How To Choose a Forex Broker - Part 2

[Igor 10]

Broker Support

• Live Chat Support. Since the forex marketplace is open nearly 24 hours a day, seven days a week, a broker’s customer service should be available during the hours that the trader might need help; i.e., when the trader is awake. The ease with which one can access live chat support or speak with a live person, rather than a time consuming and often frustrating auto attendant is an important consideration. A quick “test” chat or call can provide an idea of the type of customer service a broker provides, wait times, and the representative's ability to concisely answer questions regarding spreads, leverage, regulation, and company details, including how long they have been in business, and the size of their trade volume (larger brokers generally have access to better prices and execution). Most reputable brokers do offer round-the-clock support due to the nature of the forex markets.
   
   
  
• Languages. Many brokers’ websites specify the languages spoken by their customer support crew, or list separate telephone and/or email contacts by country. If the website does not provide this information, a call can be placed to clarify and determine if a trader will be able to comfortably and effectively communicate with the broker. In general, it makes sense to only do business with a company that can provide clear and helpful assistance in a language in which the trader is fluent.
   
   
  
• Funding Methods. Most forex brokers allow clients to make deposits using a credit card, such as a VISA or MasterCard, a bank wire transfer, or an electronic payment, such as PayPal. These methods are generally quick and allow traders to start using an account within a short period of time. Checks, either from an account in the individual’s or corporation’s account name, are often accepted as well; however, there will typically be a delay as the broker waits for the check to clear.
   
  Withdrawal of funds from a trading account can be made in several ways, depending on the broker. Ideally, the system in place should allow for hassle-free withdrawals, and the process should be clearly stated on the broker’s website or in its promotional material. Brokers may offer withdrawals via direct deposit to the bank account on record, by check, credit card, or wire transfer. If a withdrawal is made to a credit card, it will typically be processed only to a card that was used to fund the trading account, and cannot exceed the amount of the deposit. The broker’s website should state how long withdrawals take, and if any fees will be incurred. It pays to read the fine print: a broker’s website may state that they do not charge a fee for depositing or withdrawing funds, when in fact they may relay the costs of bank fees onto the client. For example, if the broker pays a bank fee of $20 for a wire transfer, the cost will be passed on to the client.
   
   
  
• Commissions & Fees Clients should be able to find detailed and up-to-date information regarding a broker’s commission and fee schedule. Brokers make money through commissions and spreads – the difference between the bid and ask price of the forex pair. Many brokers advertise that they charge no commissions, but instead make their money with wider spreads. The spread could be a fixed spread of, for example, three pips (the minimum unit of price change in forex), or it could be variable depending on market volatility. The wider the spread, the more difficult it can be to make a profit. Popular trading pairs, such as the EUR/USD and GBP/USD typically have tighter spreads than more thinly traded pairs. (There are three types of commissions used in this market. Any fees associated with deposits, withdrawals or other account actions, such as receiving a paper statement by mail or having an inactive account, should also be clearly stated.
  

 

Advanced Features

 

• Introducing Brokers. An Introducing Broker (IB) is an individual or organization that solicits and/or accepts orders to buy or sell futures contracts, forex, or commodity options, but that does not accept money or other assets from customers to support the orders. The Introducing Broker has a direct relationship with its clients, but partners with a merchant that handles the trading floor and trade execution operations. In the U.S. most brokers will not partner with an Introducing Broker unless it is registered as an IB with the CFTC and NFA.
   
  IBs provide specialized customer support and usually earn commissions on each of their clients’ trades. To stimulate business, IBs are often provided with perks that can be passed on to clients, including access to value added services, such as advanced charting software, and volume-based trade rebates. Some IBs, particularly those with a very large client base, offer their clients a rebate on every trade. Since many forex traders make many round-trip trades each month, the rebate savings can be substantial.
   
   
  
• CFDs, Oil & Metals. Not all forex brokers allow clients to trade the CFD, oil and metals markets. A CFD is a “contract for difference” where differences in settlement are made though cash payments instead of the delivery of physical goods. If a trader wishes to participate in these markets in addition to forex, he or she should confirm that the broker offers access to all of the markets. At times, the trader may need only open a different account with the same broker to provide the ability to trade in all of the markets. Due to the close relationship between oil, metal and currency prices, and because many currency traders actively follow the price of oil and commodities, many forex brokers have chosen to add these markets to their product offerings.
   
   
  
• Hedging. Traders can use hedging as a means of reducing risk. A forex hedge exists when a currency trader enters a trade with the intention of protecting an existing or anticipated position against an unwanted move in exchange rates. A trader who has bought a currency pair (entered a long position) can use a hedge to protect against downside risk, and vice versa. Direct hedging occurs when opposing trades are entered simultaneously; for example, a trade to buy a currency pair entered at the same time as a trade to sell the same currency pair. The net profit is zero while both trades are open, but the idea is that one of the trades eventually will make money and the other position can be closed. Brokers will state if they allow direct hedging. (For related reading, see Forum discussions about Hedging.)
   
   
  
• Scalping. A scalp is a very short-term trade that can be applied to the forex markets. These trades can last from a few seconds to a few minutes, and are intended to take small pieces out of the market on a frequent basis. Scalpers often trade using very small chart intervals. A challenge with scalping is that, since a typical winning trade is small, depending on the size, one or two losses can wipe out dozens of small wins. But with the right trading system, scalping can be a profitable means of participating in the forex market, especially for traders who like fast-paced action. A scalper should only trade the most liquid markets during times of high volume, using a broker that provides fast and reliable quotes, as well as an easy-to-use trade entry platform. (For related reading, see Forum discussions about Scalping.)
   
   
  
• Dealing Desk. In the foreign currency markets, a dealing desk is the location of a financial institution’s forex dealers. A dealing desk may, in reality, be a large facility staffed by dozens of traders who specialize in specific currencies and who offer support and assistance to traders. The dealing desk executes trades on behalf of the firm’s clients. A drawback to dealing desks is the chance that a trader will receive a re-quote – the rejecting of a client’s original order that is followed by a new, worse price that the client can either accept or reject. In fast markets, re-quotes could happen multiple times, resulting in losses.
   
  A more direct method of accessing the forex markets may be the no dealing desk broker (NDD). This is a preferred method for many professionals and one that allows traders to access the interbank market directly without the need to go through a dealing desk. NDDs work with market liquidity providers, such as global banks, financial institutions, and other market makers, to get the most competitive bid and ask prices. A computer typically selects the optimum buy and sell prices from amongst the NDD’s liquidity providers, and the prices are shown to clients via the trading platforms. NDDs provide an automated process that is generally considered to be fast, transparent and fair.
   
  Whether a trader uses a dealing desk or no dealing desk is a matter of preference, but either way, the method by which a broker handles trades should be investigated and understood.
  

 

Conclusion

If a trader has confidence in a forex broker, he or she will be able to devote more time and attention to analysis and developing forex strategies. A bit of research before committing to a broker goes a long way, and can increase a trader's odds of being successful and profitable in the competitive forex arena.

[chulaihuey 10]

Excellent and thorough discussion of some of the most important considerations in choosing a broker, thanks.

I might add two other items:

• Capitalization: Brokers registered with the US's CFTC are required to report monthly on their financial status. That report can be viewed at: Financial Data for FCMs
  
• Number of Accounts: At one point in time I did some research trying to find out how many accounts various brokers had. The CFTC, again a US thing, requires a quarterly report on number of accounts. As best I could tell it was to be included in the broker's Risk Disclosure Statement. Attached is a sample from Q3, 2011. I was not always able to find the Risk Disclosure Statement, and as best I recall some I found and did not find the data.