5 Points on How to Choose a Forex Broker in 2011

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Yes, I know there’s lots of information about how to choose a forex broker, yet new tools are available for assessing brokers, new tools that weren’t available beforehand. Here are 5 points about how to chose a forex broker for the new year:

  1. Regulation: Regulated brokers tend to be fairer with their clients. There’s isn’t a 100%, but losing the approval they worked so hard to get, is likely a risk they won’t take. The US NFA and CFTC, British FSA, Swiss FINMA and the Australian ASIC are all good stamps. The US authorities made significant improvements, so they became more relevant. Don’t settle for seeing a stamp of approval on the broker’s site. Check out the official government sites of each regulatory body.
  2. Profitability rate:  Speaking of regulation, this is a rather new metric, that is only available to US brokers. Brokers are now required to post the profitability rate of their customers. A broker with a higher profitability rate likely works harder to make his traders succeed. This can be done in terms of education, support or anything else.
  3. Transparency: With the significant growth of forex social networks, transparency isn’t only a nice buzzword. Is our potential broker available on social networks such as Currensee or FXBees? If so, it’s a good sign, that he has less to hide.
  4. Google Bad Reviews: Positive reviews can be a tricky thing, but look up for genuine negative ones – Google the broker’s name with words such as “sucks” or “withdrawal” to see if clients had troubles with the broker, especially in the sensitive field of withdrawing money. Too many genuine complaints mean trouble.
  5. Broker type: Most brokers are market makers, meaning they create the market between their traders. This may easily lead to a conflict of interest between the broker and the trader, as the broker is also a participant in this market, and may bet against the trader. NDD / ECN / STP brokers, that generally send the orders to bigger institutions and just serve as mediator taking commissions, tend to have better morals. As most brokers are market makers, and many of them are OK, this factor is hard to apply. Nevertheless, I believe that these models will become more prominent in 2011, thus allowing the traders more choice.

Spreads, leverage, platform type, and many other parameters are also of importance, but at the end of the day, you want to know that your broker is reliable.

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About Author

Yohay Elam – Founder, Writer and Editor I have been into forex trading for over 5 years, and I share the experience that I have and the knowledge that I’ve accumulated. After taking a short course about forex. Like many forex traders, I’ve earned the significant share of my knowledge the hard way. Macroeconomics, the impact of news on the ever-moving currency markets and trading psychology have always fascinated me. Before founding Forex Crunch, I’ve worked as a programmer in various hi-tech companies. I have a B. Sc. in Computer Science from Ben Gurion University. Given this background, forex software has a relatively bigger share in the posts.

20 Comments

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  2. TheGeekKnows- Forex Articles on

    Good advice. I like the regulation point. Indeed that not only must we look out for the regulated status on the broker site, we must also see the respective regulator site for confirmation! Thanks!

  3. The profitability rate is an interesting new matrix imposed by CFTC. During this year it should distinguish brokers. Some of it will be due to the segment of market participants each broker targets, but certainly a big part will be a reflection of the broker itself.

  4. Good points.
    Some of them are using the NDD/ECN/STP terms solely for marketing purposes because that’s the new deal in town since few years ago.
    I have yet to know, for own curiosity, how a broker proves to a retail customer that he really is what he claims on his site/ ads all over the Internet.

  5. TradeProfits on

    Good points Yohay. Times are changing for the forex industry and I think the last year was probably one of the most ”exciting” in a long time; especially with the Profitability rate. With that said, I think that negative reviews about any one particular broker might not necessary show you the true picture. Obviously there is a lot of sketchy stuff going on, but I think it often comes down to newbies losing money and they blame the broker. Anyhow, good points, and definitely something to keep in mind before going with a new broker.

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  8. Naseer Ahmed on

    I am a newbie and want to know in detail as to how will I discover that a particukar broker is NDD,ECN OR STP AND WHAT DO THESE TERMS REALY MEAN.THANKS

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  12. Dear Naseer the newb,

    The only way to truly discover what the broker is doing with your trades is to get a job with them, however what they do with your trade isn’t that important. Personally I consider the following criteria in ordered of importance.

