Choose a forex broker who suits your needs

1. Who regulates your forex broker?

If your broker is registered in the US, see if they are registered with the National Futures Association (NFA) or Commodity Futures Trading Commission (CFTC). Similarly, based on where they are based you should validate their registration with the respective regulatory body. Use broker regulatory bodies for reference.

2. Capitalization

Capitalization refers to how much liquid cash a forex broker has ready for use. Given the OTC nature of the forex market, brokers need to meet margin deposit requirements with lending banks in the interbank markets to get competitive spreads. When a broker is a member of a regulatory organization, they must adhere to the minimum capitalization level. In the US as of Jan 2009 it was set at $10,000,000; with plans to raise it to $20,000,000 over time.

This is among the most important things in broker selection and vital to avoid scam forex brokers.

3. Trading platform & software

There are different types of trading platforms and software ranging from internet-based application to desktop applications. Choose one that suits your trading style.

A day trader who trades frequently will need a robust system than a fancy looking interface. Hence it's important to test if the platform does not crash during important news releases. Most trading platforms also come with built-in add-on features such as news feeds and charts which are essential components to forex trading. It's important to test its accuracy and usability.

4. Fee and commission structures

While many forex brokers promise trades at no exchange fee or commission, you should be wise to understand that their service is not free! There are 3 cost structures based on which the forex broker makes money of your trade.

Variable spread - If you are trading in extremely volatile markets and for short-term periods a fixed spread will ensure that you don't get penalized for lack of liquidity in the market.

Fixed spread - Works better for major currency pairs with good liquidity. This keeps the transaction cost low.

Commission as a % of spread – Is common among ECN brokers. Usually in the order of two-tenths of one pip, some of them charge higher depending on the services in offer.

So there is no thumb rule. An easier choice is to go for a well capitalized broker, who will naturally have the best rates. Then choose a broker with a fee structure that favours your trading style.

5. Are they a dealing desk or a non-dealing desk (STP or ECN)?

A non-dealing desk broker sends his customer's orders to a market maker. The customer (trader) receives spreads from the market maker using either fixed or variable. The broker himself makes his money either by charging his customers a commission or directly from the market maker.

Each dealing desk broker is a market maker and operates much like how banks work. Prices can either be fixed for the day or change dynamically based on supply and demand. Brokers who are dealing desk can be seen as holding a position against the trader to manage their risks. However, in reality the risk is managed through interactions with banks and financial institutions around the world.

More recently the ECN brokerage model has emerged. Simply put an ECN is a non-dealing desk broker to a many dealing desks and variety of market makers. Each dealer sends a currency pair bid and ask rates to the ECN with a matching volume it's good for. The ECN in turn distributes that price to the customer. When an order is received the ECN funnels the order to the broker the price was taken from. Here spreads are determined by the difference between the best bid and the best offer at a particular point in time on the ECN. ECN makes its money through a fee to the customer plus a "commission" from the dealing desk.

6. Leverage and margin call policies

While the average trader is content with moderate leverages in the range of 1:100 and 1:200, some aggressive traders choose brokers purely by the high leverage levels (up to 1:500) offered. Naturally it can lead to higher profits or larger losses.

However, before finalizing a broker understand the margin call policy, which comes in 3 variants - FIFO (first in first out), LIFO (last in first out), and Close all open trades.

7. Customer Support

It is important to choose a broker who is easy to contact and quick in their response. Learning about this after a problem arises could be expensive.

A good broker is as good in dealing with support issues as in executing trades at low transaction costs. Watch out for those brokers who are in a hurry to get your account opened, but non-responsive to general enquiries.

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