How to Choose a Forex Broker: What You Need to Know (2024)

You can place bets on the world’s currencies through forex (foreign exchange) brokerage accounts, buying or selling currency pairs that react to economic developments all over the globe. The forex market operates 24/5, opening on Sunday evening in Sydney, Australia and closing after stock traders complete their business on Friday evening in New York. The volume of currency trading is large, transacting more than $7.5 trillion per day as of April 2022, larger than the world’s stock or bond markets.

Forex traders take long and short sale positions on currency pairs, which calculate the exchange rate between two forms of legal tender, the euro (EUR) and the U.S. dollar (USD). A long position opens a trade that makes money when the exchange rate moves higher; short sale profits when it moves lower. Unlike stocks, a trader doesn’t borrow money or securities from a broker to open a short sale position, but she may have to pay a rollover fee.

Brokers hold your money in an account that changes value nightly in reaction to daily profits and losses, and they handle fees that may include commissions, access to expert advice, and withdrawal requests. Some brokers hide their fee schedules within legal jargon buried deep in website fine print, which means potential clients need to do their homework before opening an account. To help you avoid unwelcome surprises, here’s an in-depth look at how to choose a forex broker.

How to Choose a Forex Broker

Choosing a forexbroker requires you first to figure out what type of investor you are and your goals in investing in currencies.

Each broker that featuresforex investments has advantages and disadvantages. Some of the most important things to consider are regulation, the level of security provided by these companies, and transaction fees. Security features vary from broker to broker. Some brokers have integrated security features like two-step authentication to keep accounts safe from hackers.

Many forex brokers are regulated. Brokers in the U.S. are regulated by theNational Futures Association (NFA) and Commodity Futures Trading Commission (CFTC), and France, Germany, Switzerland, Austria, Canada, and the United Kingdom also regulate forex brokers. Not all brokers are regulated, however, and traders should be wary of unregulated firms.

Brokers also differ in theirplatforms and have different required account minimums and transaction fees. Before hopping on a trading platform, you may want to create a budget for your investment life. Figure out how much you would like to invest, how much you are willing to pay for fees, and what your goals are.There are lots of factors to explore while choosing the right platform for you. Make sure to take as much into account as possible before getting involved.

Understanding Forex Currency Pairs

Before you sign up for an account, it's important to know the basics of forex trading from currency pairs to pips and profits and beyond.

A currency pair compares the value of two currencies through a ratio. The first currency is known as the base and is always one. The second currency is the quote currency and displays how much you can exchange one for. A “EUR/USD 1.23000” quote means you can exchange one Euro for $1.23.

Each ratio is quoted in two to five decimals and also comes in a flipped-over version, which creates a new currency pair that moves in the opposite direction. To follow our example, EUR/USD measures the value of the euro against the U.S. dollar while USD/EUR measures the value of the U.S. dollar against the euro. Therefore:

  • IfEUR/USD = 1.25000/1.00 =1.25000
  • ThenUSD/EUR will = 1.00/1.25000 = .80000

Historically, traders in different countries took long and short positions with their local currency at the bottom (the quote currency), but that changed after the forex’s popularity skyrocketed earlier this decade. Now, most participants around the world trade the currency pair with the highest volume. The most popular version is also likely to carry a narrower bid/ask spread, lowering trading costs.

Forex traders make money on long EUR/USD positions when the ratio goes higher and lose money when it goes lower. Conversely, traders make money on short EUR/USD positions when the ratio drops and lose money when it rallies. While brokers may offer dozens of currency pairs, four major pairs attract enormous trading interest:

  • EUR/USD: the euro and U.S. dollar
  • USD/JPY: the U.S. dollar and Japanese yen
  • GBP/USD: the British pound sterling and U.S. dollar
  • USD/CHF: the U.S. dollar and Swiss franc

Pips and Profits

Forex quotes display two ratios, a higher asking price and a lower bid price. The last two decimals are often drawn in very large print, with the smallest price increment called a pip (percentage in point). Profits and losses are calculated by the number of pips taken or lost after the position is closed. All positions start with a small loss because traders have to buy at the asking price and sell at the bid price, with the distance between the two numbers called the spread.

