The first thing that many potential investors do when choosing a broker, is to consult online surveys and research. There is a lot of information available on the web that will allow you to make a more informed decision. The second thing that you might want to do is consult with friends and family who are already invested in the forex trading market, with the help of a broker. Understanding their own experiences with a brokerage firm, will help you identify what it is you want to look out for.
The advantage that potential investors have in today’s market is that they can trade with increasing low volumes. While it is certainly true that high volume investors have the potential to sway the market in their favor, far greater than low volume ones, sometimes your investment budget may restrict you from investing big. While in the past, using a brokerage firm would require you invest minimum deposits in excess of thousands of dollars, it is now possible to invest as little as $100. As such, you are in a leveraged position when choosing a broker. You can experiment with different brokers with small sums of money to determine which one is up to your satisfaction.
Factors to keep in mind when choosing a broker
Perhaps the most important factor when entering the forex market that you will want to keep in mind is the amount of money you are investing and the volume of trades. If you are only looking to invest a small amount of money, your broker options will immediately be narrowed down to only a handful. Whereas previously, brokers required high initial investments into the market, they have now relaxed their limits significantly.
Another factor involved in trading, is the number of currency pairs that each brokerage firm will offer. Some of the best brokerage firms offer anywhere between 30 and 60 currency pairs for you to choose from and trade within. As such, if you are interested in trading with a rare currency pair not offered by most brokers, your choices will automatically become limited.
The trading lot size will also play a huge role in your choice of broker. While initial investment may be an important factor, some brokers will require you to trade in minimum lot sizes of 1000. This is the common minimum among most brokers. However, some brokerage firms may require you to trade in far larger lot sizes in excess of 10,000.
Finally, leverage will also become important. Leverage is the amount of money that a brokerage firm will allow you to borrow from it. Leverage is important because it will allow you to increase your gains significantly even with minimal investment. However, leverage is a double-edged sword because if you are unsuccessful in your trades, you will increase the rate at which you owe the broker. Brokers can offer leverage ratios anywhere between 50:1 and 400:1. Ultimately, the decision to take on increased risk will fall entirely on you.
Type of broker
In the forex market, there are predominantly two kinds of brokers. These are market maker brokers or an Electronics Communications Network broker. The way in which they differ is based on their fee schemes. Market maker brokers will base their fee on a percentage of the value spread. This means that their fee will be entirely dependent on the difference between the selling and buying price. Since this spread is variable, it must be noted that such brokers have it in their best interests to manipulate the spread sometimes. Electronic Communications Network brokers, on the other hand, charge a fixed fee per transaction. As such, they are not incentivized to manipulate the spread.
While it may seem like a no-brainer to go with ECN brokers, it is important that you study the payment and funding options closely as well. Some brokers may charge fees for withdrawing money from your account. As such, if you are not in a liquid position, it is not recommended that you trade with cash that you require for the short-term. It is also important to study the interest rates that different brokers offer if you are planning to trade overnight. Some brokers may also charge other kinds of fees associated with wire-transfer, routing, and margin rates.