Before you can get involved in the Forex market, you will need to open a brokerage account. Brokers act as the middlemen between you and the currency pairs you want to buy. Choosing the right broker can make a big difference in the level of profitability that you are able to enjoy as a trader. Before picking the broker you plan on entering the market with, keep these tips in mind.
1. Check With the Authorities First
With Forex brokers, you can usually check with their regulating agency to find out more information. The good thing about checking with a regulating agency is that you will get unbiased information that is not from someone who stands to benefit from you opening an account.
When choosing Forex brokers, you can get this type of information from the National Futures Association. They track complaints on all of the brokers in the United States. Since some brokers are scams, it is important to make sure that they are regulated by some kind of governing agency and that they do not have a lot of negative feedback from traders.
If you are outside of the United States, you can check with the regulating agency of the country where your broker is located.
2. Find Out How the Broker is Paid
Before choosing a broker, you should also find out exactly how it is paid. In the foreign exchange market, brokers are usually compensated with the foreign exchange spreads. This is the difference between the bid and the ask price in the market.
In some cases, Forex brokers will charge a commission on top of the spread that is charged. With commission brokers, the spreads are often very low, which can come in handy with certain trading strategies.
When looking at how the broker is paid, take into consideration how you plan on trading. For example, if you are a buy and hold trader, a bigger commission may not make a difference. If you are a day trader, you want the lowest commission possible.
3. Look at Trading Tools
The trading tools that a broker offers you are also important to evaluate before making a decision. For example, most Forex brokers allow you to download trading software directly to your computer. You can usually check out how the software works before opening an account. It is important to make sure that you are comfortable with how the software operates.
You may also want to pay attention to the research tools that are provided by the broker. You need to be able to do thorough amounts of research on each investment that you choose. Many brokers also offer forums, articles and webinars to help you become familiar with the market and how it works.
4. Know Broker Policies
Every broker has policies that you will have to become aware of when you start trading. For example, if you open an account with a broker, you might have to put up a minimum of $1000. You might only be able to make deposits or withdrawals via a bank wire or through a third-party payment processor.
In some cases, brokers put restrictions on the type of trading activities that you can engage in. Some brokers offer leverage of 500:1, while others may only offer 50:1 leverage.
Before signing on with a broker, read through the terms and regulations of having an account. Otherwise, you could wind up with an account at a brokerage that is not conducive to your unique trading style.
Luke Arthur is a Forex trader and writer on financial topics. He is the creator of the site Forex Trading Rookie and he enjoys helping others learn about the foreign exchange market.
Ray is an ex-financial adviser and the founder of Financial Highway. Currently working in the financial industry and working towards completing his Chartered Financial Analyst, CFA, designation.