Picking A Forex Broker: What You Need To Know
The foreign exchange market is a favorite among experienced traders. It is a global, decentralized OTC market for trading foreign currencies. This market determines the exchange rates for every currency, and it includes every single aspect of exchanging, buying, and selling currencies, both at determined and current prices. A forex broker is an intermediary. The broker provides traders with a platform for conducting forex trading. Transactions always consist of a pair of two currencies.
Do I need a forex broker?
When asking yourself if you need a forex broker, it’s best to start with another question: “Is trading forex for me?”
Who is trading forex for?
If you’re an experienced trader, you will likely enjoy the fast-paced nature of trading forex. The forex stock market is huge. It is able to offer a lot of liquidity, and, more often than not, investors can more easily exit and enter trades. There are often lower transaction costs that accompany this ease of trading. There is more flexibility in the forex market than in the stock market.
However, the forex market is volatile. When trading anything, there is a risk of loss. When you’re trading a currency pair, that risk is sometimes amplified. Though you don’t need much initial capital to get started (a topic covered below), the inherent risks are greater. It is not a get-rich-quick scheme. Skilled traders make money, but even experienced, skillful traders still go through periods of loss.
Who needs a forex broker?
Everyone needs a forex broker. Forex trades are managed on international exchanges, and only members of those exchanges—brokers—can conduct trades. You need a forex broker to have a platform to trade forex.
A specialized forex broker is one that trades solely in forex. If forex is your only field of interest in the trading world, a specialized broker will be a good choice. Non-specialized brokers are brokers that you can also use to invest and trade in the domestic stock market. It is often far more convenient, both technologically and monetarily, to have your money and platforms with the same broker.
Word to the Wise
US News stated that $6.5 trillion in forex trades occur each day. Forex trading is a legal endeavor, but that doesn’t mean that every broker follows the letter of the law. US News stated that traders should be on the lookout for “scams” and “bad actors.” When a forex broker is crooked, that can lead you to lose money and even end up in legal trouble. To avoid such serious consequences, you need to know what to look for in a forex broker, such as if the broker is regulated.
What do I need to look for in a broker?
Deposits and Withdrawals
The timing and hassle-free nature of deposits and withdrawals is an important facet of a broker. You want your money fast. Forex is a fast-paced trading environment, and you can’t wait around for weeks for a deposit to clear. The more effortless and quick deposits are, the better.
You could be the most skilled trader in the world, and transaction costs could still put a dent in your wallet and slight your potential. Every time you engage in a transaction, a broker will likely take a commission. Make sure you know the commissions up front. A broker’s transparency about their fees and commissions says a lot.
Many forex brokers will offer you a downloadable platform. You can download it onto your Mac or PC, and the platform gives you access to the markets, research and data, and more. The higher-tech the platform, the better. A broker who offers a lot of research, commentary, and data, whether outsourced or self-generated, is a good selection. Brokers also might offer mobile or web trading for interested customers.
The execution of trades—fast, hassle-free, and transparent—speaks to user experience, as does the quality of the platform. You don’t want to be irritated with the platform every day because it is underperforming.
Customer service is also an indicator of quality. Customer service that is responsive and upfront is a sign of a good broker. Good customer service can make all the difference, and it is a big factor in keeping customers loyal.
Regulation is vital. Regulatory bodies, such as the Commodity Futures Trading Commission (CFA) and the National Futures Association (FTA), watch for misconduct among forex brokers. These regulators provide protection to consumers. Each country has its own regulatory bodies; the FTA and CFA are America’s.
How can I tell if a forex broker is regulated?
The forex broker should have its regulation listed at the bottom of its website. If it is not located at the bottom, it might be located in one of the company information hyperlinks. Reading reviews of forex brokers will help you determine whether a company is regulated, if you are unable to find the information yourself.
How much do I need in order to trade forex?
Vantage Point Trading recommended opening a trading account with at least $2,000. While you don’t need a ton of initial capital to start trading forex because of the nature of the market, $2,000 is a good idea. Vantage Point recommends upping that to $5,000 for a “decent income stream.” Anywhere between those two points is a good place to start.
When it comes to forex brokers, you want to make sure that the broker you’re looking at is transparent and trustworthy. Though forex doesn’t require a lot of capital to start, you need to have at least a few thousand in the bank to make money. Check out our reviews for more information on the best forex brokers on the market.