A forex broker is a firm that offers platforms to traders that allows them to buy and sell currencies. Every trader needs a broker to trade forex. Some examples of forex brokers are ACM Gold, FxPro, ETx Capital and ForexMart.
What to look for in a forex broker
Choosing a forex broker is the most important decision that a trader can make. Choosing wrongly can lead to loss of profits or even worse, loss of invested capital. Below are some of the things that one should consider when choosing a broker:
- Location – For traders who prefer going to an office to talk to their broker this is an important consideration. It is true that dealing with queries is best-done face to face than over the phone. If you are willing to overlook the location there are many online brokers that are available.
- Regulation – Regulation is key when choosing a broker. The more reputable the regulator the more assured that your funds are safe. Your broker will be registered with a particular regulator – make sure that their regulator is well known and respected. In South Africa, the FSB (Financial Services Board) is the financial regulator.
- Spread – The spread is important because this is where your transaction costs come from. A good test is to compare the spread of the major currency pairs between brokers. Examples of the major currencies are EUR/USD, GBP/USD, CAD/USD. The EUR/USD is the most traded currency pair in the world and often has the lowest spread. So one can use the spread for the EUR/USD to compare the spreads between currencies.
- Platforms – Most brokers offer an online platform and a downloadable platform like MT4. Some brokers offer MT5 which is popular among traders who use computer programs to trade. MT4 and MT5 can be downloaded over the internet. Check that the broker supports MT5 if you intend to trade on your computer.
- The speed of execution – Slippage is the difference in the price at which you wanted the trade to be executed and the price at which the broker executed the trade. For example, let’s say you clicked buy USD/ZAR at 13.6893. Due to slow execution, the trade was executed at 13.6913. The slippage will be 2 pips (13.6913 – 13.6893). High slippages can result in reduced profits.