The 4 Most Important Factors in Choosing a Forex Broker

Choosing a Forex BrokerProbably the one question I am most frequently asked by new aspiring forex traders is, “How do I choose a broker?”  It is, indeed, a critical question, and having the right broker can be critical to your success (or lack thereof) as a trader.  I had it easy – when I first started trading forex, there probably weren’t more than about 10 brokers to choose from for a small trader like myself.  Now there are dozens, maybe hundreds.  Well, following are what I consider the 4 most important things to consider in choosing a broker:

1 – Trustworthy & Honest

This simply has to be number one, because it doesn’t do you any good to make a fortune in your trading account if you can’t get your broker to give you your money when you want to withdraw it.  The worst horror stories from traders are those where they relate that they opened an account with $500, made $10,000…but then when they tried to make a withdrawal, could never get their broker to give them their money.  And, unfortunately, that very thing has happened to hundreds of traders.

So how do you find a reliable broker?  I believe the best procedure is to read the comments in forex forums (like Forex Factory and Forex Peace Army) regarding the brokers you’re considering.  Also, talk to people you know who are successful traders – most of them will be more than happy to recommend a good broker (I recommend mine all the time!).  There are always good and bad comments, but you should still be able to get a pretty solid sense of whether a broker is essentially reliable.  The other thing I recommend everyone do is, once you’ve opened an account, early on in your trading make a withdrawal request, just to see if you encounter any problems.  With a trustworthy broker, there should be no problems and you should receive your money within 1-2 business days, within 5 business days at the most (that’s a week – if your broker takes longer than that to get your money to you, I’d recommend looking for a new broker).

2 – Spread is (Almost) Everything

The critical importance of getting good (i.e., small) spreads cannot be emphasized too much, but is often overlooked.  The difference between just a 1 pip spread and a 2 pip spread can really add up over time.  If you’re a scalper or day trader who makes an average profit of 10 pips per trade, then the difference between a 1 and 2 pip spread makes a 10% difference in your trading profits.  Spread also effects the triggering of stop orders and take profit orders.

In the beginning of my trading, I lived with an average 2 pip spread on Eur/Usd, and 2-3 pips on Gbp/Usd and Aud/Usd – I just didn’t know any better.  With my current broker, I now get less than half a pip on Eur/Usd, and half a pip to 1 pip on Gbp/Usd and Aud/Usd.  Even on slightly exotic pairs, like Usd/Sgd or Usd/Nok, I don’t usually have to give more than 1 and a half pips at most.  It makes a huge difference over time.  Just one example – it’s a lot easier to scramble out of a trade at breakeven if I enter a trade and the market just “dies” on me, that is, just flatlines, going basically nowhere, to the point where I no longer wish to be in the trade.  Just the slightest blip in price can enable me to get out at even or better.

There’s an excellent spread comparison tool at myfxbook.com that compares – live – the spreads from 60 brokers on the most commonly traded pairs.  It’s not 100% accurate all the time, but it’s certainly close enough to give you a clear idea of whether a broker’s spreads are good or bad.

Another factor to consider, that’s related to spread, is whether your broker engages in the annoying habit of “re-quotes”.  Re-quotes are when you bring up the order box for a market entry order, click buy or sell…but instead of executing your order instantly, the broker re-quotes the price spread.  I’ve never had this problem with brokers I’ve used, but I’ve heard of traders who had to endure 2 or 3 re-quotes before finally getting their order accepted – and this often resulted in them having to enter 2-4 pips away from the entry point they were originally seeking.  That can flat out kill your trading – if your broker re-quotes, find another broker.

Slippage – that is, the difference between your actual order fill price and the price where your order is placed – is the final factor in regard to spread.  Personally, the broker I now trade with is great on slippage – that is, I don’t have to worry about there being much slippage, not more than 1 pip at most.  In even the fastest markets, my stop orders are almost always filled exactly where I have them placed.  But I’ve heard of traders experiencing slippage of several pips on almost every trade.  Again, that’s something that can kill your trading success.  A broker that you see a lot of slippage with is not a good broker.

3 – Reliable Trading Platform

It’s essential to trading success that you use a broker whose trading platform is reliable.  What that basically means is that you can count on it to always be up and running.  Imagine this nightmare scenario:  You place a quick market entry order, but before you’re able to enter take profit or stop loss points on it, your trading platform goes down, and stays down and inaccessible for several minutes, possibly even an hour or more.  I don’t even want to think about what kind of whopping loss might result.

Fortunately, this is another factor that can easily be determined simply by doing a little research into comments on brokers in any number of forex trading forums.  If trading platform problems exist with a broker, you’re almost certain to find traders complaining (loudly) about it in a forex forum, so definitely keep an eye out for those kind of comments.

4 – U.S. Regulated or Not?

Some traders recommend only trading with brokers that are regulated by U.S. government rules and organizations, the thinking being that such brokers should at least be basically honest, and that should you have a problem with them, it’s easier to get help in resolving the problem.

I am not one of those traders.

