Whether you’ve decided to enter the FOREX market because you’re attracted by its size and always-on nature, or because the concept of currency exchange particularly resonates with you, an initial search online will yield a bewildering array of brokerages. This piece by guest writer Ricardo Evangelista, Desk Manager and Senior Analyst at CFD broker ActivTrades, explains how to choose a FOREX broker.

The internet enabled the retail FOREX market

It wasn’t until the development of the internet during the 1990s that the business of speculating in the foreign currency exchanges became accessible to the retail investor. Until that point, it was solely the province of large banks. ActivTrades was part of that first wave of solely online brokers, starting out with FOREX in 2001. 

The decentralised nature of the FOREX market also allowed for a new kind of broker that didn’t need to be tied to a particular exchange in the way that a futures broker needs to have a relationship with, for instance, the Chicago Mercantile Exchange. This has led to a proliferation of brokerage firms offering spot (cash) FOREX trading – meaning there are many more brokers to consider when choosing a FOREX broker than in other asset classes.

So, here are my top recommendations for how to choose a FOREX broker…

Learning how to choose a FOREX broker: 5 things to consider

1. Talk to experienced traders and do due diligence

When considering how to choose a FOREX broker, speak to those already trading FOREX. If you don’t know anyone, consult online forums. Relying on the opinion of experienced traders as a starting point will narrow down the otherwise overwhelming amount of information available online. But remember that looking good online is not a guarantee of quality and integrity. Be thorough in your research on how to choose a FOREX broker!

Check where the broker is located and which regulatory body they comply with. Because, just as internet connectivity now means that a trader living in the Middle East, for example, can use a firm based in London, it also allows a broker to serve a worldwide market from Mauritius or Belize or Azerbaijan for instance.

This isn’t necessarily a bad thing if the FOREX broker is regulated by a body in a country with a mature financial market. So if the governance authority is in the US, Japan, the UK or Europe, as examples, there is a better chance that the broker will be a legitimate business with your best interests at heart.

2. Do the usual checks and demos

Refer to the checklist you would use when choosing a broker in any sector. Evaluate the performance of its trading platform and data feed, the quality of customer service it provides, and its costs and approach to margins.

You also need to check how it handles its bid/ask spread and order routing. Before you go live, it’s always a good idea to use a demo account; don’t underestimate the importance of being familiar with the platform, different order types and so on. As in any sector, this is a key part of how to choose a FOREX broker.

If you’re looking for more information on this, Tradeguider has a blog written by Jim Cagnina from Infinity Futures that goes into depth on how to choose a broker in general.

3. How does the broker execute your trades?

You want to make sure your broker respects real market dynamics and goes to the underlying market to get prices. Ask them about the liquidity providers they use and listen for the names of large international banks or prime suppliers in the answer.

But also check the small print in their terms and conditions. This is normally found on their website: look for the execution and risk management policies in the legal documents section.

Then check whether the broker uses a dealing desk or non-dealing desk approach. Automatic execution without human intervention – a non-dealing desk approach – is better for the trader. It means, for instance, that trade execution won’t be delayed.

4. Do they offer additional insurance on your investments?

Another benefit of using a broker operating under reputable regulation is that should they run into trouble and need to file for bankruptcy, your account will be covered by that regulator’s compensation scheme. 

However such schemes have their limitations. For instance, in the UK the Financial Services Compensation Scheme provides deposit protection for up to £85,000 for a single person. 

So, it’s worth checking if a brokerage firm offers its own insurance policy that ensures a greater protection of funds beyond this amount. For instance, at ActivTrades we use Lloyds of London to underwrite the additional protection we give our clients, covering individual accounts up to £1 million.

5. Choosing a FOREX broker that cares

Yes, the FOREX market is the biggest in the world and the most actively traded. Yes, it can be easy for the beginner to get started. But don’t forget that it is a highly volatile market and any investment is not guaranteed to bear fruits. You can even lose all your capital or more. 

When you’re choosing a FOREX broker make sure to pick one that offers negative balance protection, so you can’t lose more than the deposited funds. 

A good FOREX broker will treat customers fairly, provide enhanced protection that stretches beyond the basic regulatory requirements and have a vast amount of educational resources available. If a broker has invested in these elements then they’re worth your consideration.

Summary: Do your research to find the right FOREX broker

Choosing a FOREX trader can seem daunting, due to the number of options out there, so these recommendations I’ve outlined should help you to narrow down your search. However, learning how to choose a FOREX broker that is suitable requires research, careful consideration and, as mentioned, some time spent on demo accounts.

This blog was written by Ricardo Evangelista of ActivTrades on behalf of Tradeguider. For more great insights and trading tips, check out our latest blogs and browse our Free Resource Center. If you’d like more information around how to choose a broker, whatever the market, read our piece by Jim Cagnina from Infinity Futures: The Fundamentals of Choosing a Broker. This is an extensive checklist to help you with your search.

Tradeguider is the home of Wyckoff Volume Spread Analysis (VSA). Smart money is as active in the FOREX market as it is in any asset class and Wyckoff VSA works well with FOREX, as we use the relative number of transactions or ticks per bar compared to the previous bar as an indicator of volume. This is explained further in our blog on FOREX and volume. We support retail, corporate and professional traders with our SMART Trader products, as well as supporting FOREX with our Automated Alerts, in our Free Resource Center and Mentorship program.