The ultimate guide to choose a forex broker
I get this question over and over again, so I decided to create an article about it and direct traders to this article instead of writing a complete essay every time I answer it (saves me time hehe)…
The question is:
Where should I open my live account? Who is the best forex broker?
I’ve heard horror stories about brokers (specially a certain kind of brokers that you are about to learn) not allowing traders to withdraw their capital, or stopping traders out just enough to wipe out their entire trading accounts, and so on and so forth.
So I dont want this to happen to you ok.
Look, trading itself its difficult enough to add another type of risk, which is what I call: Broker Risk.
You might ask: What are the sort of things that could go wrong with your broker?
Things that could go wrong with your Forex broker
You could get stopped out for no apparent reason
Once a trader asked me if it was possible for the market to reach an specific level but not being able to “print that value” because it was so fast… It made no sense to me so I asked him what happened… He said that that was the answer his broker gave him, he was stopped out and the closest the market was to his stop loss was 35 pips…
You could get slippage
Slippage is the difference between the price you want to get (to get in the market) and the price you actually get. I’ve heard stories of traders getting 80 pips of slippage. Imagine getting in the market and suddenly you are – 80 pips… that’s must not be very pleasant experience.
Your funds could get retained
Once a trader approached to me asking for help, he is an experienced trader and decided to open an account with a new broker offering a US$1000 bonus when you funded your account with US2000 or more… He traded the amount of lots they required in order to be able to withdraw the capital, and when he tried to withdraw, he wasnt able to do it… 4 years later, he is still waiting for his funds.
These are just a few of the things that could go wrong by not choosing the right broker…
As I said before, trading itself its difficult enough to add more risk by not choosing the right broker, you know what I mean?
Ok, so now the question is: Who are these “bad” brokers?
Well, the idea about this article is not to trash any Forex Broker… but to make you aware of the broker risk and share with you a few guidelines that you can use to choose the right broker for you.
Forex brokers to Avoid
Use the following guidelines to avoid choosing the wrong broker.
Never open an account with a new broker. I know that not all new brokers are bad brokers, but some of them are just around for a few months, then they disappear (some of them with your capital).
Brokers that offer $$$ or other bonuses (such as iPads, etc) when oppening your account. Again, it’s not that all the brokers that offer “something” are bad brokers, its just that nothing in life is FREE, it all comes to a cost to you, so you got to be careful about this.
So please, this should not be the reason why you open an account with your broker. Now, if you already decided to open an account because of other reasons (good reputation, etc) and they suddenly offer a bonus, then it’s alright, but dont open it just because of the bonus.
Based on a fiscal paradise. If your broker to be is based in a fiscal paradise, please rethink it. Have you ever thought what is going to happen if you decide to go to their headquarters and ask fo your money? No body is going to be able to help you…
Not regulated brokers (or regulated by an unknown entity). Look, regulators are good for traders, they help you in case your broker acts against you, so you better open your account with a regulated broker.
Some brokers go as far as opening themselves a “regulatory entity” that “regulate” them… so you also need to be careful about unknown regulatory entities.
Ok, these are a few of the most important aspects that you should avoid at all costs. Now lets talk about a few things that you need to consider to open your account.
How to choose a Forex Broker
The first thing that you should check is the reputation of the broker.
Look, there is no perfect broker, you should know that. You shouldnt either believe every single review you see online, because some of the reviews are posted by angry traders who got wiped out for taking poor trading decisions and they dont want to take responsibility.
But when several traders complain about the same thing (slippage, re-quotes, cant withdraw capital, etc), then you’ve got something to think about.
So the first thing that you need to do is a quick online review about your possible brokers.
Years in business
The more years in business the better for you.
You need to stick with the brokers that are here for the long haul.
Every year brokers come and go, they advertise being one of the largest brokers and yet, they disappear without any kind of warning.
So please, open your account with a broker that has been around for years, that’s the only way to make sure they’re here for the long haul.
As I said before, regulators are there to monitor brokers. If there is something fishy about the broker, they step in and do whatever needs to be done on traders best interests.
So you need a fully regulated Forex Broker. They need to be regulated in the countries the have offices.
Make sure they are regulated by a well known regulatory entity, such as the NFA and CFTC in the US or the FSA in the UK, etc.
Being regulated by an entity in the Virgin Islands wont be good for you.
You want to choose a broker that is based in a solid country. And I mean solid based on the quality of institutions.
For instance, if I come up with two possible brokers, one is based in the Virgin Islands and the other one is based on US, I’ll definitely choose the one that is based in the US.
It’s not that I have something against Virgin Islands, its just that it is a fiscal paradise, and they are there for a reason, to save money, sometimes avoiding regulatory fees that you need to pay on other countries.
ECN vs Market makers
There are two types of brokers…
Market makers, as their name implies, they create a “market” and take trader’s opposite position, if you are going long, they go short, and viceversa.
On the other hand, ECN broker connect buyers and sellers, sometimes other traders, institutions, etc.
Seeing which type of broker is better is out of the scope of this article, you just need to see which one fits you better.
You need a broker that has good customer support. You dont want to have problems trying to reach your broker when suddenly your platform crashes and the market is moving against you…
The best way to test this is my contacting them, ask some questions before opening your trading account, see in how much time they get back to you, etc.
Do they have a support phone number? Online chat? Where you can contact them immediately in case something goes wrong.
Although not as important, the tighter the spreads, the better for you…
Ceteris paribus (all other aspects constant) choose the broker with the tighter spreads, but again, this aspect is no as important as any of the above aspects.
For instance, I’d rather choose a broker with better reputation and larger spreads than a broker with a fishy reputation and tighter spreads.
Now this one is not as important, but still you need to consider it.
If you feel comfortable with any trading platform, you need to make sure your broker uses that platform.
For instance, a lot of traders feel comfortable with MetaTrader 4, make sure to open your account with a broker that uses MT4, otherwise you’ll have to learn a new platform that has different features, etc.
So these are a few of the most important aspects that you need to take in consideration before choosing a Forex Broker.
Best Forex Brokers
Here is a list of brokers that you should consider opening an account with (As the time of this writing I have no kind of relationship with any of them).
I mention them because I’ve been trading for a few years now and I know thay have good reputation and have been around for years and believe they are here for the long haul.
If you open an account with any of the following brokers, you should be ok.
But remember you should do your own research before choosing a Forex broker.
Oanda is a Market Maker and was one of the first brokers to introduce variable spreads and the “pippete” (the fifth decimal in the quote).
In business since 1995, and its based in New York. Regulated by the NFA and CFTC, FSA and others.
One of the first ECN brokers available for forex traders.
In business since 2000 and it is based in the US, fully regulated by the NFA and CFTC.
FXCM is one of the oldest Forex brokers around, they have recently added a new feature to its proprietary platform: Real time Volume, which only includes FXCM transactions.
In business since 1999, they are based in New York. They are regulated by the NFA and the CFTC, FSA and others.
ECN Broker, and you can also trade stocks, futures and options with MB Trading.
In business since 2000 and its based in the US. Fully regulated by the NFA and CFTC.
One of the first brokers that incorporated Metatrader 4.
In business since 1998, based in London and regulated by CySEC and FSA.
Parent company Gain Capital was one of the first brokers available for retail traders.
In business since 1999, Based in Badminster, US. Fully regulated by the NFA, CFTC, FSA and others.
By no means this list should be considered as the “only” list with reputable brokers around, feel free to suggest other brokers in the comment section.
What other things you could go wrong with your broker? Comment them and I’ll add them to the above list.
Do you have a story to share about your ex-broker?
What other brokers would you add to the list?
Share your thoughts.