As forex traders, there are many risks involved with every trade. One of the most significant decisions you need to make is regarding the broker you select. The market for forex brokers is exceptionally competitive and, sometimes, it’s challenging to differentiate the good ones from the ones who’ll only add to your stress.
Every Forex broker offers its own set of features. While some features can be evaluated objectively, others can be difficult to judge. Choosing from a wide range of forex brokers can be quite challenging. Asking the right questions, though, can help you narrow down your search.
Before you start exploring different brokers, it’s best to have an idea of what you’re looking for exactly. By researching the right things beforehand, the evaluation process can be much more fruitful.
Here are five questions you should ask:
How Stable Is the Company?
A forex broker’s stability is perhaps the first aspect you need to evaluate. Before evaluating how stable a broker is, though, you need to know what information you should look out for. Here are some factors that help you evaluate your options’ stability:
- The company’s background information, including the number of years it’s been operational for and whether it’s experienced any downturns.
- The broker’s financial situation which includes the possession of liquid assets, whether and how much regulatory capital they have.
- The company that is responsible for auditing the broker’s financial statements.
- The company’s current client information including the number of clients they currently have since a large number of clients indicate a better chance for the company staying in business.
Is The Company Regulated?
Another vital question you should be asking potential options is whether they’re regulated. Brokers that are registered will easily be able to provide the regulatory bodies they are registered with. Many brokers also even mention this information on their websites.
Every country has its own regulatory body or bodies. Forex brokers in the United States, for instance, are registered with the National Futures Association or the U.S. Commodity Futures Trading Commission. Similarly, brokers in the United Kingdom are registered with the Financial Conduct Authority.
It’s important to note that brokers that offer services in various countries might be registered with multiple regulators. Regulation laws differ from country to country and, while some countries consider regulation mandatory, others may not.
By having a clear idea of whether a broker is registered and how the regulatory body it’s registered with operates, you won’t be caught off guard regarding the legalities.
Where Does The Company Obtain Its Prices And Who Executes The Orders?
Different brokers obtain their prices through multiple methods. These pricing methods are:
Dealing Desk Execution:
According to this method, the forex broker not only creates the price but executes the orders, too. This method usually involves fixed spreads, which is the difference between the ask and bid prices. These fixed spreads could potentially be higher than variable spreads. This pricing method often comes with its restrictions, so it’s always better to be aware of these restrictions before you make a decision.
No Dealing Desk Execution:
This pricing model involves market makers streaming ask and bid prices to forex traders through trading platforms, after which orders are executed for investors by the market makers mentioned earlier. This method involves fewer restrictions as compared to dealing desk execution.
Does The Company Face Any Trading Restrictions?
Many times, a forex trader faces certain restrictions when he or she is working with a forex broker. These restrictions, laid down by the regulatory body a broker is registered with, impact a broker’s ability. They include:
- The anti-hedging limit which requires the offset of numerous positions that involve the same currency on a FIFO (first-in, first-out) basis.
- Some restrictions may limit forex traders aiming to use leverage. The amount of leverage a trader can typically control depends on various factors, including the size of the broker, where you want to do business, and the regulations involved.
Forex traders may also be limited by other restrictions, such as limit orders. When you’re exploring different options, it’s vital to know the extent of these restrictions before you make a decision.
What Trading Costs Are Involved?
Before evaluating different cost options, it’s essential to assess your trading model. Knowing various things, such as the number of transactions you’re planning to make and the principal amount you want to invest, can help with the decision.
One aspect you should focus on is the kind of spread brokers offer. Variable and fixed spreads both come with their advantages and disadvantages. Variable spreads, for instance, may result in lower fees while fixed spreads provide a degree of certainty.
In situations when the market is more unpredictable than usual, brokers may use slippage, which might be detrimental for short-term trades or trades based on the latest news releases.
Another aspect brokers should consider is markups, which results in charges over the market spread. While markups decrease transparency, the overall costs are much easier to calculate. On the other hand, some brokers earn revenue through commissions, which is a fee charged on every transaction. Commission-based trades offer greater transparency than other trades. Alternatively, brokers may charge a fixed price that doesn’t change with the trading volume.
Sometimes, brokers may charge other fees, including inactivity fees, quarterly or monthly minimums, and margin costs. Additionally, trades conducted overnight may also result in rollover fees.
Choosing a broker is one of the most crucial decisions you’re going to make in your forex trading career. Knowing what to ask and the answers you should look out for ensures you’ll be able to make the right decision when the time comes.
What other questions should a forex trader ask when choosing a broker? Let us know in the comments below!
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