Honestly, I despise the current U.S. trading regulations on forex trading, specifically the margin requirements (as much as ten times higher than what you can get with an offshore broker), the no-hedging rule, and the, in my not-so-humble opinion utterly idiotic FIFO rule.

[Tweet “Honestly, I despise the current U.S. trading regulations on forex trading”]

Current margin requirements mean that U.S.-regulated brokers offer no more than 50:1 leverage.  Well, that’s fine if you’ve got plenty of capital to work with, but I started my forex trading with a whopping $50 in a micro account – with 50:1 leverage, I never could have gotten off the ground.  And one of the things I have always most liked about forex trading is the opportunity it offers the “regular guy” (or girl) to start out with just a small amount of money and still have a reasonable chance of gradually making themselves a fortune.

The worst, most useless and annoying, U.S. regulation, in my opinion, is the FIFO rule.  FIFO stands for “first in, first out”.  The rule basically says that if you have multiple positions in place, and you go to close one, you must close out the one you first entered.  I often have multiple positions on in a given currency pair, where I’ve bought or sold additional lots at different price levels.  Want to be annoyed (AND lose money!)?  Try this:  A market suddenly starts moving rapidly up or down, and you want to close out part of your positions quickly, either to take profits or minimize losses.  You click on a position, hit “close order”, but instead of your order being closed, a screen pops up reminding you of the FIFO rule – that you can only choose to close out the first position you entered (even if that’s NOT the one you want to close out) – and then, as the market continues to move, costing you more and more money, you have to take the time to scan through your list of positions to FIND the one you entered first.  I had this happen to me exactly once – I have never traded with a U.S. regulated broker since.  Instead, I enjoy the freedom of trading with a broker who offers me the ability to trade the way I want to, rather than the way the government wants me to.

Again, there are many traders who only feel comfortable trading with a U.S. regulated broker, and who ask me, “How do you know your money is safe if the broker isn’t regulated by the U.S. government?”  My reply?  What, like U.S. government agencies are the ONLY regulatory agencies in the world that can be trusted??  Like there are NO honest brokers anywhere in the world unless they’re under the governmental thumb of the U.S.??  MY question is, “What makes the United States feel it has the right to regulate every brokerage firm in the entire world?”

The bottom line is, if you’re more comfortable trading with a U.S. regulated broker, then do that.  If you’re more comfortable trading with an overseas broker that offers less cumbersome trading rules, then go with that.

I hope this article has been helpful for you.  What I most hope you take away from this article is the simple importance of considering important factors to your trading and doing simple research in choosing a broker.  As always, these are just my thoughts and opinions – I’m not God.  If you’d like to take a look at the brokerage firm I use, just email me and I’ll be happy to direct you to them for consideration.  I wish you all the success in the world in your trading.

This article has been written by: Jack Maverick

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Winners Edge Trading was founded in 2009 and is working to create the most current and useful Forex information and training available on the internet.

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  • Jack Maverick
  • Jack Maverick

    Nishebita – Contact me by email and I’ll be happy to share with you.

  • Jack Maverick

    I’m happy for your success, but I’d say you were fortunate to get off the ground using only 50:1 leverage with that amount of starting capital. It is, of course, advisable to use no more leverage than one needs, but many new traders, regular people starting with just a small amount of capital, need all the leverage they can get in the beginning, and therefore I’d have to respectfully disagree with your admonition to stay away from 200:1, etc. Best wishes in your trading, good that you’ve found a strategy that works for you.

  • nishebita

    That is very thought provoking article. I would like to take a look at the brokerage firm that you use and also can you name non USA overseas broker name please.

  • Gary I think yours is already in the mail check with support.

  • Pap

    About the leverage thing; I’m trading with Oanda and they have a leverage cap of 50:1, I got my 20€ to 200 in two months, so 50:1 is enough to me and tbh I plan to use no more than 20:1 when my account is bigger. Fifo doesnt bother me aswell because my trading style averages a trade per week. Low pip swing trades are history to me. Stay away from 200:1 500:1 even 1000:1, learn to be patient and to squeeze from a trend all she has got for you.
    Profit from market noise? No ty I rather go try my luck in the roullette.
    Btw casey I enjoy reading your posts.

  • Jack Maverick

    Scott – Hey, you were doing well with a sailboat! I’d say the current U.S. regulations turned MY speedboat into a leaky life raft. 🙂

  • Scott

    Thanks again Jack! This info couldn’t have come at a better time. In all honesty, I have several US brokers (live) and always got better service out of my offshore brokers. Like Casey I still question the reasoning for the new laws and changes. I do not trade for the thrill, I trade for an investment. But the new laws took my speedboat and turned it into a sailboat. And about as much fun as watching paint dry! 🙂

  • Gary Roberts

    Hi Casey,

    Off topic, but when can Investment Copier members finally expect to receive their refunds? It’s been in excess of THREE MONTHS now since I personally became eligible for a refund AND I’M STILL WAITING.

    I’ve tried getting an answer out of Nathan,but he won’t tell me anything – ABSOLUTELY CRAZY SITUATION!?!

