Choosing a Forex Broker

Choosing a Forex Broker

It might seem like it goes without saying that it is important to do your due diligence before committing to a market broker in any asset class — be it forex, commodities, options or stocks.  But what is most surprising is the fact that most traders choose their brokers without giving it much thought because they feel the need to jump right into the markets and start making amazing gains.  Those of us with experience in these markets know that there are some important reasons to have patience in these areas because not all forex brokers are created equal.  Additionally, the potential for destructive losses in many cases is even greater in forex markets because most traders (especially new traders) will utilize large levels of leverage in order to maximize gains.  Unfortunately these practices have the potential to maximize losses as well — so it is highly important to understand the inner workings of your broker before taking on real market risk.  

Stops and Execution

When you want to choose a forex broker, the first area to monitor is the broker’s ability to execute trade and honor specific order levels.  For example, if you have a stop loss in a EUR/USD trade that is placed at 1.35, it will be critical to have that stop loss filled correctly if prices trade at the 1.35 level.  If this does not happen, you can undergo unnecessary losses or even encounter a margin call that you were not prepared to experience.  Some brokers offer guaranteed stop losses, while others offer variable stop losses that may or may not be filled (depending on overall market liquidity).  This is an important difference that must be understood before any real trades are placed.  

If you are not prepared for the arrangement that is offered by your broker, you could begin to experience losses at a rate that is much faster than you were initially expecting.  Looking at stop loss arrangements and trading execution is one of the quickest and easiest ways you can determine whether or not a specific broker is right for you.  But you will also need to spend some time using that broker’s demo account in order to determine whether or not you are seeing slippage between the order level you were expecting and the one that was actually filled in your trading account.  

Spreads

The second important factor to watch is the spread that is offered on your most commonly traded currency pairs.  In pairs like the EUR/USD these will usually be somewhere between 1 and 3 pips, but there are brokers that offer even lower rates and this can only help your trading account.  One sacrifice that is often made when getting lower spreads is weaker trading execution, so you will need to determine which aspect of the broker arrangement is most important to you before you open a live trading account and begin establishing positions.  Spreads, Stop Losses, and Trading execution are a few of the most important factors to consider when choosing your main forex broker.