How to Choose a Forex Broker

Currency trading brokers, foreign exchange brokers, and forex brokers are all the same thing, and all of the words are used interchangeably to describe a company that allows customers to buy and sell currencies. The idea is very simple, you open an account at a currency trading broker and magically the door is opened to the rest of the world’s currencies.

While finding a forex broker is easy, picking one that is right for you isn’t so easy. In fact, with the number of firms currently offering their services to individual investors it seems that more choice has only made the market more complicated, not less complicated. We’ll explain the currency trading scene, what makes a good and bad broker, as well as how to pick the broker that is right for you, below.

Forex Brokers and Regulation
Ideally, it is best to work with a company that exists in a market that is at least partially regulated. The United States is one of the nations that is most active in regulating brokerage firms, particularly currency brokers. Other countries, however, aren’t so stringent, and customers would be prudent to avoid these brokers in favor of the well established players.

What makes a “bad” broker and a “good” broker different often goes unnoticed. While it is true that with each trade you place, you can both earn and lose money, it is also true that each trade doesn’t mean you actually own the currency. In the United Kingdom, for example, “contract for difference” brokers are very common. These brokers do not actually buy and sell currency on behalf of their customers. Instead they merely act as a casino, hedging one customer against another, opening up the possibility that traders have a string of winning trades and thus bankrupt the brokerage firm. What happens then? Well, the traders lose money, even though they really picked the correct trade.

One well known and respected brokerage firm in the United States is FXCM, which is also a major player in many international markets, as well. FXCM is not only regulated by US authorities, but it also trades publicly on the stock exchanges, giving regulators additional insight into how the business as a whole works, and not just how it treats its customers. That amount of transparency is welcomed by investors, and FXCM credits it as one of the main drivers of its success.

Picking a Broker
Besides the regulatory environment, traders should also be aware of the different software applications, trading tools, and benefits each broker provides. For example: some brokers offer only their own, custom trading software. Others, however, allow traders to make use of such third-party software as Metatrader, a very common forex platform.

This distinction may not be so important to a trader who has not yet developed some level of familiarity with a trading platform, but to those with experience, it isn’t uncommon to find that a broker is a poor selection due solely to the platform. For the sake of understanding the concept, it is as if you asked an Apple computer user to swap computers with a lifetime Microsoft user. That probably wouldn’t work out so well, would it?

A final consideration is funding options. Believe it or not, foreign exchange brokers often have the widest selection of choices when it comes to how a trader funds his or her account. Some brokers offer as many as ten different selections ranging from checks and money orders all the way to Paypal or other ecurrencies.

The flexibility in payment options should be weighed carefully against any funding fees, or transfer fees. Some brokers allow for free bank wires or EFTs, while others charge a fee for such services. Almost all Paypal brokers charge a fee on deposit, as Paypal charges brokers a fee for each payment. Likewise, withdrawals may come with fees, too, often ranging from $5 to $20, or occasionally a flat percentage of the amount withdrawn.

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