    1. Solvency, will the broker pay my money or profits back to me when I want it. (depending on the brokers regulation you can see the financial assets and liabilities)
    2. Execution Consistency, am I getting the price I ask for when I ask for it, or am I getting slipped, re-quoted, or rejected. (this can be indicated by blogs and research, unfortunately the only reliable measurement is first hand experience)
    3. True Cost of Execution, what is the executed spread + commissions, and miscellaneous service fees that I am paying. (this can be indicated by blogs and research, unfortunately the only reliable measurement is first hand experience)
    4. Reputation, this is a tough one to accurately measure as 50% of the newbs loose their initial deposit du to inexperience or naivety, not because of the brokers practices.

    Definition and impact of the acronyms:

    STP= “Straight Through Processing”. This is referring to the routing of a trade. A broker does this because it’s lacking the sophistication required to net its traders longs and shorts together. The broker will send all of the trades to one or a pool of many counter parties. This type of broker will receive its compensation either as a hidden fee as part of the spread that the trader pays (Markup/Rebate), as a Commission paid in addition to and on top of the spread and or through miscellaneous service fees or charges. The broker is acting as a middleman between the trader and the counter party, so slippage, re-quotes and rejections are more likely to occur, resulting in a much higher total cost of execution.
     
    ECN= “Electronic Communication Network”. This is a network or aggregation of counter parties. The brokers routing is still STP, so the trader experience and cost structure is the same as above.
     
    NDD= “No Dealing Desk” This is purely a marketing statement without basis in reality. Personally I stay away from any broker that makes this claim. Technically it is true that an STP broker does not have a dealing desk, however the counter party that your trade is routed to most certainly does. If the broker makes a statement that it is an NDD it is either unaware of how the forex market works or the broker is misleading, I don’t want this person as my trading partner. The term dealing desk carries negative stigma due to the unscrupulous or naive use of the tools designed to manage and offset the brokers risk. Today a dealing desk is a set of logical tools that will modify spread based on market conditions, route trades based on matching and predetermined risk profiles, and is usually automated. (if it takes more than two seconds to receive a fill, or you get a lot of rejects or re-quotes chances are you are dealing with an unscrupulous counter party that is using its risk management tools against you)
     
    MM= “Market Maker” This type of broker is the counter party in the trade. A good MM is sophisticated utilizing its risk management tools to ensure a high degree of execution, it will also have direct access to deep liquidity via relationships with several of the largest fx banks. In my experience this is the best kind of broker, there is no middleman, the cost of execution is usually only the spread I pay, they tend to have great fill rates. Good Market Makers seem to understand the value of a long-term relationship sure they are in the business to make money but they don’t want to turn and burn their clients. The forex is a volatile market and the MM may try to make $10 a lot but they will settle for $1, or even $0 to insure good execution and keep a happy customer trading with them.

    Cheers,
    Big Piping

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  17. Forex trading is totally deferent from any other job. If you are having a good knowledge of forex market then it’s good otherwise you need a good forex broker. When I was new in forex trading only UFX Bank helped me to learn forex market and to understand forex basics. UFX Bank is good forex broker.

  18. Exchange Rate Hedging on

    Interesting points, not sure if this helps, but I look for articles (not written by the brokers) reviewing some of the major brokers, and it always helps to look into forums. Also definitely avoid any broker that someone took the time to create a website or write an article about (negatively). For someone to spend that much time and effort to badmouth a broker means something.

  19. Choosing the right broker and the right type of account is just as important as choosing the right system. So if you are hesitant with the broker, go to forum ask advise, and look for reviews.

    And If I may add, for me having a 24/7 online support is a big plus specially if they have online chat support. Of course you wouldn’t want to spend for a long distance call right?