Forex trading has exploded in popularity over the past few years. A large number of companies have cropped up to offer individuals access to the forex market – in fact, the choices in forex brokers are so abundant that it can be mind-boggling. Picking a forex broker is probably one of the most important decisions that forex traders can make, because they are placing their hard- earned money in the broker’s trust. With that in mind, how should you pick one?
First, it is important to know that most forex brokers have similar and sometimes identical, buy and sell prices for currencies. Even though there is no official exchange, the market is transparent and competitive enough that brokers know clients will not tolerate off-market pricing. What makes each broker different is its size, geographic reach, breadth of product offerings, trading platforms, charting packages and value-added services.
There are a million different questions you could ask prospective brokers – and it is important to do so – but the following are five critical questions. These questions are geared towards whittling down the list of potential forex brokers to the largest and most stable players. Although the financial crisis has caused the demise of large Wall Street titans, it is still smarter to trade with a well-established firm than a small start-up. Hopefully, these questions can help you determine whether the broker you are evaluating deserves your business.
How many years has the broker been in business?
As a rule of thumb, the longer a forex broker has been in business, the more likely it is that it will stay in business. It may be useful to consider brokers that have been offering forex trading for 10 years or longer over those that have been doing so for five years or less. The longer a broker has been in business, the more familiar it will be with the market, regulatory changes and requirements. It will also have had time to adapt and expand its product offerings.
Is it regulated by the Australian Securities and Investments Commission? If so, for how many years?
The job of the Australian Securities and Investments Commission is to protect investors in Australia. Therefore, it is generally more prudent to use a broker that is regulated by ASIC. This means ASIC is keeping an eye on the forex broker, making sure it is meeting the guidelines enacted by the Australian government to protect investors. If a forex broker is not regulated in Australia, yet tries to solicit Australian customers, then you may want to ask why. Is it trying to skirt the law, or are its internal practices insufficient to meet ASIC’s guidelines? If either is true, you may want to consider whether you really want to do business with that broker.
In what other countries does it have offices, and is it regulated in all places it does business?
Many global foreign exchange providers are regulated not only in Australia, but in the United States, the United Kingdom, Singapore, Dubai and Japan. In the US, the Commodity Futures and Trading Commission publishes capital numbers for brokers that are regulated there, so you can gauge the broker’s size. The more countries a broker is regulated in, the better. That means more eyes are on the company and are reviewing its practices to make sure it is being honest. Different countries use different guidelines, so if a broker can meet all of those guidelines, it is likely a better candidate to trade with than a broker regulated in only one country.
Is there an office in Australia?
There is a lot to be said about face-to-face interaction. Being able to meet a live person and visit an office can be extremely important, especially to some new traders. Foreign exchange brokers who have an office in Australia can generally provide more intimate support than a company which only has offices thousands of kilometres away. Local offices also may occasionally hold educational seminars for their clients and provide other meet and greet opportunities.
Do they provide 24-hour customer service?
Do you hate it when your computer breaks down after hours and there is no one to call for help? When you are trading and have open positions, that annoyance is magnified ten-fold. The forex market is open for trading 24 hours a day, because when it is 12am in Sydney, it is 8am in New York. When trading such an active market, it is essential to trade with a broker that has 24-hour customer support. This includes being able to talk to a dealer and place trades over the phone in case your computer or its trading station ever goes down. You never want to be stuck with a trade and have no way to get out.
Using due diligence in choosing a broker is extremely important and not all that difficult. For example, it only takes 15 minutes to pick up the phone and call a broker to ask the questions above. It is important to speak to a live person at least once, because at a minimum, someone should be on the other line to pick up, and that person should speak in an easy-to-understand manner.
Once you feel satisfied with the answers, it is time to ask about account-opening minimums and value-added services such as training and education, free, real-time news, and the ability to trade from your iPhone or Blackberry. Finally, don’t forget to do a walk-through of the trading platform, which can help you understand not only how the broker’s software works, but also its level of customer service.
As you can see, the process of choosing a broker is not very different from the process of choosing a spouse – without the need for a long-term commitment, of course. Before settling on the person that we want to marry, most of us will date a number of different people. Some will be short, some tall, some quiet and some who can’t stop talking. With each person, we learn a little more about ourselves, our needs and our desires. Eventually, we settle on that one person who we hope to be happy with for the rest of our lives.
Before choosing a forex broker, it is also important to date, or test-drive, a few different providers to determine which does the best job of meeting your needs and desires. It may be helpful to open up small accounts with a few brokers, test-drive their trading software, see if their quotes are competitive and determine whether the charting package is simplistic or complex enough for your needs. Only after reviewing a few brokers should you settle on one – but unlike a marriage, there is no need to compromise! Divorce with a broker is not very messy – so if, for one reason or another, a forex broker fails to satisfy your needs, then find someone else.