell it immediately only for 1.3943. The wider the spread the more difficult it will be for you to make profit. Typically, popular or most traded currency pairs are offered with tighter spreads and thinly traded pairs are offered with wider spreads.
Minimum Initial Deposit
Most forex brokers ask for only a small initial deposit to start trading. Look for a regulated broker that offers a minimum deposit in the range of around $50. Your buying power will be higher when you employ the leverage. This is one reason why currency trading is popular among investors and new traders. Many forex brokers offer standard, mini as well as micro accounts that require you to deposit amounts of money initially.
Ease of Depositing Funds and Withdrawing Money
The deposit and withdrawal policies vary from one broker to another. Further, brokers may allow you to deposit funds in several ways including credit/debit card, PayPal, wire transfer, etc. Typically, withdrawals are allowed through wire transfer or check. Brokers may also charge a fee for the services offered by them. Best forex brokers often offer deposit and withdrawal terms that are favorable to you. It is, therefore, important that you carefully go through the terms and conditions.
#3: Currency Pairs Offered for Trading
A large number of currency pairs are available for trading, but only a few are traded the most. These pairs have the greatest liquidity. They are USD/JPY, EUR/USD, USD/CHF and GBP/USD. A forex broker may offer you a huge selection of currency pairs, but you should check whether the broker is offering the currency pairs that you are interested in trading. Best forex brokers always offer the most traded currency pairs.
#4: Customer Service
Trading in currency occurs round the clock. Therefore, a broker that offers the reliable customer support service is the best forex broker to work with. Another aspect you need to take into consideration is the modes of communication that the broker makes available. Further, the customer service personnel should be able to clearly answer your questions related to regulation, spreads and leverage.
#5: Trading Platform
As the currency trading platform is your portal to the markets, you must make sure that it is visually appealing, easy to use, offers technical and fundamental analysis tools and it is easy to enter and exit trades.
These are the key aspects to be considered when choosing the best forex broker to work with. However, there are other considerations as well. These include customization options, availability of automated trading options, order entry types, backtesting capability, trading alerts and strategy builders offered. Find out if the broker you are planning to work is offering a free demo account. This will help you to try out the platform prior to signing up.
It is important to choose a forex broker who instills confidence in you. Therefore, it is a good idea to do a little bit of research prior to committing yourself to using a brokers platform. It also contributes to improving your chances of succeeding in the competitive forex market.
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