Choosing a forex broker is a difficult process. There are literally thousands of companies competing for your money – tantalizing you with seductive ads, hoping you will trust them enough to deposit your money with them. It gets exhausting trying to decipher the hype from the facts, and the real brokers from the scam artists.

There are 5 essential factors to consider before deciding on a forex broker:
• Credibility
• Low Spreads
• Platform
• Leverage
• Word of Mouth

Credibility. Like most people, I have a 9 to 5 job that pays the bills. I work hard for my money, so I am very careful of whom I trust my money with. I won’t trust my money with a stranger, nor would I trust my money with a forex broker that I’ve never heard of.

When I choose my forex broker, I’m looking for big names. I’m looking for brokers with a long history and sustainability. I want a broker that I know won’t be bankrupt tomorrow or the day after. I will rather pay a premium to trade with a reputable company than risk the chance that I may lose my entire bankroll with an unknown broker.

Remember, forex is highly unregulated, and scammers do exist. Beware of them, and take a look at the CFTC’s advisory http://www.cftc.gov/opa/enf98/opaforexa15.htm. Your forex broker should definitely be registered with the Futures Commission Merchant (FCM) and the Commodity Futures Trading Commission (CFTC). It’s your money! Do your research and due diligence before signing up.

Low Spreads. Unlike your discount stock broker who charges you a fixed dollar amount per trade, forex brokers make their money from the spread. This is also where the unsuspecting forex trader can go broke.

The spread is the difference between the BUY and SELL price, and is measured in pips. For example, if the EUR/USD pair is 1.2810/1.2813, there is a 3 pip spread. When you buy the currency, you will buy it at the asking price of 1.2813. If you were to sell it at that precise moment, you will lose 3 pips (around 30 dollars in a regular lot) because the market is only willing to buy it at the bid price of 1.2810. This means that the currency pair must gain 3 pips for you to break even.

This is why a lower spread is desirable since you will need less movement of the currency before you start profiting. The typical spread ranges from 3 pips to 6 pips.

Platform. The platform is the software that your broker uses and you should be comfortable with the software since this is what you will be using to make trades. Most brokers have their proprietary software, and most offers advanced charting features, real-time quotes, and fast execution.

There are two types of platforms: web based, and client based. Web based platform like Easy-Forex are convenient since you can use it without ever having to download or install the software. The best part is you don’t have to be on your own computer to make a trade. You can trade while vacationing in the South of France sipping on a rum and coke.

Client based software will require you to install the software on your computer, but is generally slightly faster once everything is up and running. Installation is usually pretty straight forward, and the broker’s customer service will be more than happy to help you if you run into any trouble installing it.

Leverage. Everybody loves leverage. Leverage gives us control to more money than we can reasonably expect to accumulate on our own. It probably gives us control to more money than we should have access to. With 1:100 leverage, you can trade 100,000 dollars worth of currency with just 1000 dollars. Now that’s impressive.

However, leverage is a double edged sword. It is powerful if you know how to use it properly, but can easily destroy you if it is misused. Remember what Aunt May said to Peter Parker, “With great power comes great responsibility”. Make sure you use leverage responsibly.

Know what your broker offers in terms of leverage. Typical leverages are 1:25, 1:50, 1:100, 1:250, and 1:400. Usually it is nice to have the option to use high leverage, as long as you know what you are doing.

Word of Mouth. This is the most important factor of all. When it all comes down to it, it doesn’t matter whether one broker has a slightly better spread than another, or they use cutting edge charting software as their platform. You will trust a recommendation of your friend over any stats you have researched.

Ask around, and you will soon discover that most people have similar experiences with each broker. This is the most reliable source of information you will ever have when deciding on which broker to use. This is where you find out if there is a difference between the spread posted on the website, and the spread that actually occurs. Also, you will discover the execution times, true level of customer service, and any suspicious activities that they’ve encountered.

If you know someone who trades currency, you are way ahead of the game. If not, don’t sweat it. There are lots of non biased, friendly forums on the net to answer your concerns.

Last bit of advice…

How do you decide on which car to buy? Would you ever buy one without first test driving it to test your needs? Probably not. So don’t dive head first into the first broker you see. Try out at least 3 brokers by opening up free demo accounts and then decide. What do you have to lose?

In conclusion, I strongly urge you to be careful and carry out your due diligence when selecting a forex broker. If you follow this guide to selecting a good forex broker, you will have taken your first steps towards a successful trading career!


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