This is a normal operating procedure because most forex brokers charge no commissions or fees for trade execution, instead relying on the bid/ask spread as their main source of income. Major currency pairs typically display narrower spreads than minor pairs but many brokers now offer fixed spreads, meaning they won’t expand and contract in reaction to market conditions, even if it’s to your advantage.

Traders need to choose lot sizes for their forex positions. A lot denotes the smallest available trade size for the currency pair. $100,000 is considered a standard 100k lot when trading the U.S. dollar and used to be the smallest position allowed at many forex brokers. That’s changed with the introduction of mini lots at 10,000 units ($10,000 when trading USD) and micro-lots at 1,000 units ($1,000 when trading USD).

The larger the unit size, the fewer pips needed to make a profit or take a loss. You can see how this works in the following example, in which both trades earn the same profit.

  • A standard EUR/USD pip = .00001
  • You “make” 1 pip when buying $100,000 EUR/USD at 1.23000 and selling at 1.23001
  • (0.00001/1.23000) x 100,000 = $8.10 per pip x 1 pip = $8.10 profit
  • You “make” 10 pips when buying $10,000 EUR/USD at 1.23000 and selling at 1.23010
  • (0.00001/1.23000) x 10,000 = 81 cents per pip x 10 pips = $8.10 profit

Of course, the sword cuts both ways because a long or short trade with a large unit size moving against you will generate losses more quickly than a trade with a small unit size. That means it’s important to study your new pursuit in detail before you jump in with real money and develop risk management skills that include correct position sizing, holding periods and stop loss techniques. Free pip calculators, which are widely available on the Internet, can help tremendously with this task.

What Is “Margin”?

New forex accounts are opened as margin accounts, letting clients buy or sell currency pairs with a total trade size that is much larger than the money used to fund the account. U.S. brokers typically allow individuals to open accounts for as low as $100 to $500 while offering up to 50:1 margin, providing significant leverage, which is another way of saying your trade size will be larger than the current account balance.

A $500 account at a 50:1 margin broker, for example, lets the forex trader place long and short bets up to $25,000, or 2.5 times the mini lot size. Leverage can be risky, with the power to wipe out accounts overnight, but a high margin makes sense because currencies tend to move slowly in quiet times and carry little default risk, meaning the dollar or euro is unlikely to go to zero. Even so, forex volatility can escalate to historic levels during crisis periods, like the wild British pound and euro gyrations in 2016 after Brits voted to leave the European Union.

Unlike stockbrokers, forex brokers charge no interest for using margin, but positions held overnight will incur rollover credits or debits, determined by the relationship between interest rates in the currencies that comprise the pair. Total trade value determines the credit or debit in this calculation, not just the portion over the account balance. At the simplest level, the trader will get paid nightly when holding a long position in the higher interest-bearing currency and will pay nightly when holding a long position in the lower interest-bearing currency. Reverse this calculation when selling short.

Tips on Picking a Forex Broker

Take your time when looking for a reliable forex broker to make sure your money and trades will be handled appropriately. All U.S. forex brokers must register with the National Futures Association (NFA), a self-regulating government body intended to provide transparency. Go to the NFA websiteto verify the broker’s compliance and look for complaints or disciplinary actions that could affect your final decision.

The safety of your funds and private information is more important than any other consideration when you open a forex account because brokers can get hacked or go bankrupt. Unlike stockbrokers, whose clients’ funds are protected by the Securities Investor Protection Corporation (SIPC) if the brokerage shuts down, U.S. forex brokers provide no account protection. Even worse, a forex broker can recover more than your account balance through legal action if it doesn’t offer negative balance protection, which promises you won’t be asked for more money than your account balance if a position crashes.

