When I first started becoming interested in learning forex trading, I started by demo trading for a while. After that, my next decision was to start trading real money, and so I was faced with this question of: How to choose a forex broker?
I wanted to start trading for real with a live trading account, instead of playing around with virtual money. I needed to get started in forex trading and fund my forex trading with real, live, cold hard cash!
Eventually, every beginner forex trader has to come to this point: Choosing a forex broker to open a live trading account with. And with so many forex brokers competing for your attention, how do you pick the right one?
How To Choose A Forex Broker – The 8 Step Process
You cannot trade forex without a forex broker. You need forex brokers just like you need oxygen for your lungs in the forex trading world.
These are the 8 steps process I used to choose a forex broker.
#1: Visit Forex Brokers Review Sites
Yes, You read that right. Now you are wondering why I’m telling you to go to forex brokers review websites to read the reviews and ratings right after I’ve told you “not to trust” forex brokers review websites. Well, you are doing it for one reason only: To get a rating.
Which forex brokers review website did I use? I used ScamBroker.com.
You need to find forex brokers with 4 star ratings and above. Remember that: 4 star ratings and up! It is important that ratings come from a lot of people.
A rating of 5 stars from just 5 traders is suspect. Likewise, a rating of 3 from just 5 traders is not good. Ignore such forex brokers that have reviews from a very few people. The whole idea is based on what I would call the ‘truth factor”. Most traders who give reviews and ratings do tell the truth, only a few will not.
Based on this, it can be reasonably assumed that if a 3 star rating (and up) comes from a large number of traders, then that rating is a a “rough” but good indication of of what type of forex broker it is.
#2: Is The Forex Broker Regulated?
The second step in how to choose a forex broker is making sure, you are dealing with forex brokers that are regulated.
So after I got all the forex brokers that had 3 star ratings, I wanted to make sure they were regulated or not. This is without doubt, the number 1 thing you should be checking before anything else.
Why you need forex brokers to be regulated? Well, when a forex broker is regulated, that means there’s usually a government regulation that exists to make sure that the activity conducted by the forex broker follows certain strict guidelines. This also means that there are regulatory agencies that monitors the compliance of these guidelines.
So how do you find out if the the forex broker is regulated or not? Well, the first point of call is to go to the forex brokers website and check to see if they are regulated and if so by what regulating agency. That information is generally placed on the footer of their website.
For example, for the Pepperstone forex broker, here’s what you will see on the footer:
Now, if you don’t believe what you see on the forex broker’s website, you can go a step further by searching on forex brokers review websites to confirm this information or contact the regulating agency to confirm if the forex broker is regulated or not.
Here is a list of Regulatory Agencies in different countries:
- United States: National Futures Association (NFA) and Commodity Futures Trading Commission (CFTC)
- United Kingdom: Financial Conduct Authority (FCA) and Prudential Regulation Authority (PRA)
- Australia: Australian Securities and Investments Commission (ASIC)
- Switzerland: Swiss Financial Market Supervisory Authority FINMA (FINMA)
- Germany: Bundesanstalt für Finanzdienstleistungsaufsicht (BaFIN)
- Canada: Investment Industry Regulatory Organization of Canada (IIROC)
#3: How Long Has This Forex Broker Been In Business?
Being in the forex broker business is tough. Just imagine for a minute what it would take to setup business as a forex broker:
- Imagine the paperwork that it would take
- The regulatory compliance requirements that needs to be undertaken to get regulated
- Cost of setting up the infrastructure (hardware, software)
- Expertise that needs to be hired (lawyers, software engineers, managers, employees, etc.)
- The time it would take to setup and run effectively.
- Finances that are required to get it off the ground to start running.
I can give a lot more, but you get the point I’m trying to make. You want to select a forex broker who has proven itself to be in business for a long time. The longer the time frame a forex broker has been in business, the more stable that forex broker is (generally speaking).
What is an adequate time frame to be in business? Well, as a rule of thumb: 5 years. Look for forex brokers that have been in the business for 5 years or longer, nothing less. With such forex brokers, you know they have a reputation to protect and you know they have solidly established themselves.
The risk of opening live accounts with newly establish forex brokers is that:
- They have not established their reputation yet (it is a factor of time)
- There will be a lot of things about them that you will not know yet.
- If they go under, you can say goodbye to your money.
#4: What Country Have The Forex Brokers Established Their Business In?
This is one factor that tends to be overlooked by many forex traders but for my case, when I started looking to choose a forex broker, I wanted forex brokers to be established in a country where I know the country is “tough” when it comes to regulatory compliance.
This is my personal preference but I prefer; USA, United Kingdom and Australia.
