By BabyPips
The retail forex market is so competitive that just thinking about having to sift through all the available brokers can give you a major headache.
Choosing which broker to trade with can be a very overwhelming task especially if you don't know what you should be looking for.
In this section, we will discuss the qualities you should look for when picking a broker.
1. Security
The first and foremost characteristic that a good broker must have is a high level of security. After all, you're not going to hand over thousands of dollars to a person who simply claims he's legit, right?
Fortunately, checking the credibility of a broker isn't very hard. There are regulatory agencies all over the world that separate the trustworthy from the fraudulent.
Below is a list of countries with their corresponding regulatory bodies:
- United States: National Futures Association (NFA) and Commodity Futures Trading Commission (CFTC)
- United Kingdom: Financial Services Authority (FSA)
- Australia: Australian Securities and Investment Commission (ASIC)
- Switzerland: Swiss Federal Banking Commission (SFBC)
- Germany: Bundesanstalt für Finanzdienstleistungsaufsicht (BaFIN)
- France: Autorité des Marchés Financiers (AMF)
Before even THINKING of putting your money in a broker, make sure that the broker is a member of the regulatory bodies mentioned above.
2. Transaction Cost
No matter what kind of trader you are, like it or not, you will always be subject to transaction costs.
Every single time you enter a trade, you will have to pay for either the spread or a commission so it is only natural to look for the most affordable and cheapest rates. Sometimes you may need to sacrifice low transaction for a more reliable broker.
Make sure you know if you need tight spreads for your type of trading, and then review your available options. It's all about finding the correct balance between security and low transaction costs.
3. Deposit and Withdrawal
Good brokers will allow you to deposit funds and withdraw your earnings hassle-free. Brokers really have no reason to make it hard for you to withdraw your profits because the only reason they hold your funds is to facilitate trading.
Your broker only holds your money to make trading easier so there is no reason for you to have a hard time getting the profits you have earned. Your broker should make sure that the withdrawal process is speedy and smooth.
4. Trading Platform
In online forex trading, most trading activity happens through the brokers' trading platform. This means that the trading platform of your broker must be user-friendly and stable.
When looking for a broker, always check what its trading platform has to offer.
Does it offer free news feed? How about easy-to-use technical and charting tools? Does it present you with all the information you will need to trade properly?
5. Execution
It is mandatory that your broker fill you in the best possible price for your orders.
Under normal market conditions (e.g. normal liquidity, no important news releases or surprise events), there really is no reason for your broker to not fill you at, or very close to, the market price you see when you click the "buy" or "sell" button.
For example, assuming you have a stable internet connection, if you click "buy" EUR/USD for 1.3000, you should get filled at that price or within micro-pips of it. The speed at which your orders get filled is very important, especially if you're a scalper.
A few pips difference in price can make that much harder on you to win that trade.
6. Customer Service
Brokers aren't perfect, and therefore you must pick a broker that you could easily contact when problems arise.
The competence of brokers when dealing with account or technical support issues is just as important as their performance on executing trades. Brokers may be kind and helpful during the account opening process, but have terrible "after sales" support.
Beware of Bucket Shops
Here are the bad guys we keep mentioning earlier. Bucket shops are fraudulent brokerage firms that "book" a client's orders but never really execute them on an exchange.
Have you ever seen Boiler Room?
Aww come on, don't tell me you missed Ben Affleck's legendary speech about money?!
"They say money can't buy happiness? Look at the smile on my face. Ear to ear, baby!"
And it's precisely this greedy money-oriented philosophy that drives the people operating bucket shops.
They're named such because these brokers used to put their clients' phone-in orders in slips then dropped them (the slips, not the clients) in a tiny bucket instead of actually executing them.
Without the real transactions, the client is actually betting against the bucket shop operators who are also known as bucketeers.
These bucketeers do not usually disclose the real price of the asset their clients are trading, which means that they can lie and tell the client that the price has moved against them even when it really hasn't.
But thanks to the invention of the internet, clients now have a way to tell whether their broker is cheating or not! Thank you again Mr. Al Gore. You are so awesome.
Lucky for you, we at BabyPips.com are more than willing to help you avoid entrusting your hard-earned cash to these nasty bucketeers.
To help you separate the good brokers from the bad ones, we've come up with ReviewPips.com, wherefellow forex traders were kind enough to post their feedback on brokers.
You might also want to check out our forex forums where friendly forex folks discuss their experiences with different brokers.
So before you deposit your money with just anyone, make sure to do your espionage so that you avoid fraudulent brokers and forex scams. Mind you, there are plenty out there and we'll look more into that later on!
Defending Yourself
While you may feel like a dwarf among big bad brokers, it doesn't mean that you have to take their abuse! If you are disheartened because it seems that brokers have all the advantage, rest assured that there are a few simple measures to help even the odds.
