In Trading Routine and Psychology

If this site was about knitting sweaters, my job would be a lot easier. But its not. It’s about trading, and people just simply do strange things when it comes to investing their own money.

One of the questions get I asked the most concerns who a good forex broker would be to use. I decided to make my own list of things I look for in order to help this question along.

These types of lists are already well plastered all over the internet, I realize, though I found many of them missing out on some important points. For veteran traders, this is all second nature, but for newer traders, you might find some of these ideas useful:

1. Registered and monitored by a government-run or affiliated 3rd party

This is number one for a reason. We are talking about a place that will be holding your money; if they can run out of business the next day without heavy repercussions then you want to know. No registration, no 3rd party monitoring, no money. If the broker is housed the US, then you want to see that they’re a registered member with the NFA. If they’re in the UK, then you want to see that they’re registered with the FSA. If Australia, ASIC, and so on. If elsewhere, see if they have separate legal entities established in the U.S., U.K. or Australia, etc., and see that they are registered there.

I’m simply using these 3 countries as examples, however, there are many others that have very well structured market-monitoring entities in place.

The entities listed above are by far the some of the most structured and detailed in terms of overall regulation in the world. Be cautious of forex brokers claiming registration in smaller nations that simply do not have the resources to properly monitor their financial markets.

Regardless of registration, most countries have laws in place to protect investors from custodians, though registration with these affiliated entities assures careful, regular assessment of your broker in question.

And PS – Many brokers you would even THINK (because of internet presence, etc) are registered members ARE NOT. Read the fine print and never assume anyone is under such circumstances.

2. Reasonable Spreads

Brokers have the ability to charge you essentially whatever they want for a bid / ask. For most brokers, this isn’t much of an issue, though I know of several mainstream forex brokers that charge comparatively large amounts for trades that many newer traders don’t typically think twice about. This is money that will be directly subtracted from your bottom line. The easiest way to tell what spreads will look like when you go live is to either ask your potential broker if their demo server spreads are representative of real spreads, or simply ask other traders what they’re getting charged.

Many brokers advertise spreads by saying things like “As low as xx pips”. If that’s the case, you usually want to take that number and multiply it by 1.5 – 2 (sometimes more) if you want to get a reasonable assessment of what a normal spread looks like on their platform. Unfortunately, no written rule exists, to my knowledge, on how they are able to advertise their spreads. But the non-guarantee disclosure, which is included in the docs you sign when opening an account, will tell you to ignore this part of the website that got you interested. That I can assure you.

3. Above Average Customer Service

Call your potential broker, and just have a conversation with them about anything that might concern you. You can usually gauge, right from the beginning, what to expect in terms of overall customer service. If the sales team is not knowledgeable or unhelpful, chances are the customer support, once you become a client, will be as well.

At first, this might not seem to be that big of an issue, until you have problems. Great customer service makes virtually every aspect of your trading experience 10x easier in the long run.

4. Low or No Hidden Costs (Commissions, Account Maintenance, Rollover etc.)

Some brokers, especially those previously used to dealing with the futures markets, boast virtually nonexistent spreads, but charge commissions on trades. You’ll need to find out what this number is and see approximately “how many pips” this number will come out to. For most reputable forex brokers charging commissions on trades, this number will usually float anywhere from ½ pip to 1 pip, depending on the situation (but not set in stone – you have to do your homework).

Rollover costs are also a factor to consider. Brokers vary on their methods for calculating it, if at all, and it’s of course likely to affect you if you are holding positions over longer periods.

5. Match Your Technology Needs

Need ProRealTime? Need Metatrader? Need an API capability? Make sure you know well in advance what you intend on doing in the future in terms of trading, and that you broker will suit these requirements. A lot of people will open accounts with one broker, only to realize a month later that they should have opened an account elsewhere because they have a need for something on the technological side.

6. Ignore the flashy advertising

Brokers spend a substantial, ridiculous, insane amount of money each year making sure they’re getting in your face on a daily basis. Just because you know the name doesn’t mean they’re necessarily good, or will suit your specific needs. Everyone is different, and has different requirements.

7. Don’t choose a broker just because you bought something and they say you can get ‘rebates’ or other deals on trades

Whoever is telling you this is trying to make money off of every transaction you take once you open an account through them. They’re selling you. Not all, but some of these deals set up between these merchants and brokers offer unfavorable terms for the end clients, particularly because in order for both parties to make money, transaction costs are modified, and not in a good way. They’ll inflate the costs and give you money back, making you think you’re getting a bargain. Your ‘rebates’ will usually equal the end cost of just going straight through the broker, or somewhere else.

8. Market Maker or ECN (Dealing Desk or Not)?

People claim that because market makers hedge or ‘trade against you’ you are always at a disadvantage. This is a big myth, though I will have a hard time convincing some people of this. ANY forex broker that messes with electronic execution or their books usually ends up out of business, where they rightfully should be. Reputation is key, and it doesn’t matter if they’re an ECN or market maker. No matter what, someone is always on the other side of your trade; they might be one step away from you or two, but someone always is.
Some people like ECNs, others like plain old market makers. What it really boils down to, however, is the reliability of the execution.

9. Execution

Lagging or lean? Unfortunately, this part of the equation isn’t really known until you actually sign up as a client, but a broker’s back-end business is critical to every step you take as a trader. You want to ensure you’re getting good fills with little or no slippage or requotes.

This is more of a technological issue than anything else. Some brokers are simply set up much better operationally speaking, than others. In the past, this has been one of my bigger complaints with certain houses. Again, it usually comes down to technology, and who has the better setup.

10. Currency pairs available

The easy part. Make sure they have everything you intend on or want to trade.

11. Leverage Requirements

Certain brokers boast ridiculous, obscene leverage restrictions (or lack thereof) for forex transactions. If you like lighting your hard earned money on fire, then go for the 400:1 leveraged broker. One of the biggest things I talk about here is how leverage kills traders, and while the market might like it to raise liquidity, your bank account usually doesn’t. Most brokers offer 50:1 or 100:1 leverage. This is way more than enough to suit your needs.

12. Minimum deposits

Don’t go for a broker just because the minimum is low to open an account. If you’re looking for a low account minimum, then make sure the more important requirements get filled first.

In my opinion,

Some of the best brokers available to medium sized and retail clients are those who have a big leg in the institutional world. Do your homework and find out who is really using them. Many institutional brokerage houses have even gone so far lately as to open subsidiary businesses catering to smaller clients. Deutsche Bank and Citigroup are two examples. The only downside to them is that their own banks are their only options in terms of liquidity, though this isn’t too often an issue, if at all. Spreads could vary, etc.; every case is different.

Uneducated clients of many smaller retail brokers will claim that they do all sorts of whacky things. Admittedly, some brokers have in the past done ‘shady’ things to their clients. Internet marketing and a well executed brokerage business are two entirely different things. Just do your homework and listen to your gut; common sense will keep your mind at ease about your money and future transactions.

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  • isomorph

    couldn’t agree more. especially re the technology bit. after signing up with the LMAX exchange/MTF, i realized how much behind my previous brokers were in terms of execution quality. but don’t take my word for it. go check out the code their IT team open sourced on github and watch the tech presentation their former CTO, martin thompson, gave at a major IT conference where he was presenting how their work allows the LMAX execute engine to reach amazing metrics in both speed, accuracy, and reliability of execution. (for those in IT, suffice it to say that martin fowler himself was sufficiently impressed to write an article about their work. so that should tell you something.) thompson’s blog here: where you can get an idea of how obsessed those guys are with making coding super efficient and fast, and how topnotch the LMAX IT backend is.

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