    Gary Roberts

  • Jack Maverick

    Thanks, Casey. I invite people to connect with me on Google+ as well.

  • Jack Maverick

    Matt, I’ve heard some good reports on Pellucid, but have not personally checked them out. Happy that you’re happy. 🙂

  • Jack Maverick

    I feel your pain, Scott – as I noted in the article, if I had had to work with just 50:1 leverage, I never would have gotten my trading account off the ground.

  • Jack Maverick

    “They have been on a rampage since 2010”
    THAT’s for sure – I had to change brokers TWICE between 2010 and 2012, because the CFTC hammered them until they just stopped accepting U.S. clients. Fortunately I finally found one that won’t knuckle under to U.S. pressure.

  • Jack Maverick

    I think nearly all overseas brokers are very upfront about whether they accept U.S. clients. Uncle Sam has hammered many of them into submission – FXCM UK no longer accepts U.S. clients – but there are still plenty out there, because the demand is out there.

  • Jack Maverick

    Haha – Sam, I’ve said more than once that if I ran into Barney Frank or Chris Dodd, I’d have a hard time resisting the urge to flatten them. 🙂

  • Jack Maverick

    I agree. Raising margin requirements does nothing but squeeze out small traders – banks can afford to pony up any amount of margin. If they really wanted to guard against market manipulation, they’d have much stricter position limits, not just higher margin requirements.

  • Gerry N.

    Great article. I live in Europe and did not know all about US regulated. Never seen spreads less than 1 pip so please share info .Regards Gerry N.

  • smayer97

    If you are interested in what the CFTC is actively doing, just do a simple internet search for CFTC sues broker soliciting US and you will find many recent examples.

  • smayer97

    I posted what I thought would be an informative post regarding this topic of what the CFTC/NFA are doing about this issue but for some reason it was suspended and never showed up.

    The gist is simply that it appears at this time that the gov’t is not after the clients but rather any foreign brokers that are not properly registered, and therefore not under the CFTC review, that are soliciting US clients. They have sued and fined many firms (at least 25), a few big names too. Result…name have closed their doors to US clients.

    So as it stands the greater risk is more that if the CFTC targets your foreign firm attracting US clients, they would be forced to close their doors to US clients, forcing you to have to find another broker, with possibly less favourable trading conditions.

    An alternative is to open an offshore corporation, then register with a foreign broker.

    Food for thought.

  • smayer97

    Who is your broker?

  • Scott

    Thank you Jack for the great article. Thank you Casey for the great info. I traded for years with FXPRO and when they pulled the plug a couple of years ago!!!!! Going from 500:1 to now 50:1 leverage really impacted my trading style.

  • Take the Time to Thank Jack Maverick https://twitter.com/jbmaverick Since he put together this great article. Thanks Jack!

  • Scott

    This is great. Thank you Casey.

  • Dave,

    It is not illegal to have an overseas broker at all. That would be a very unjust and unconstitutional law. Thank God that we still live in the land of the free.

    However I will get some information regarding that topic as well.

  • Denis,

    Thanks for asking the question and I will look into doing some material regarding that topic.

  • Sam its true they are just driving business away from the United States.

  • Matt thanks for sharing and I totally agree with you but of course it is important to do research, start small and build a relationship.

  • Garv if you click on our brokers tab Tallinex has been very good to me but I do of course diversfy I dont believe anyone should keep all of their funds in one place.

  • I honestly try to think of what the actual motives for these rules are??? It is certainly not designed to help retail traders which is what they say.

  • Dave Hanna

    Many traders are under the impression that the CFTC rules make it illegal for a United States citizen (resident?) to trade with a foreign broker not registered in the U.S. (and therefore subject to the onerous rules you refer to). Could we get a follow up article on where this impression comes from, why so many hold it, and what is the correct reading of the law? I, for one, would really appreciate it.

  • Akan Ifem

    Thank you for this eye opener, Thank GOD i didn’t fall into this FIFO trap bec it would have been disastrous, I still need a reliable broker

  • Denis

    It would be helpful to educate us as well with what added responsibilities one may have with IRS regulations or additional forms required given(I assume) no 1099B’s will be issued, and which brokerages will accept US clients.

  • Sam

    I agree the most stupidest rule is FIFO. Thank you F**khead Frank and Dumb**s Dodd and all the other regulator involved. Get rid of FIFO and I’m more than happy to use US broker.

  • Matt

    Very good article that new traders should pay attention to here. There is nothing wrong with using an overseas broker, in fact the very reasons you laid out here are the exact reason that I use an overseas broker myself. I have used PellucidFX for 1 year now and they are great, and I withdraw money every single month with no problem, it is in my bank account within 2 business days every time.

  • Garv

    I decided to go with a U.S. broker, specifically FXCM. I heard too many horror stories of withdrawing, price requotes etc. So which “oversea” broker do you use and recommend?

  • Ari

    Jack, your broker sounds great. Who do you use? Thanks!

  • Adam

    Good stuff… Agree that US rules are stupid