Choose Your Forex Broker With Care

So you've finally made the decision to trade the forex market and want to open an account with a broker, but where do you start?  If you don't already know the forex market is still largely unregulated although new guidelines laid down by the National Futures Association in the US about capitalization, finally came into effect on 21st December 2007.  They are an attempt to force out brokers with insufficient funds and to offer traders better protection.   However, here is my own personal checklist of questions you need to ask before parting with any money.

The most important questions are: what is the net capital, where is the brokerage based and who are the regulatory authorities.   The quickest way to find answers to these questions is to ask the brokers directly!   The NFA requirements are that brokers should have a minimum of $5m dollars plus a percentage of their clients' funds as a safety net.  To my knowledge there are only 14 companies in the US which currently meet this criteria.  It is unclear what is to happen to those brokers who fail to meet these guidelines but already 4 companies have already been closed down.

Knowing the location of the broker is also very important because if they are offshore they may not be regulated.  In the US your broker should both NFA and CFTC (Commodity and Future Trading Commission) registered while in the UK they should be with the FSA.   Other countries will have different regulatory bodies so please check - it's your hard earned money.

Once you are satisfied with the broker's financial probity the next issue is what trading style does the broker allow.  For example what is the broker's attitude to "scalping"?   I recently spoke to a leading broker at an exhibition where I was told that whilst scalping was allowed, sniping was not!   When I asked them to explain the difference there was a great deal of foot shuffling and avoidance of eye contact!   Other brokers do not permit long term trading or may even on a minimum number of monthly trades so please read the small print.  Also check if telephone support is offered - internet connections do break down and trading platforms do fail.  If you are stuck in the middle of a trade with no means of communicating you will not be able to cope with your stress levels. 

It is also important to establish the broker's policy on spreads and the extent to which they are widened when the market is volatile, especially during major news such as non farm payroll.  If you visit any of the many forex forums you will see that this is one of the most hotly discussed topics.  Forex forums can also be good places to check a broker's reputation, although do bear in mind that sadly there are many disillusioned traders in this market so opinions can be too subjective.   A little research before you start trading and parting with your money will save a lot of disappointment and heartache later on. 

Finally, does the broker pay you any interest on your deposit - it is your money in their account, and you can be assured that they will be earning interest on these funds, so why should they keep it for themselves.  I know of one broker who pays interest on a second by second basis, so don't be afraid to ask.