Regulatory capital requirements rose substantially after the 2008 financial crisis, but that didn’t stop a wave of 2015 bankruptcies when the Swiss franc collapsed overnight. Many accounts dropped into negative balances in minutes, possibly incurring additional liability, while those that survived lost everything when the broker shut down. The take-home lesson from that horrible situation: Prospective clients should stick with the most reputable brokerage houses, preferably those tied to a large bank or well-known financial institution.

The U.S. forex industry uses “introducing broker” and “white label” categories to market its services and build its businesses. The introducing broker denotes a smaller operation that refers clients to a large broker in exchange for rebates or other incentives. In white labeling, the small company rebrands the large broker’s trading platform, allowing the big operation to execute trades in the background. Both practices may increase operating costs, encouraging these businesses to widen bid/ask spreads and increase fees.

Before you give a broker any money, review its funding and withdrawal procedures. Some require long waiting periods until you can trade when you fund through checks or wire transfers, while others will charge hefty fees when you withdraw funds or close the account. Account closure in particular can be stressful when a broker forces you to fill out long forms, take surveys or speak with a representative trying to change your mind. It can also take up to a week or longer to get your money back from less reputable operations.

Customer service should provide easy access to the help and trading desks through chat, phone and email. Look for 24/5 coverage, meaning you can reach the broker any time between Sunday evening and Friday evening in the United States. Before funding the account, test the broker’s speed in answering your questions by opening the chat interface and calling the phone number to see how long you have to wait for a customer representative’s response.

Forex Trading Platforms

Currency pairs are priced through the interbank market, a communications system used by big banks and financial institutions but without a central exchange like NASDAQ or the New York Stock Exchange. Forex brokers take their cues from those transactions but aren’t required to offer clients the best interbank bid or ask and may intentionally display wider spreads with less favorable prices, adding to profits when they complete those trades through the system.

Prospective clients can check for conflicts of interest by reviewing trade execution procedures at the broker’s website. Specifically, find out if the broker has a dealing desk that makes a market, taking the other side of a client trade. A more reliable broker will post quotes directly from the interbank system through a wholesale liquidity provider or electronic communications network (ECN) that handles the actual buy and sell transactions. These are third-party firms with direct connections to the professional system.

Forex traders open and close positions through the broker’s trading software, which should include a mix of stand-alone, web-based, and mobile platforms. MetaTrader has emerged as the industry standard for stand-alone software in recent years, providing a robust feature set that includes real-time quotes, price charts, news, research, and customizable watchlists. The MetaTrader platform was developed by MetaQuotes Software Corporation, based in Cyprus.

Web-based trading provides an alternative to stand-alone software but often has fewer features, requiring account holders to access other resources to complete their trading strategies. Mobile apps provide the greatest convenience but fewest bells and whistles in a slimmed-down design that usually allows one or two-click trading. It’s best to use the full-featured stand-alone software whenever possible, saving the mobile experience for those times you’re away from your trading desk.

Most forex brokers offer demo accounts that let prospective clients look at the stand-alone, web interface and mobile platforms, allowing them to trade forex pairs with play money. This software displays the same quotes, charts, and watchlists as the real system, so it’s an invaluable resource to examine the quality of the broker’s bid/ask pricing. Be suspicious if the broker doesn’t offer a demo account because it might be using an inferior or outdated platform.

Put several of these accounts side by side with real-time quotes from a large financial siteand you’ll quickly find out which forex brokers are offering the best bid and ask prices under normal market conditions. If possible, take a second look just after a Federal Reserve rate decision or other market-moving events to see how the currency pairs move in highly volatile conditions.

Order Entry Types

The trade execution screen on the demo account offers a ton of useful information. Look for a variety of trade entry types and stop orders as well as safety provisions that may include Guaranteed Stop Losses and Close All orders. Many of these order routing methods are designed to protect the trader against excessive slippage, which denotes the difference between the expected and actual execution price.

