Forex trading is quite popular these days. In fact, it has become a primary source of income for many people from around the world. The reason is that it’s a high-reward activity and doesn’t require a lot of skills to be carried out.
That’s right! Trading is all about timings and calculations. Apart from that, there’s not much that affects you except for two things. The first one is the trading platform that you pick and the other is your forex trading broker. Yes, not picking the right forex trading broker can actually make you lose money; therefore, you must pay attention here.
Thankfully, we’ve got you covered today. Here’s everything you need to keep in mind when choosing a forex trading broker.
Safety of Funds, Regulations, and Legal Concerns
Two of the most important things to keep in mind when choosing a forex trading broker are regulation and compliance. If the broker is not regulated, it can do whatever it wants with your funds. As a result, you may fall into a scam.
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Safety of Funds
A regulated broker ensures that your funds remain safe by complying to a set of rules. It is mainly why regulation is considered extremely important. If you’re a professional, you’ll know about the ‘Net Capital Rule.’ Every regulated broker follows it and ensures that you have a certain amount in liquid form, providing you with a security blanket if the broker closes out along the way.
Apart from that, a regulated broker always keeps the funds of all its clients in separate accounts so that these funds are only used to make trades and to avoid accidents, of course. A few countries, including the United Kingdom, also provide insurance to all its regulated brokers so that the clients can manage to recover their money or at least a part of their investment in case things go south.
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Regulatory Compliance
An official regulator protects all the brokerage operations in case of a trustworthy broker. All traders are protected against manipulation and fraud; therefore, chances of any abusive practices are minimal to none. For example, in the United States, they have the Commodity Futures Trading Commission (CFTC) as a retail forex dealer and merchant. All the brokers in the US are registered with it, ensuring trade safety.
They’ve also got Natural Futures Association (NFA) which keeps a check on the brokers. You can check out the ‘about us’ page on the broker’s website before signing up. Go for it if it’s registered with these regulatory bodies. In fact, you should always be thorough with your research and make sure that the broker you choose comes with such credentials, depending on your location. On top of that, you must never forget to check the brokers’ reviews when choosing one for your trading purposes. If anything, it will ensure that you make the right decision.
Margin Amounts and Leverage
The level of margin amounts and leverage provided to traders is another vital factor. Leverage is a feature that you can find in many trading instruments. In case you’re not aware of it, it means that most of your investment comes from the borrowed amount from the broker. It works in a very simple way.
When you set up your trading account, you add a certain percentage of the total value while your broker puts up the remaining amount. Here, your input is the margin. It also implies the fact that your initial investment only covers a small portion of total trade. However, the profits and losses both are calculated based on the total value of the trade. The margin compared to your total exposure is called leverage ratio.
Commission Rate and Spread
One thing that you must remember here is that you won’t be only paying the margin rate when trading forex. That’s right. While you may not pay any commission directly, you have to pay for the spread. The difference between the buying and selling price when opening a forex trade is known as spread. However, such charges are applied to CFD trades only.
Now the tricky part of the story is that the spread amount is not constant. It largely depends on the economic situation of the market. If the market is volatile, the amount of spread will increase in order to keep up with the volatility. Though many regulated brokers offer minimum spread these days, the figure can vary, depending on the condition of the market.
Risk Management Options
Most brokers these days offer a free trial account that allows you to open trades in an environment exactly like the actual one using virtual funds. These accounts are typically known as demo accounts. Although these accounts close on their own after a month or so, traders who open live accounts after that are oftentimes provided with unlimited access to their demo accounts as well. It is especially helpful to try out new strategies.
Demo accounts are super helpful if you wish to test what the broker offers. From the service to the pricing and products, you can test everything beforehand. Not to mention, demo accounts are useful at a later stage as well. It allows you to try and test new strategies while remaining on the safer end of the pole.
Other than that, it’s important that you pay attention to other risk management factors and whether the broker supports it or not. In simple terms, a broker must offer a stop-loss order as it minimizes most risks on the trader’s end. Not to mention, the take-profit order. It’s equally important.
The Takeaway
Lastly, please don’t forget to look into the types of brokers. There are four types to be exact. The first one is Electronic Communication Network (ECN), Direct Market Access (DMA), Straight-Through-Processing (STP), and Market Makers. All these brokers operate differently within the foreign exchange market. Make sure to look into them before choosing one and making trades. Rest assured, it’s a high-reward activity that can help you a lot with your financial situation.
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