Choosing a Forex Trading Broker

Protection of your funds

Make sure to check that your forex trading broker is properly regulated. Regulation by the appropriate authorities is no guarantee that your funds are safe, and that the broker can be trusted, but at least provides you with some comfort that they will have to abide by certain requirements, such as maintaining minimum capital requirements.  In addition, if things do go wrong, and there are a number of complaints from forex traders to the regulatory organisation to which the forex broker is a member, the regulatory authority will have certain powers to investigate the complaints, to require the forex trading broker to co-operate with any investigation, and in certain, extreme circumstances, to force the closure of the forex broker.

Always check which regulatory organisations the forex broker is regulated with.  For example, if the trading broker is based in the US, then they will need to be regulated by the National Futures Authority (NFA).  For further details of forex regulation, click here.

Spreads and Commissions

Check with the forex trading broker how tight the spreads are on the currency pairs you intend to trade, and how these compare with other brokers.  Also check if the spread is larger if you trade a mini account.  Check whether a commission is also charged.  That ‘1 pip' spread may not look so attractive if there is also a large commission to pay!  As a general rule, if you open an account with a forex broker who is a ‘market maker', the commission will be included in the spread, whereas if your broker is an ‘ECN', there will usually be a commission to be paid in addition to the spread.  Click here for more information on the differences between market makers and ECNs.

Trading platform

Each trading platform for each forex trading broker is different, and will offer different features.  Some will provide ‘one click dealing', others will let you take trades directly from the chart.  To a large degree, it will be a matter of personal preference as to which platform a forex trader will feel comfortable with.  However, a diligent forex trader will check how reliable the platform is, particularly during periods of increased market volatility.

Execution and slippage

Execution and slippage are key factors to check prior to opening a live account with a forex trading broker.  If you intend to trade news events, check how reliable their platform is when key economic news events are released, and during other periods of fast moving markets.  Does the platform freeze, or does the forex trading broker increase the spreads just before and after the release of key economic news events?  When you do take a trade in a fast moving market, is there any slippage, ie. is the price you are filled at identical to price which the broker's platform was displaying when you executed your order?

Leverage

With currency trading, a forex trading broker allow you to trade on margin.  Check with each broker to check what their margin requirements are.  Most will allow you to trade on 100:1 leverage (ie trade with 100 times your account size), but some brokers allow 200:1, or even 400:1 leverage. Remember, though, the increased degree of leverage can work against you as well as working for you, and if a trade goes against you, this can magnify your losses.  As a novice forex trader, always be weary of trading forex with extreme levels of leverage.

Account size

What is the minimum account opening size?  What is the minimum trade size allowed by the forex trading broker?  Do you have to trade in multiples of lots, or can you trade fractional sizes of lots?  Does the forex trading broker pay you interest on the balance of your trading account?