Most Forex traders use a broker to handle their transactions. What exactly is a broker? Strictly speaking, a broker is an individual or a company that buys and sells orders according to the investor’s decisions. Brokers earn money by charging a commission or a fee for their services.
A Forex broker needs to be associated with a large financial institution such as a bank in order to provide the funds necessary for margin trading. In the United States, a broker should be registered as a Futures Commission Merchant (FCM) with the Commodity Futures Trading Commission (CFTC) as protection against fraud and abusive trade practices. While in Kenya it’s the Capital Markets Authority.
Before trading Forex you need to set up an account with a Forex broker. You may feel overwhelmed by the number of brokers who offer their services online. Deciding on a broker requires a little bit of research on your part, 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.
You could try selecting a few online brokers and contact their Internet help desks to see how quickly they respond to inquiries 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. This can be true for any online business, not just Forex brokers.
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 be able to tell you how much slippage can be expected in both normal and fast-moving markets.
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. 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 standard accounts.
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.