To trade forex, you need a trading account with a forex broker and have funds in that account. A broker is a company or individual that buys or sells according to the decisions of the traders and charges a commission (remember, it can be included in the spread ) for their services. The number of online brokers is huge and you may have a hard time choosing one. We are going to take a few basic steps to choose the broker, the time spent at this point will be rewarded.
Is the broker regulated?
The forex market is labeled as an unregulated market and basically it is. But make no mistake, there are foreign exchange market regulation agencies and today it is almost vital to choose a regulated broker.
There are numerous regulatory agencies, private and governmental, without a doubt the best thing is that it be at least in one governmental and in another prestigious private one (there are private agencies created exclusively to regulate broker A, we must doubt this).
In the United States, a broker is defined as Futures Commission Merchant (FCM) and must be registered with the CFTC (Commodity Futures Trading Commission) and the NFA ( National Futures Association ). It can be verified that a firm is registered with the NFA on its own website www.nfa.futures.org/basicnet.
In England they must be regulated by the FSA (Financial Services Authorization), in the rest of Europe it depends on the country, for example in Spain the CNMV (National Securities Market Commission). Of course, a broker can be in a tax haven and be regulated by local entities, but the guarantees are practically null in these places where the legislation is very permissive.
Among well-regulated brokers, one should look for those with a good track record within the regulatory agency and well capitalized that allows them to have a solid financial base.
Without a doubt, the regulatory bodies most valued for their good work are the FSA in England and the NFA in the United States. The CNMV in Spain also does a very good job in regulation and the good progress that has been made in Switzerland and Australia should not be forgotten either.
Another important point when choosing the broker is the trading platform they offer. All brokers allow you to operate through the internet easily, the trading platform will be your connection with the broker and your work tool, you will carry out almost all the analysis work on this software, so it is extremely important. Luckily, free demo accounts are almost universal, any broker offers them so you can try the platform without risking a penny. Try and practice with a broker’s platform before opening a real account with it!
When you are testing a trading platform keep in mind:
- Possibility of receiving exchange rates of currency pairs in real-time.
- Account summary showing your account balance, available margin, open positions, history, and profit/loss on open positions.
- Graphical package and analysis tools. Most brokers offer graphical and analysis packages integrated with the trading platform, you should be comfortable with real-time graphing and analysis tools. Some brokers offer graphical and analysis software for a fee. All this is important to take into account, if they offer you a free graphic and analysis package, it is also integrated with the trading platform and you also like it, then better than better.
Trading platforms can be divided into two large groups: based on web technology and local programs.
Web platforms, as their name suggests, are used through a browser and it is not necessary to install any software. They are usually based on JAVA.
Platforms in the form of local programs have to be installed on your computer. These platforms are faster and usually better for analysis, as a disadvantage is that it is difficult to find a broker that offers a platform that is not for the Microsoft Windows environment, if you use MAC you will have problems finding a good broker with a platform that adapts to your needs, however this should change soon. They can also be more susceptible to viruses and intrusions.
Mini and Micro Accounts: Initial and minimum capital per operation.
What capital do you have to open your trading account? This, of course, does not depend on the broker but it can limit you when it comes to choosing one since each broker has a minimum deposit to open a trading account. Even if you have the minimum to open an account with a certain broker, you should look at the minimum size per operation, because imagine that the minimum to open an account is 1000 USD and the minimum size per operation is 1 standard lot ; you will have very little space to handle the risk of operations.
Normally mini accounts can be opened from 300-500 USD with a minimum size per trade of 1 mini lot (0.1 standard lot).
Micro accounts can be opened with considerably less money and micro lots (0.01 lot) can be traded and are ideal to start with real money without risking a lot of capital.
There are brokers that even allow so-called odd lots, so you can choose fractions of a lot to your liking and create your own custom trade size.
Costs per Operation
Taking into account the costs per operation almost goes without saying, the higher the costs the lower your profits. You will have to take into account:
- Rollover (or Swap)
The spread and the commissions we already saw what they were and how there are brokers that do not charge commissions or do not charge a spread.
The rollover is a rate that the broker charges you when you keep an open position from one day to the next, the rollover can be positive and benefit you. There are brokers that do not charge swap. You must inform yourself of the rollover rates that apply. The rollover comes from the difference between the interest rate of the country of the base currency of the pair and of the quoted currency. The greater the difference between interest rates, the greater the rollover.
Margin and leverage requirements
This point can be controversial, it can really be beneficial to have a small margin requirement if your trades are going well, but without going bad, you wish you had a higher margin requirement. Therefore, do not take the Forex margin lightly and think carefully about it.
The most normal thing is that the margin requirements go from 25% onwards.
In the same way, you can think that the higher the level of leverage offered the better for you, really think about the leverage and its use. In principle, a 100: 1 leverage for standard accounts and 200: 1 for mini accounts is more than enough for any trader and much more for a trader who is just starting out. Regarding leverage you will find brokers that offer up to 500: 1 leverage, this can make you rich in a very short time or make you lose your money in the blink of an eye. As a novice trader, don’t look for high leverage, 100: 1 for standard accounts and 200: 1 for mini accounts is sufficient.
Forex is a market that is continuously open 24 hours a day. A customer service available 24 hours a day, more than a necessity for the trader, is a duty of the broker.
Speed of execution and stability of the servers
Forex is a fast moving market, sometimes turbulent. In this framework, it is essential to have a broker with high stability on its servers and with fast execution of your orders, this is what is on everyone’s lips: The price you see is your price (from a phrase that you will hear a lot in English: what you see is what you get). This phrase refers to slippage and requotes, if you see a certain price on the platform and execute an order, the final price at which your operation is made should be the price you saw.
At this point, I inevitably have to say that a dial-up connection will not work for you to trade Forex, we strongly recommend having a high-speed internet connection.
In short: well-capitalized regulated broker, low spreads, stable trading platform with good analysis and charting software (if possible at no additional cost), minimum per trade and adequate leverage to our initial deposit and fast order execution should be enough to choose our broker.