FOREX Brokers

What is a FOREX broker?

Most FOREX traders use a FOREX broker to handle their transactions. Strictly speaking, a FOREX broker is a person or a company that buys and sells orders according the investor's decisions. Brokers earn money by charging a commission or fee for this service.

A FOREX broker needs to be associated with a large financial institution such as a bank in order to provide the funds (basically their safety net) necessary for margin trading. In the US a broker should be registered as a Futures Commission Merchant (FCM) with the Commodity Futures Trading Commission (CFTC) - this gives traders some protection against fraud and abusive practices.

Which broker?

To trade FOREX you need to set up an account with a FOREX broker. The choice of online FOREX brokers may seem overwhelming - deciding on a broker does require you to perform some research but the time spent will give you insight into the services that are available and fees charged by various brokers.

The best advertising is word-of-mouth advertising, and this is just as valid in FOREX trading as it is for any other type of business. Talk to friends and associates to see who they are dealing with and find if they have any complaints or difficulties in dealing with a particular broker.

To get an idea of how quickly different FOREX brokers responds to enquiries, you could try selecting a few online brokers and contact their Internet help desks - this will give you an idea how rapid a response you will get and whether or not they answer questions to your satisfaction. Keep in mind, however, that pre-sales service may be better than after sales service. (Of course this can be true for any online business, not just FOREX brokers). However if their pre-sales support is dreadful this can be an indication of more of the same once you're a customer.

Customer satisfaction and safety are just part of the story. You want to find a broker who executes orders quickly and with minimum slippage. All online brokers should offer automatic execution and have clear policies regarding slippage. They should absolutely be able to tell you (before signing up) how much slippage can be expected in both normal and fast-moving markets.

FOREX brokers - spreads and terms

Next you want to know the fees involved. What is the spread? Is spread fixed or variable according to the type of account? Are mini accounts subject to wider spreads? Are there any other charges? Smaller spreads mean more profit for the trader, but there may be a trade-off between spread and service. If you're just starting out, you may want to balance the margin against against minimum starting balance - how much do you want to start out risking? Look at the overall picture before deciding to go with a particular broker.

Margin accounts are the lifeblood of FOREX trading, so be sure you understand the broker's margin terms before setting up an account. You need to know the margin requirements and how margin is calculated. Does margin change according to the currency traded? Is it the same every day of the week? Some brokers may offer different margins for mini and full accounts. Check the upgrade path - you should be able to upgrade to a full account as you become more proficient and find the markets and techniques which work for you.

FOREX brokers - trading software

Trading software is very important for the online FOREX trader. Get a feel for the options that are available by trying out a demo account at a few online brokers. Above all, you are looking for reliability and the ability to perform well in fast-moving markets. The software should offer automatic trading and may have special features such as trailing stops and trading from the chart. Some features may only be available at an extra cost, so be sure you understand what your trading needs are and how much the broker charges to provide them. My preference is to have a FOREX broker with software which is easy enough to use and powerful enough for my needs so that I don't have to call support!

Other information to find out about includes the broker's policy regarding minimum account balances, interest payments on account balances, which currencies can be traded and whether or not non-standard sized lots can be traded. You should also find out whether clients' funds are insured and the extent of that insurance.