The following order types should be the minimum requirement for any broker you choose:

  • With market orders, the order will be filled immediately at the best available price. This can incur excessive slippage in fast-moving markets, executing cents or dollars away from the bid or ask price listed at the time of entry.
  • Stop orders send a conditional buy or sell order that turns into a market order at the chosen entry price.
  • Limit orders send a conditional buy or sell order that can only be filled at the entry price or better.
  • Stop-limit orders send a conditional buy or sell order with two prices, stop and limit. The order turns into a limit order at the chosen stop price, filling only to the limit price. The order will cancel automatically if the quote passes through the limit price without getting filled
  • Guaranteed stop losses send an order that’s guaranteed to be filled within the requested parameters as long as the quote passes through that price.
  • Close alls send an order to close all open positions at the best available prices. This can incur excessive slippage in fast-moving market conditions.

Does the Forex Broker Offer Trading Education and Tools?

Reputable brokers offer a variety of resources for clients to make smarter decisions and improve their trading skills. Look for an educational section on the website with diverse webinars and tutorials on the fundamentals of forex markets, popular currency pairs, and market forces that generate buying or selling pressure. These materials should include detailed information on how central banks affect currency markets when they raise or lower interest rates and how traders can prepare for those periodic events.

The educational section should also provide instruction on the broker’s trading platforms, currency pairs, and market order types. Look for videos, manuals, or other tutorials that show you how to build customized watchlists, set up technical charts, and display easy-to-read quote screens. These instructional materials should also explain how to access news and research directly from platforms so you don’t have to surf the Internet looking for information.

Extensive research and economic analysis tools should highlight currency pairs that might offer the best short-term profit opportunities. This section should offer free third-party commentary and insight from industry experts as well as real-time news and live webinars. Look for research that spans the globe rather than just local markets and provides a comprehensive daily economic calendar that lists all market-moving economic releases around the world.

Social trading has gained enormous popularity in recent years and is now available at the most reputable brokers. This feature lets account holders interact with one another through a social hub, sharing trading ideas, strategies and insights. Some social hubs have taken this concept one step further, offering a copy trading interface that lets you mimic the buy and sell decisions of other clients.

The best social hubs will feature some sort of rating system that allows clients to access the most prolific members with ease. These contacts can be enormously useful in customizing trading platforms, which often feature API interfaces that allow third-party add-ons. It’s even more helpful when the broker provides a comprehensive add-on library, with contributions that make trade management an easier task.

The Bottom Line

Take your time when looking for a forex broker because a bad decision can be costly. Top brokers will offer robust resources, low trading costs, and access to the worldwide interbank system. They’ll also handle your money with care, even if you open a small account in the hopes of turning it into a small fortune through your trading skills.

Investopedia does not provide tax, investment, or financial services and advice. The information is presented without consideration of the investment objectives, risk tolerance, or financial circ*mstances of any specific investor and might not be suitable for all investors. Past performance is not indicative of future performance. Investing involves risk, including the possible loss of principal.

How to Choose a Forex Broker: What You Need to Know (2024)

FAQs

What factors should you consider when choosing a forex broker? ›

Here are nine factors to consider when choosing a foreign exchange broker:
  • Regulatory compliance.
  • Leverage and margin amounts.
  • Spread and commission rate.
  • Deposits and withdrawals.
  • Trading platforms.
  • Trading hours.
  • Amount of forex markets available.
  • Educational tools available.

What to look out for in a forex broker? ›

In this article, we look at five things to consider when choosing the broker that is right for you.
  • Regulatory Compliance. The first thing to check when selecting a forex broker is their reputation. ...
  • Account Features. ...
  • Currency Pairs Offered. ...
  • Customer Service. ...
  • Trading Platform.

How do I know if a forex broker is legit? ›

How Do I Know If a Forex Broker Is Legit? You can ask the broker for their Retail Foreign Exchange Dealer (RFED) number. 10 You can also check with the National Futures Association or the Commodity Futures Trading Commission.

