Here is the second part of the 10-point guide to finding the best FOREX broker. This part covers point 6 to 10. For points 1 to 5, please read the first part.
6. Is Your Broker a Member of any Regulatory Body?
FOREX markets are not legally regulated and therefore, not all brokers are members of a regulatory body. Make sure that the broker you are planning to trade with is part of at least one regulatory body. Trading with unregulated brokers will only help you lose money. In the United States, there are bodies such as the National Futures Association (NFA) and the Commodity Futures Trading Commission (CFTC) that offer protection in case the broker fails. All countries have some bodies like these. It is wise not to trade with brokers who are not members of any regulatory body. You’d not want the broker to take all your money and vanish one day, would you?
7. Is the Spread Suitable?
A broker makes money through the spread. Spread is the difference between the ask price and the bid price. Spread depends on the broker you are trading with and the currency pair you are trading. Normally, a spread of 1 to 3 pips is okay for the major currencies. Before choosing a broker, get details regarding the spread for the currency pairs you’d trade through the broker. Do not fall for low spread as there are several traders – mostly the ones that make very little number of long-running trades- offering a low spread and charging traders with additional fees.
8. Is the Lot Size Suitable?
The lot sizes are standardized in the following way.
1000 currency units for a micro lot
10,000 currency units for a mini lot
100,000 currency units for a standard lot
However, some brokers offer more flexibility and let the trader create a lot size of his own. Traders would not need this much money as they’d be trading on margins.
9. Are you OK with the Leverage?
It is the leverage and margin that allows you to control large sums of money with a much smaller investment. The standard leverage is 100 times. A leverage of up to 200 times is possible. Certain brokers prefer to keep the leverage at 50 times thereby bringing down the risk. Leverage and margins vary from one broker to another. So, make sure the leverage provided by your broker suits your plans.
10. What is the Broker’s Business Model?
The business model of the broker is also a very important factor that can influence your success. For example, there are brokers who own a dealing desk but access the FOREX market through the electronic communications network. There are also market makers who are similar to traders, but not exactly traders. Market makers are people that help you find a match for your trade. They usually do that through brokers. Sometimes, they might match your trade too. This could be dangerous for you as the market maker with whom you have trusted your funds is like your opponent. When they match your trade, they would lose if you gain.
Whether you are availing the services of a broker or a market maker, taking a look at their past history and feedback is important. Look at the reviews provided by independent forums and do not rely on testimonials by a couple of people.
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