When selecting a prospective Forex broker,
find out with which regulatory agencies it is registered with. The Forex
market is labeled as an “unregulated” market,
and it basically is.
In the United States a broker should be
registered as a Futures Commission Merchant (FCM) with the Commodity
Futures Trading Commission (CFTC) and a NFA member. The CFTC and NFA were
made to protect the public against fraud, manipulation, and abusive trade
You can verify Commodity Futures Trading Commission (CFTC) registration
and NFA membership status of a particular broker and check their
disciplinary history by phoning NFA at (800) 621-3570 or by checking the
broker/firm information section (BASIC) of NFA's Web site at
Among the registered firms, look for those with clean regulatory records
and solid financials. Stay away from non-regulated firms!
The NFA is stepping up their efforts in educating investors about retail
Forex trading. They’ve created a brochure fit for a Pulitzer Prize called,
"Trading in the Retail Off-Exchange Foreign Currency Market”. The NFA
recommends you read it before taking the Forex plunge.
They’ve also developed a Forex Online
Learning Program, an interactive self-directed program explaining how
retail Forex contracts are traded, the risks inherent in Forex trading and
steps individuals should take before opening a Forex account. Both the
brochure and the online learning program are available at no charge to the
Forex is a 24-hour market, so 24-hour support is a must! Can you contact
the firm by phone, email, chat, etc.? Do the reps seem knowledgeable? The
quality of support can vary drastically from broker to broker, so be sure
to check them out before opening an account.
Here’s a good tip: choose several online brokers and contact their help
desks. Seeing how quickly they respond to your questions can be key in
gauging how they will respond to your needs. If you don't get a speedy
reply and a satisfactory answer to your question, you certainly wouldn't
want to trust them with your business. Just be aware that as in other
types of businesses, pre-sales service might be better than post-sales
Online Trading Platform
Most, if not all, Forex brokers allow you to trade over the Internet
relatively easy. So trading software is very important. Get a feel for the
options that are available by trying out a demo account at a few online
Closely examine the broker’s screen layout. It should include:
* the ability to view real-time currency exchange rate quotes,
* an account summary showing your current account balance with realized
and unrealized profit and loss, margin available, and any margin locked in
Most trading platforms are either Web based (in Java), or a client-based
program you can install on your computer, and which version you choose is
your personal preference:
* Web based software is hosted on your broker’s web site. You won’t have
to install any software on your own computer, and you’ll be able to log in
from any computer that has an Internet connection.
* A client-based software program, or one that you download and install,
will only allow you to trade on your own computer (unless you install the
program on every computer you use).
Usually, the "download and install" program runs faster, but most programs
are operating system specific. For example, most brokers only offer their
trading platform application to run on Microsoft Windows. If heaven forbid
you are a Mac user (!), you won’t be able to install the application and
will have to use your broker’s Web based or Java-based trading platform.
These two (the Web or Java-based) will run on any computer since they run
through your internet browser.
Java-based software programs are preferred by most brokers, who think they
are more safe and reliable. Java-based software tends to be less
vulnerable to attack from viruses and hackers during transmissions than
"download and install" software.
But always be sure to open a demo account and test out the broker's
platform before opening a real account!
Don’t forget your high speed Internet
The Forex market is a fast moving market and you will need up-to-the
second information to make informed trading decisions. Make sure you have
a high speed Internet connection. If you don’t, you might as well not even
bother trading. Dial-up will absolutely not work for Forex! If you plan to
trade online you will need a modern computer and high speed Internet
connection, and we can’t stress this enough!
Before selecting an online Forex broker, you should closely examine their
features and policies. These include:
* Available Currency Pairs
You should confirm that the prospective broker offers, at minimum, the
seven major currencies (AUD, CAD, CHF, EUR, GBP, JPY, and USD).
* Transaction Costs
Transaction costs are calculated in pips. The lower the number of pips
required per trade by the broker, the greater the profit that the trader
makes. Comparing pip spreads of half dozen brokers will reveal different
transaction costs. For example, the bid/ask spread for EUR/USD is usually
3 pips, but if you can find 2 pips, that’s even better.
* Margin Requirement
The lower the margin requirement (meaning the higher the leverage), the
greater the potential for higher profits and losses. Margin percentages
vary from .25% and up. Low margin requirements are great when your trades
are good, but not so great when you are wrong. Be realistic about margins
and remember that they swing both ways.
* Minimum Trading Size
The size of one lot may differ from broker to broker, spanning 1,000,
10,000, and 100,000 units. A lot consisting of 100,000 units is called a
“standard” lot. A lot consisting of 10,000 units is called a “mini” lot. A
lot consisting of 1,000 units is called a “micro” lot. Some brokers even
offer fractional unit sizes (called odd lots) which allow you create your
own unit size.
* Rollover Charges
Rollover charges are determined by the difference between the interest
rate of the country of the base currency and the interest rates of the
other country. The greater the interest rate differential between the two
currencies in the currency pair, the greater the rollover charge will be.
For example, when trading GBP/USD, if the British pound has the greater
interest differential with the U.S. dollar, then the rollover charge for
holding British pound positions would be the most expensive. On the other
hand, if the Swiss Franc were to have the smallest interest differential
to the U.S. dollar, then overnight charges for USD/CHF would be the least
expensive of the currency pairs.
* Margin Account
Most brokers pay interest on a trader’s margin account. The interest rates
normally fluctuate with the prevailing national rates. If you decide to
take an extended break from trading, the money in your margin account will
be accruing interest. Keep in mind that most brokers DO NOT allow you to
accrue interest unless your margin requirement is at least 2% (50:1).
* Trading Hours
Nearly all brokers align their hours of operation to coincide with the
hours of operation of the global Forex market: 5:00 pm EST Sunday through
4:00 pm EST Friday.