How do you know if a broker is scamming you? ›

20 Ways to Check If Your Broker Is Safe or a Scam
  • Regulatory Compliance. Verify that your broker is regulated by a recognised financial authority locally or globally. ...
  • Reputation and Reviews. ...
  • Contact Information. ...
  • Background and History. ...
  • Client Funds Segregation. ...
  • Account Security. ...
  • Trading Platform. ...
  • Fees and Spreads.

What should I know before choosing a broker? ›

10 Things to Consider When Choosing a Broker to Work Under
  • Commission split. One of the first things to consider is the commission split. ...
  • Commitment to technology. ...
  • Location. ...
  • Mentor program. ...
  • Culture. ...
  • Broker's reputation. ...
  • Management support. ...
  • Brokerage size.
Jun 24, 2024

How do I know which broker to choose? ›

Choosing the right online broker requires some due diligence to get the most for your money.
  1. Step 1: Know Your Needs. ...
  2. Step 2: Narrow the Field. ...
  3. Step 3: Figure Out the Fees. ...
  4. Step 4: Test the Broker's Platform. ...
  5. Step 5: How Well Does the Stock Broker Educate Its Clients? ...
  6. Step 6: Ease of Depositing and Withdrawing Funds.

How do you know if a broker is good? ›

Check out the broker's reputation online by reading reviews and ratings from other traders. It's wise to check whether the broker has been involved in any scandal or whether it has been fined for any kind of misconduct. Verify the broker's contact information and check their customer service.

What broker should I use as a beginner forex trader? ›

Overview of the best forex brokers for beginners
BrokerFX commission per lot
Forex.comNo commission is charged
eToroNo commission is charged
Interactive BrokersTrade value less than $1 billion: 0.2 bps * trade value; min. $2
IGNo commission is charged
6 more rows
Jul 16, 2024

What are common mistakes forex traders make? ›

Six common forex trading mistakes
  • Not doing your homework.
  • Risking more than you can afford.
  • Trading without a safety net.
  • Overreacting.
  • Trading from scratch.
  • Trading with emotion.

How to find a legit Forex broker? ›

You can check the broker's testimonials and reviews to determine if their services are reputable or not. You may also want to check if their reviews are honest or not. In addition to this, it's also wise that you check if the broker you've chosen is regulated or not.

Which is the safest Forex broker? ›

Best Forex Trading Platforms in 2024
  • PrimeXBT: Best Forex trading platforms Overall.
  • Lite Forex: Best for CFDs on Commodities.
  • JustForex: Best for Multi Assets.
  • FXTM: Best With High Floating Leverage and Fast Execution.
  • PLUS500: Best Option to Trade CFDs.
  • AvaTrade: Best Forex Trading Platforms for Leverage.
Jan 19, 2024

How do I make sure my broker is legit? ›

Visit FINRA BrokerCheck or call FINRA at (800) 289-9999. Or, visit the SEC's Investment Adviser Public Disclosure (IAPD) website. Also, contact your state securities regulator.

Are there fake forex brokers? ›

If you come across a broker, firm, or company that claims it can guarantee profits, you may be dealing with a forex scam. Tranquil Trade FX does not hold any regulatory licenses from legitimate regulatory jurisdictions and has been listed on the FCA's warning list for unauthorised firms.

How do you find out if you are talking to a scammer? ›

You might be dealing with an online scammer if they request sensitive personal information, money, or insist on speaking on a chat app of their choice. You might be dealing with an online scammer if they request sensitive personal information, money, or insist on speaking on a chat app of their choice.

What happens to your money if a broker goes bust? ›

Overview. Typically, when a brokerage firm fails, the Securities Investor Protection Corporation (SIPC) arranges the transfer of the failed brokerage's accounts to a different securities brokerage firm. If the SIPC is unable to arrange the accounts' transfer, the failed firm is liquidated.

