How does one go about choosing a forex broker?
To effectively invest on the forex market, you not only need to choose an appropriate trading strategy, you also need to choose a reliable Forex broker. The broker’s reliability is determined by his willingness to fulfil his financial obligations. In the below list you will find a few important points that need to be taken into account when you choose a forex broker.
Year of launch and development dynamic
Long term activity on the currency market is typically sign of a company’s financial stability, well-established business processes and staff professionalism. The dynamic of positive development (offering new services, opening new offices…) also highlights the serious approach that a broker has undertaken. Nevertheless, a young company doesn’t necessarily mean that the services provided aren’t any good, as major Forex brokers have been launched within just the last five years.
Country of origin and regulation
A broker’s country of origin is also very important. The legislative authorities of developed countries strictly regulate financial activities; they notably forbid illegal transactions against traders. Moreover, in these countries, one can always have legal recourse with the regulator in the event of a dispute with a forex broker. Brokers registered in offshore countries are not subject to any governmental control, which therefore calls their reliability into question.
Before depositing money into a trading account, each trader must verify that his broker protects his clients’ money in the event of unforeseen circumstances, especially the broker’s bankruptcy. One of the easiest ways to limit this risk is to open a segregated account. This means that client funds are held separately from the company’s funds, in different accounts. This way, the broker cannot use his clients’ assets for his own operational activities.
Furthermore, forex brokers have different insurance regimes to protect them against risks. For example, Cyprus created the Investor Indemnity Fund, which is run by the CySEC (Cyprus Securities and Exchange Commission). Clients of Cyprus forex brokers who go bankrupt are therefore entitled to compensation up to 20,000 euros.
It is recommended that particular attention be paid to the following points when looking over a brokerage contract. Some brokers will have several legal entities, some of which will be registered in developed countries which regulate and provide brokerage licences while others are located in an offshore country. Before signing a contract, you must therefore verify in which country the entity is located.
If a broker is involved in a serious conflict, legal procedure or subject to fraud accusations, these facts quickly become known on the internet.
Nevertheless, this information must be carefully examined. Even on well-moderated independent forex forums, one will often see messages written by a broker’s staff which aims to tarnish the reputation of their competitor.
Recently, sharp competition has stimulated the massive access to the forex market. The amounts of deposits, spreads and minimum transaction amounts have fallen. Nevertheless, specific attention needs to be paid to companies that provide forex trading with an initial deposit of just one dollar. Many brokerage houses aim to recruit as many clients as possible with little concern for the quality of their service.
Trading terms are: the minimum amount required to open an account, the spreads and brokerage fees, the number of financial instruments, leverage and margin call and stop out levels.
A broker’s reliability can also be judged by the quality of the support it provides and its support team. A broker that quickly and efficiently answers questions is focused on its clients’ success. The diplomatic handling of disputes is also a significant sign of high quality service.
For more information or for personalised advice, feel free to contact us or ask questions on Forex Central’s traders’ forum.
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