Generally speaking, these countries have really good regulatory agencies that make sure the forex brokers are doing their business right so you as a customer can be protected. I will be a very reluctant to open live trading accounts with forex brokers that operate in countries where my personal trust factor is low.
#5: Ease Of Deposit And Withdrawal
There will be a few odd forex brokers that make it easy for you to deposit funds for trading but make it so hard for withdrawing it or any profits you make.
I’ve read of cases like this in forex brokers review websites and that is kind of scary. But here’s the big problem: you will only know this (deposit and withdrawal) when you experience it yourself. So what I suggest is that when you’ve selected a forex broker to open an account with, deposit an amount of money that you will not lose sleep over.
Trade it for a while and when you make some profit, withdraw that profit and see if it is going to be hard or easy. Only then, you will will really know!
Once the forex broker passes the test of “ease of deposit and withdrawal” then you can start thinking about depositing larger sums of money into your forex trading account for trading.
#6: Trading Platform
I was already hooked into MT4 trading platform whilst demo trading so it was really a no-brainer for me to chose a forex broker that offered MT4 trading platform. The thing I love most about MT4 trading platform was the user friendliness and its ease of use. Make sure you choose a forex broker that has the trading platform you are familiar with or you want to use.
Another important point about trading platform is to make sure that the forex broker provides it to your free of charge. Don’t be foolish and end up paying monthly subscription fees for the use of trading platforms. You will be just burning money.
The market information you get from free trading platforms like MT,4 are the same as those that you’d be getting from subscription based forex trading platforms.
#7: Trade Execution
The next step on how to choose a forex broker is based on their trade execution.
The problem with selecting a broker based on their trade execution is that this is something you will know only after you’ve actually opened a live account with a broker.
Why is broker trade execution important?
When you click the buy and sell button, your forex broker must fill up your orders at the price that you wanted or at the best possible price under normal market conditions, otherwise, you will get your orders filled at the worst possible price.
Let me explain what a normal market condition is: a normal market condition is when there are:
- no important news to excite the market (which mean high volatility) &
- no surprise events
Which means the market should have normal liquidity.
Let me give an example: lets assume that you have a stable internet connection, if you click “sell” EUR/USD at 1.4000, you should sell at that price or within micro-pips of it.
And there shouldn’t be any delays in getting your sell order filled.
Simply because if there is a delay, your order can get filled at the worst possible price.
Also, if you intend to be a scalper, the speed at which your order is filled is very important.
What I suggest is that you test out the forex broker first. What you do is deposit a sum of money that your wife will not strangle you if you lose, into your live forex trading account with your new forex broker and test out the trade execution of the forex broker and see for yourself.
This unfortunately, is one thing that you cannot really get the truth by reading forex broker review sites but by doing it yourself and experiencing it.
#8: Customer Service
The final step on how to choose a forex broker is based on customer service.
Why customer service? Well, don’t we all hate those companies were we ring and we are put on a hold for minutes? Similarly, we hate companies that we email about certain information but do not get a reply back fast enough or worse, we get no reply at all!
Forex brokers are not angels. A forex broker that deals with customer issues quickly, reliably and professionally tells you a lot about the forex broker you are dealing with.
A few quick ways to gauge quickly how good the customer service of a forex broker is before opening a live account with them, is by doing these:
- Send an email using their contact address in their website and ask a few questions and see how how long it takes for them to respond. Allow for different time zones, if they are based in a different country.
- Get a phone and ring them up and ask them a few questions, and see if you are put or hold or to see if they are helpful or not.
Forex brokers know how important customer service is and all it would take is for one grumpy customer to post a negative review on a forex website. That can stop many traders from opening live accounts with them.
That’s why any reputable broker you open a trading account with should be fairly good with their customer service.
So there you have it. I have given you the 8 steps process on how to choose a forex broker. Out of these 8 steps process, the following 3 are the most important:
- The forex broker is regulated!
- They have been in business for a while.
- Make sure the broker is established in a country that you can trust. One with a strong regulatory compliance rules and processes that brokers must adhere to.
If these 3 conditions above are satisfied, the remaining 5 conditions will fall in line as well.
Don’t not trust and believe everything your read in forex brokers review websites. Those bad reviews will scare the living daylights out of you and as you’ve read in my case. I ended up opening up my forex forex trading account with a so-called scam forex broker and guess what? Never had any major issues with them at all.
As suggested, if its your first time to open a live forex trading account with a forex broker, you should deposit a small amount of money at first and test the forex broker out:
- Test them out in ease of deposit and withdrawal
- Check their execution and speed of execution
- See if you like their customer service
After you are satisfied with the forex broker, you can deposit the rest of the money you planed initially, into your forex trading account.