The term forex broker is understood in many different ways in the foreign exchange world. However, on its basic level it is an entity that stands between the trader (yourself) and the actual forex market. This is a place where you post your desired transaction which will be executed in the market.
Nowadays almost all forex brokers offer an online platform from which you can trade directly. Usually, the trader opens a trading account with this broker through an online transaction using either a credit card or one of the electronic money companies. Once your real money are there, you will be able to observe the movements of the forex markets represented by currency pairs and make buying and selling orders. Remember, that forex exchange is entirely decentralized. It is what we call “over the counter”, in other words, there is no official exchange center like in the case of shares. As opposed to that, all interested parties that buy or sell currencies make up the forex market.
Your forex broker must execute your transactions without delays and minimize requotes . The broker must provide secure transactions, hold you deposit and return it immediately if required. The broker must display a real time currency exchange market and give you additional information such as important financial and political news. Many brokers will offer you a possibility to see what other (successful) traders are doing and follow them (copy trading, social trading, etc). The broker also must teach you their trading tools and provide with expectations of the trading items you select.
There are thousands of online forex brokers and some of them are scams, cheating on the forex trader. However, the competition between the brokers is enormous and it is getting more and more difficult for scammers. Of course, there always will be scammers claiming to be successful forex traders. They will promise 100% interest on your investment in three months or less, or sell you a book full of secret forex recipes to make you billionaire. However, there are individuals claiming to be forex gurus and such which is a specific subject outside the scope of this review.
As far as forex brokers are concerned, traders typically register with regulated brokers. It means that they are under supervision of a reliable regulatory authority, for instance, The Financial Services Authority (FSA) of UK, National Futures Association (NFA) and Commodity Futures Trading Commission (CFTC) of US, etc. Remember that registering with a forex broker is not a marriage. Top regulated forex brokers usually offer a demo account. The time is unlimited and you can practice your forex skills, verify the forex tools and the user interface. Most demo trading accounts are comparable to their live versions, but are not exactly the same. There may be a difference in the execution rate, slippage and reliability. Actually, live versions are more reliable than the demo versions.
However, do not play with the demo account too long. Trading the real money is different from trading the virtual money. It requires integrity, physiological skills and very well defined set of goals. It is an entirely new life experience, no more no less. Besides, the demo account comes with a large amount of virtual money (100,000 USD or more ) so you can use a high leverage. Try to trade a small part of that virtual money on the scale of your initial investment. If you are a beginner, 1,000-10,000USD is what you are planning to invest, right ?
There is a number of trading parameters to characterize the broker. When you open the demo account and practice, you will eventually learn all of them. However, at the very basic level you will have to check the following list:
Regulation. It is important, that the broker is regulated (see the discussion above). In addition check when the company was founded. Top forex brokers are those established 3-5 years ago or more.
Types of the accounts. There are many types of accounts at the various online brokers. The most common accounts are the standard, mini, micro, and demo. For instance, the for many brokers the minimum standard account can be 1,000 USD and the micro account could just 1USD. There are also special types of accounts called Islamic account which are regulated in compliance with the rules of Islam. Of course, the more money you invest, the more privileges you get. Many brokers offer extra services for larger accounts such as extra visual tools, large bonus etc. The general rule is the spread that brokers charge you: usually there will be lower spreads for the larger account.
Spreads. This is how the forex brokers are making their money. The spread is the difference between the currency price at the marker and the price you buy or sell this currency through the online broker. For example, the bid /ask market price of the currency pair EUR/USD is 1.4238/1.4239. It means that you can buy euro for 1.4238 and sell it for 1.4239USD. However, the broker shows you the pair as follows 1.4235/1.4236. In that case the forex traders say that the spread is 3 pips (the difference in the last digits). The spreads can vary from 2 to 20 pips depending on the market situations and the currency pair. Many brokers offer a fixed spread, i.e. it is guaranteed that the spread always remains the same irrespectively of political turns, bad financial news and possible market volatility. On the other hand, varying spread does not mean that the broker is going to cheat on you. As opposed to that the floating spread broker offers the best price at any given moment. Therefore, in times of high liquidity, the floating spread tends to be lower. This makes trading through these brokers cheaper. However, it comes with the risk of market conditions at times.
Leverage. The idea is simple. A forex trader borrows the money from the broker for trading. Leverage allows a trader with a small trading account to invest in large value contracts. Usually, brokers offer up to a ratio of 1:500 for an account holder. Therefore, Leverage is about maximization of your profit. At the same time, the risk of trading with leverage is also multiplied many times over and hence there is a need for a proper risk management and control (see our articles Leverage and its Significance, Risk and Leverage, Forex Leverageholic Review ).Also remember, that before a forex trader can use leveraging, he/she has to put a deposit of “good faith” also called the performance bond. In return, the broker set up a margin. In that case the trader can execute an order larger than what he has in his trading account. Nevertheless, if the trading account fall below the margin, the broker will close some or all of the trader’s positions. The possibility of high leverage, shows a trust between the broker and the trader. It also makes obvious that the broker has a strong position and does not depend specific market
Customer service is one of the most important factors. This is something easy to verify, something that you can feel right away. Delays in replies, non existing or hard to reach phone numbers, delays with withdrawing your trading money are warning signs. If there is no clear way to contact someone at the company or this way does not work it is a definite red flag. Top ranked brokers offer a variety of ways to contact them. This includes phone, email, live chat, skype, paltalk and many others. Besides, professional brokers usually offer a multilanguage support which can include your national language. Finally, value-added service is becoming a regular feature due to an enormous competition between the forex brokers. Service including forex analysis, forex news and forex signals is a definite sign of a good broker. Many brokers offer a debit card which simplifies your transactions. Using the card you can add up to your account or withdraw your win online or at the ATM machine.
Clearly, there is a lot to consider when selecting your broker. There are many other factors such as the simplicity and transparency of the visual tools, free forex signals, expert articles, bonus, promotions, social trading, PAMM accounts, copy trader systems, etc.
However, signing up with the broker is not a marriage. If you do not like the broker you can always move on. Use the demo account. If you like it, try a small deposit and see what happens. There are hundreds of well established forex brokers. With them you are absolutely sure that there is no scam or cheating. Do not blame the broker for your loss neither praise them for your wins. At the end of the day it is your trading skill, your integrity, your education and your trading plan that make it possible.