What To Look Out For When Choosing Your FX Broker

FX broker ads are everywhere these days, with a lot even giving out free money if you sign up with them. Choosing one that is right for you need not be so difficult. As a corporate FX trader, part of the jobscope included opening new trading accounts. Although it's not exactly the same, i think many of the lessons learnt apply for retail traders as well. Here are the only 3 things you need to care about:

1. Is your broker reliable?

Ultimately, you need to make sure that the money you put in with your broker is safe and sound. Imagine earning 10x on your initial deposit only to find out that you cannot withdraw! Believe me when i say that there are many shady brokers out there. A lot of them are incorporated in tax havens where the laws are lax. This is partly due to tax reasons, but they also make it hard for anyone to go after them for not paying up.

Things to look out for are:

• where is the broker incorporated?
• how many years has it been in operation?
• Does it have a physical office in the country you reside in?
• Try withdrawing a small sum of money first before putting in anything big

2. Type of broker

There are 2 main types of forex brokers. Electronics Communications Network (ECN) brokers and Market Maker brokers. You can think of ECN brokers as just providing a gateway that allows you to connect to other participants in the forex market. They don't take a position. Instead, they pass on your order to the market for it to be filled by another market participant.

Contrast this with a Market Maker. In this case, your trades are actually done with your broker as the counterparty. This raises the question - does your broker want you to lose, then? If your strategy involves scalping, with tight stop-losses, such a broker may not be suitable. Market Makers also tend to have wider spreads that make them unsuitable for such a strategy.

Another concern that was highlighted during the SNB crash fiasco a few years earlier was that ECNs tend to be vulnerable when there's low liquidity, not being able to give an accurate price. This actually caused some ECN brokers to go under.

3. Broker suits your trading style

If you have a reliable broker, the final thing you need to consider is whether your broker suits your trading style. By this, i mean:

• How tight is the spread?
• Can you open long and short positions for the same currency pair without closing the other side?
• Does the spread widen around news?
• Can you place your stoploss on both the bid and the ask?
• Do you like the trading platform? Aesthetically, performance etc.
• How wide is the slippage?

Final thoughts

This isn't an exhaustive list by any means but i think it would go a long way towards choosing a good broker for you. You could do everything right, but still be screwed over by a rogue trader/company like the MF global incident. It was a reputable firm and no outsider would have known that they were mixing clients' funds with company funds for trading.

To mitigate this risk, i recommend not keeping any more funds in your trading account than necessary. What we used to do was set up a sweeping arrangement, whereby an unused funds at the end of the day were swept up to our corporate bank accounts. Does it add more cost? Sure does. But when you're dealing with more money than you can afford to lose, you can't put a price on your peace of mind.