What are factors to consider when opening a brokerage? ›

Table of content
  • Fees and charges.
  • Advanced trading platform.
  • Trading leverage offered.
  • Easy-to-use interface.
  • Security and stability.
  • High-quality support services.
  • Bottom line.

What are the most important things to know about forex trading? ›

To help you understand this market better, here are 6 key things to consider before you trade in forex.
  • The currency pairs you are trading in. ...
  • The significance of the bid-ask spread. ...
  • Leverage. ...
  • Forex trading strategies. ...
  • Your trading plan. ...
  • Your emotions and biases.

How do I choose forex trades? ›

A Guide on How to Choose Which Forex Pair to Trade
  1. Understand the Major Currency Pairs. ...
  2. Recommend forex pairs. ...
  3. Consider Market Volatility. ...
  4. Research Economic Fundamentals. ...
  5. Technical Analysis and Chart Patterns. ...
  6. Correlation Analysis. ...
  7. Consider Your Trading Style and Timeframe. ...
  8. Stick to a small number of pairs.
May 14, 2023

Top Articles
Vacation Rentals, Cabins, Beach Houses, Unique Homes & Experiences
Why Was My Prepaid Card Declined? Top 9 Reasons
Tattoo Shops Lansing Il
Foxy Roxxie Coomer
Diario Las Americas Rentas Hialeah
Parke County Chatter
Jefferey Dahmer Autopsy Photos
Wausau Marketplace
World of White Sturgeon Caviar: Origins, Taste & Culinary Uses
Vichatter Gifs
Cvs Learnet Modules
How Many Slices Are In A Large Pizza? | Number Of Pizzas To Order For Your Next Party
Binghamton Ny Cars Craigslist
TS-Optics ToupTek Color Astro Camera 2600CP Sony IMX571 Sensor D=28.3 mm-TS2600CP
Bowlero (BOWL) Earnings Date and Reports 2024
Grab this ice cream maker while it's discounted in Walmart's sale | Digital Trends
Cambridge Assessor Database
Abby's Caribbean Cafe
Craigslist Southern Oregon Coast
Publix Super Market At Rainbow Square Shopping Center Dunnellon Photos
Webcentral Cuny
Www.dunkinbaskinrunsonyou.con
Engineering Beauties Chapter 1
Sienna
27 Modern Dining Room Ideas You'll Want to Try ASAP
Buhl Park Summer Concert Series 2023 Schedule
Best Town Hall 11
Martins Point Patient Portal
Elanco Rebates.com 2022
Lucky Larry's Latina's
Kips Sunshine Kwik Lube
Arcadia Lesson Plan | Day 4: Crossword Puzzle | GradeSaver
19 Best Seafood Restaurants in San Antonio - The Texas Tasty
Can You Buy Pedialyte On Food Stamps
Main Street Station Coshocton Menu
Craiglist Hollywood
Craigslist Free Manhattan
Indio Mall Eye Doctor
Registrar Lls
Clausen's Car Wash
Walgreens On Secor And Alexis
Foxxequeen
Wordle Feb 27 Mashable
Quiktrip Maple And West
Mauston O'reilly's
Sc Pick 3 Past 30 Days Midday
Used Sawmill For Sale - Craigslist Near Tennessee
Julies Freebies Instant Win
Tanger Outlets Sevierville Directory Map
Superecchll
Aspen.sprout Forum
Latest Posts
Article information

Author: Maia Crooks Jr

Last Updated:

Views: 6161

Rating: 4.2 / 5 (63 voted)

Reviews: 94% of readers found this page helpful

Author information

Name: Maia Crooks Jr

Birthday: 1997-09-21

Address: 93119 Joseph Street, Peggyfurt, NC 11582

Phone: +2983088926881

Job: Principal Design Liaison

Hobby: Web surfing, Skiing, role-playing games, Sketching, Polo, Sewing, Genealogy

Introduction: My name is Maia Crooks Jr, I am a homely, joyous, shiny, successful, hilarious, thoughtful, joyous person who loves writing and wants to share my knowledge and understanding with you.