Choosing A Forex Broker

With currency trading becoming ever more popular, the number of brokers is growing at a rapid rate. What should one look at when deciding which broker to open an account with? These are the important points to consider.

Spread

Because currencies, unlike futures and stocks, are not traded through a central exchange, the spread can be different depending on the broker you use, so it’s well worth checking a few out before you open an account. Most forex brokers publish live or delayed prices on their websites so you can compare spreads, but check if the spread is fixed or variable. A fixed spread means exactly that - it will always be the same no matter what time of day or night it is. Some brokers use a variable spread, which might appear to be nice and small when the market is quiet, but when things get busy they can widen the spread which means the market must move more in your favor before you start to make a profit. Fixed spreads are generally slightly wider than the variable spreads are when at their narrowest, but over the long term fixed can be safer.

Execution

Some brokers will show live prices on their trading platform, but will they honor them when it comes to pushing the Buy or Sell button? The best way to find out is to open a demo account and give them a test drive. This will also give you the opportunity to see what the speed of execution is like - when you want to buy, you want to buy now, not sit around waiting for ten minutes whilst your order is confirmed!

Trading Platform

Good trading software will show live prices that you can actually trade at, not just indicative quotes. It will offer Limit and Stop orders, and ideally will let you attach these to your entry order. One-Cancels-Other orders are another useful feature - they mean you can set up your trade and then leave the software to get on with it. And the most important feature of all - can you actually understand the platform? Having all the bells and whistles is of no use if you can’t use them, so again, get a demo account and give it a go.

Support

Forex is a 24 hour market, so your broker should offer 24 hour support. You might not be trading at 3am, but that could be what time it is in your brokers head office on the other side of the planet, so make sure there will be somebody there to pick up the phone if things go wrong. You should also check if you can close positions over the phone - essential in case your PC or internet connection crash at a critical moment.

Backing

Finally, before opening an account do a little homework and find out about the company. Forex brokers are regulated, but that doesn’t mean they all have equal backing. If the market collapses, you want to know that they’ve got the reserves to cope with it and will still be around when you decide to withdraw your cash. If a broker is elusive when it comes to questions about their parentage and financial backing, then steer clear.

In Conclusion
Choosing a forex broker isn’t difficult, but don’t rush the decision. Check out a few, and always get a demo account first to make sure you’re happy with the way everything works before sending off your opening balance.

Forex Broker Regulations - Part One

What good is forex broker that you can trade and make money with, but when it comes time to take your money, they don't give it to you, because they don’t have it?

Forex Broker Bust Story. Refco was the biggest forex broker that was worth around $4 billion dollars. In October of 2005, Refco shut down its operations and every trader who had money with them got screwed big time.

Refco was regulated and for some time they were spending not only their profits but also deposits of their clients.
The amounts of money that traders saw on their trading platforms and the amounts of money Refco had in their bank accounts were different by $400 million.

So when the news hit the wire that Refco is running at such deficit, traders panicked and started asking for withdrawals. The only problem was that Refco was $400 million short of what it owed to traders.

There was a trial of course, and whatever assets the company had the court ordered to distribute among traders. I knew some people that had money with Refco. As far as I remember, after all assets were sold they got around 10% of what was owed to them. That means if person had $10,000 in his trading account, he got only $1,000 of it.

Does Forex Broker Charge Commission?

At first you may think that I am crazy :D

Why would I want to pick a broker that charges commissions over a broker that has only spread with no commissions? Let’s discover the answer to this question together.

Forex brokers are not charities. Their purpose is to make money. There are two ways brokers can make money.
First is to charge commission. Second is to collect spread.

Charging commission is the only honest way a broker can make money. If the broker does not charge commission, that means they are making money from spread.

It should be impossible for forex broker to make money from spread in natural and honest forex trading environment.

The purpose of a forex broker should be to connect traders and banks. The purpose of the traders and banks is to compete with one another for best possible price.
That competition is what determines spread in real trading environment.

The only way forex brokers can make money on spread is if they set their own “fixed” spread or add “extra” spread to natural spread. In either case it means manipulation of price.

There is only one party that can have control over prices. It’s either the traders or it’s the broker.

When traders control the prices, there is honest environment of supply and demand.
When broker controls the prices, there is dishonest and artificial manipulation that is the root of many problems.

Manipulation of spread and prices is how most forex brokers screw their traders every day, and most traders don’t even know it. Most common way is to take out their stop/losses a lot more often than they should be taken out in normal trading environment.

But remember, many brokers that charge commissions also manipulate their spread, so they make money both ways.

ZERO Spread Phenomenon

ZERO Spread Phenomenon

The ZERO spread phenomenon is a very interesting one and is only possible in non-centralized markets such as forex. Let’s discover how ZERO spread is possible in forex market.

In my opinion the goal of every honest forex broker should be to provide traders the best possible price available. The way they can do that is by choosing the best possible price from several different banks and from every trader on their platform.

So let’s say Bank A has price of GBP/USD as 1.9950/1.9952, and Bank B has price of GBP/USD as 1.9948/1.9950.

So what your broker does is it takes the lowest bid price from Bank A, which is 1.9950, and it takes the lowest offer price from Bank B, which is also 1.9950. Because bid is from one bank, and offer is from another bank, they can stay on your broker with ZERO spread without executing against one another.
Getting screwed on Stop/Losses. Let’s now discover why the stop/losses will get hit less often if you use a broker with natural trading environment.

Well…first of all, if the environment of the broker is not natural, it means that they constantly need to worry about the accuracy of their price.

Many forex traders trade during news, and when price gets very volatile during news, the forex broker with not-natural environment becomes afraid that the traders will take advantage of their price feed and will get filled on much better price than the real market price.

Because of that, the broker is forced to artificially raise their spread during news. It happens quite often that the spread is raised from 2 pips to 30 pips and sometimes more.

So if your stop/loss is 20 pips away, and the spread just got raised, even for 1 second, you will get stopped out on a price that you would never be stopped out on if you traded with broker that provides natural trading environment.

Every day is filled with many different news announcements, so if you do not have a broker with natural trading environment, you can get screwed on spread and stops very often.

Does Your Forex Broker Provide You With Natural Trading environment?!

Does forex brokers provide natural trading environment?

Let me explain more.............

Bids & Offers Example. Let’s say you are trading the GBP/USD pair. Let’s say you want to buy GBP/USD.

Let’s say you login to your forex broker account, and you see that the price is 1.9950/1.9953.

That means that somebody out there is willing to buy GBP/USD for 1.9950, and somebody else out there is willing to sell GBP/USD for 1.9953. So if you wanted to buy GBP/USD, you would have to pay 1.9953 for it. If you wanted to sell it, you would have to pay 1.9950.

Let’s say you want to buy GBP/USD, and you do not want to pay 1.9953 for it, but you would be willing to pay 1.9952 for it. So you go ahead and you submit a limit order to your broker to buy GBP/USD at 1.9952.

I love GBP/USD :)

If that forex broker has natural trading environment, you should immediately see the price on GBP/USD change from 1.9950/1.9953 to 1.9952/1.9953. Why? Because someone else was bidding 1.9950 for GBP/USD and now you are bidding 1.9952.

Your bid of 1.9952 is higher than 1.9950, so in natural trading environment, that should immediately be reflected in the price, and the spread must shrink.