Forex trading is more popular than ever. Recent world events such as the French Elections, Brexit, and last year’s U.S. elections have created dramatic surges in trading volume, and new traders are jumping on board in mass, trying to take advantage of the volatility created by these events. High quality education, coupled with easy-to-learn trading technology, has significantly lowered some of the barriers of entry for new traders, making it easier than ever for people to jump online, do some research, pick a broker, and get started trading Forex.
With so much information, and misinformation, available online, selecting the right Forex broker has never been more difficult, or more important. It’s absolutely critical that new traders understand what to look for when selecting a Forex broker. Here are the two most important things for new traders to research and understand before they start putting their hard earned capital at risk.
1) Regulation and Reputation of the broker
The most important thing to research about a broker before depositing money is the regulatory history and current status of the broker. The regulatory body for Forex trading in the U.S. is the CFTC (Commodity Futures Trading Commission). The official CFTC website contains information about broker licenses, warnings, and penalties for brokers who have either lacked transparency, used deceptive marketing practices, or have even been outright fraudulent.
In addition to the CFTC website, another suggested method of research is to check similar government regulatory sites in other countries and regions. If a broker has a clean record in the U.S. according to the CFTC, it’s still possible that they have previously faced disciplinary actions in other countries. The biggest players are ASIC (Australia Securities and Investment Commission), CySEC (Cyprus Securities and Exchange Commission), and the U.K.’s FCA (Financial Conduct Authority).
The reputation of the broker from a customer standpoint may not always be accurately represented only by the published sanctions of the government regulatory bodies. There are numerous other resources available on the web to investigate potential Forex Brokers. There are lots of Forex broker review sites, ranking sites, comparisons, and a multitude of other tools available to help consumers. Wikipedia even has plenty of information that can answer some basic questions such as “How long has the brokerage been in business?” and “Who manages the brokerage?”.
2) Cost- Spreads and Fees
Second to the regulation of the broker, is understanding how the broker makes money. Some Forex brokers employ a commission structure, but most will use spreads to generate the majority of their revenue. If the broker is charging commissions, it will typically either be a fixed fee (charge per transaction), or a relative fee which could vary depending on the volume of the trade.
Spreads, in essence, are really just fees that are being charged by the broker to perform the trade. The broker will quote two prices, buy and sell, and the spread is the difference between the two. There are different types of spreads such as fixed (set number of pips) and floating (variable number of pips depending on market volatility). Some brokers offer a choice between fixed and floating, but most brokers will offer one structure or the other. Brokers can even offer tiered accounts, where the spread is determined by the amount of the deposit.
In addition to spreads, there are also a plethora of fees, some hidden, that may be assessed. Fees to look out for and understand prior to choosing a broker include: inactivity fees, withdrawal fees, account closing fees, monthly minimum fees, and support fees.
Forex trading can be a great way to invest and make money, but it’s paramount that traders do the proper research before choosing a broker. The trader should be well versed in the brokers regulatory history, reputation, and fee structure before creating an account and adding that first deposit.