Compare Price Feeds
Imagine a horse with blinders. This horse's vision is limited to what's in front of him. If there is a hurdle in front, this horse has no other choice but to exert the additional effort needed to jump over it. This horse is a very sad horse.
If you only use the price feed on your trading platform, you are basically trading like a horse with blinders on.
You have no idea what's going on in the rest of the forex world because you have limited yourself to your broker's price feed. If your broker chooses to widen spreads, manipulate rates, and run your stops, you have no way of knowing if the move resembled the general market.
You do not want to be a sad horse. Because you are a smart trader, you want to have the most complete view of the market as possible.
The best way to do this is to subscribe to a second, third, or even fourth price feed. That way, you get another view of the market, and you'd have a chance confirm whether price really moved the way it did.
Record Everything
Always keep a detailed journal tracking ALL of your transactions! Always, always, always! Like in a courtroom, you need evidence to make a case. You may FEEL cheated, but if you have nothing to back it up, then that feeling will remain just a feeling.
The easiest way to keep records is to take a screenshot of each order you put, each trade you take, and other suspicious broker activity like odd price feeds.
Not only is this good trade journaling, but it will come in handy if have been victimized by an errant fill. By properly tracking the trades you take, you can assure yourself that you will always have evidence needed to support your case in the event that you file a dispute with your broker.
File Legal Action
If you cannot settle your conflict with your broker, then it is time for you to take legal action. Most brokers give in when faced with the threat of legal action, but if they do not, you can approach either the Commodity Futures Trading Commission (CFTC) or the National Futures Associations (NFA).
The CFTC has a Reparations program that provides an "inexpensive, expeditious, fair, and impartial forum to handle customer complaints and resolve disputes between futures customers and commodity futures trading professionals." You can check out their program here.
Likewise, the NFA has an Arbitration/Mediation program that helps FCM's and their clients resolve disputes. For more information, just head on over to the NFA's website.
Good Trading Habits
Like a disciplined nun who wears a habit, you too should develop good trading habits. We know that joke doesn't make sense, but it sounded funny so we might as well put it here. In any case, even with the proper weapons to protect yourself against evil brokers, the most important thing is still to become a better trader.
Know that no matter how advanced your charting software is, no matter how much time you put into finding the right broker, no matter how complicated your trading system is, without proper discipline, you will end up losing.
It is very easy to put the blame on brokers, but at the end of the day, it is really your choices that get you to where you want to go.
Opening a Forex Trading Account
After finding the right broker for you, you can now open a new online trading account in three simple steps:
- Selecting an account type
- Registration
- Activating your account
Before trading a dime of your hard earned money, you may want to think about opening demo account. Actually, open up two or three demos - why not? It's all FREE! Try out several different brokers to get a feel for the right one for you.
Choosing an Account Type
When you're ready to open a live account, you have to choose which type of trading account you want: a personal account or a business (aka corporate) account.
In the past, when opening a forex account, you'd also have to choose whether you wanted to open a "standard" account, a "mini" account, or a "micro" account.
Now, that isn't much of a problem since most brokers allow you to trade custom lots. This is great for newbie and inexperienced traders who only have a small account of capital. This provides you great flexibility, as you won't have to trade bigger than you're comfortable with.
Also, always, always, always remember: Always read the fine print.
Some brokers have a "managed account" option in their application forms. If you want the broker to trade your account for you, you can pick this. But is this what you really want? After all, you didn't read through the whole School of Pipsology just to have someone else trade for you!
Besides, opening a managed account requires a pretty big minimum deposit, normally $25,000 or higher. Also, the manager will also take a cut out of any profits.
Lastly, make sure you open a forex spot account and not a forwards or futures account.
Registration
You will have to submit paperwork in order to open an account and the forms will vary from broker to broker. They are usually provided in PDF format and can be viewed and printed using Adobe Acrobat Reader program.
Also, make sure you know all the associated costs, like how much your banks charges for a a bank wire transfer. You'd be surprised how much these actually costs, and they may actually take a up a significant portion of your trading capital.
Account Activation
Once the broker has received all the necessary paperwork, you should receive an email with instructions on completing your account activation. After these steps have been completed, you will receive a final email with your username, password, and instructions on how to fund your account.
So all that's left is for you to login and start trading. Pretty easy huh?
Time to log in, pop open those charts, and start trading!
But wait just one minute
We strongly advise you DEMO trade first. There's no shame in demo trading - everyone has to start somewhere.
If you have been demo trading for at LEAST six months, then maybe you can dip your feet into live trading. Even then, we suggest you go in the shallow end and consider how much you want to risk.
Trading live is a different beast altogether. It's like the difference between sparring against your kid brother (or sister) and fighting Manny Pacquiao.
No matter how successful you were in demo trading, nothing can replace the feeling of having real money on the line.
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