Choosing A Forex Broker

One might think that choosing a Forex Broker ought to be simple. Just pick one and start trading, right? Wrong!

The Forex Broker is generally a banking structure able to buy considerable masses of a currency. In the past, banks were the only institutions that had the ability to engage in the exchange or trading of foreign currency. Today, through the internet, any trader can participate in currency trading, around the clock, through the use of a Forex Broker. Not too long ago, there were only a handful of forex brokers, now there are hundreds from which to choose.

Unfortunately, until a forex trader is able to establish a large enough account size (about $250,000 or more), a forex trader will not qualify for the greater advantages of Institutional Forex Trading. The next best thing would be to use an ECN Broker, which requires a larger account than a Market Maker, or an Introducing Broker (IB) or Retail Forex Broker, which are basically middlemen who add on fees to the actual broker’s fees.

In order to help you choose the broker that is best for you, make a list of the four or five things you need in a broker, in order of priority. With those things in mind, look for brokers who meet these qualifications. Choose the top two and open a demo account. Call them on the phone and ask them questions, before deciding on the one you want to trade with. Because there are so many forex brokers today, this process should greatly cut down the time and research necessary to find the broker that best meets your needs.

Advantages of High Leverage

In forex trading, some Forex Brokers make it possible to get higher than normal leverage in forex trading, like 400:1, 300:1, or 200:1. Forex Brokers offering high leverage and smaller lot size values make it possible to begin trading with smaller account sizes, from $200 to $1,000, while the forex trader is learning to trade effectively and still has the chance of making some good returns (ROI) on such a small investment. The higher the leverage, however, the greater is the incentive for the broker to trade against, in the attempt to prevent high leverage losses to the forex brokerage firm. Many of the larger Brokerage Firms and ECNs, however, do not offer mini accounts or the option for higher leverage.

Some new forex traders are anxious to trade larger accounts, thinking that they will make money faster. But until a forex trader has learned to trade profitably and consistently, it is best to first trade a small account until he/she has learned to double that account. The vast majority of new, inexperienced, and self-taught forex traders, even those who believe they have educated themselves very well, will lose their first few accounts as they learn to make the emotional transition and the proper self-discipline needed to trade real money successfully.

The Dealing Desk

There are larger, more liquid and very well backed Forex Brokers, as well as many smaller Forex Brokers. Some Forex Brokers claim that they do not use a dealing desk when, in fact, they do, or at least use resources that employ equivalent tactics to protect the liquidity interests of the Broker or its liquidity providers. Most Retail Forex Brokers offer trades through a dealing desk, or trading desk, of some type, which takes the opposite side of every trade the forex trader enters. In fact, most trades entered through a Retail Forex Broker never participate in the true inter-bank market, but are entered at higher leverage on a side ledger of a type, within the Retail Brokerage itself. In this case, the Forex Broker cannot be expected to be the forex trader’s friend, but an opponent, because if the trader wins, the Broker’s trade loses.

Forex Brokers are in the business to make money, by taking the forex trader’s money. They are not in the business of educating their clients. This is the reason a trader can never trust the Forex Broker to educate their clients to be successful forex traders, no matter how much free education they give away. They give away enough free education to make a beginning trader feel confident, then the Broker takes his account. For this reason it is vital to get high quality education from neutral and experienced Forex educators, mentors or coaches whose only goal is to make the forex trader successful. Then, the experienced Forex mentor can teach and facilitate the forex trader in how to choose the best Forex Broker for the individual’s needs, trading style, strategy and circumstance. This is an important decision in that it will greatly affect one’s trading, trading plan, and success as a Forex Trader.

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The Non-Dealing Desk Brokerage

There are numerous advantages to trading with a Non-Dealing Desk Broker.

1. Eliminates Conflict of Interest. Non-dealing desk brokerages do not trade against their clients. They do not take positions that may from time-to-time conflict with the interests of individual traders and their clients.

2. Security. Generally, non-dealing desk brokers are larger and more secure. It is not uncommon for the smaller, desk-dealing brokers to go bankrupt, or close down. Many forex traders still have not recovered their funds from such situations.

3. Market Access. Non-dealing desk brokers offer every forex trader, whether big or small, equal access to the interbank market. The rates, or bid and ask prices, on a non-dealing desk platform are not those set by each individual broker, but are actually those derived from active trading between participating banks, institutional investors, FCMs and individual traders. The process itself makes every forex trader, regardless of the size of their account, an independent market maker.

4. Anonymity. Trading is done in total anonymity. The non-dealing desk broker does not know or have a need to know the forex trader’s positions. Therefore, stop loss orders cannot be targeted for takeout whenever a broker has a need to meet liquidity requirements. This allows the forex trader to trade freely.

5. Eliminates Spiked Rates. Dealing desk brokers spike rates to take out trades when it suits their purposes. In fact, they routinely spike rates of up to 10 pips or more, not just to take out stop losses, but for a variety of reasons. Whether used to fill unbalanced trades, leverage the broker's own account, or to meet immediate liquity requirements. Until the NFA stops this practice, dealing desk brokers will continue to manipulate rates and trades to their own advantage, which makes forex trading much more difficult.

6. Pricing Intervention. Non-dealing desk broker rates, as well as bid/ask prices, come directly from the interbank system. They are not filtered or otherwise manipulated to maintain established and undisclosed profit margins or spiked by the broker to gain a trading advantage.

7. Reorders. Reorders are completely eliminated. Forex traders never get "reorders" from a non-dealing desk because they serve no purpose. The broker has nothing to gain from them.

8. Full Disclosure. The non-dealing desk broker's fees are limited and clearly disclosed. There is no deception, manipulation, or hidden fees.

9. Commissions. A large number of forex traders still believe that there is such a thing as commission free trading. This is a myth. It is simply a marketing tactic used by a large number of dealing desk brokers. However the so-called "commission free" broker actually generates a transaction fee every time a trade is executed. The only difference is that the non-dealing desk fee is fully disclosed, while the dealing desk broker "fees" are not. Even worse, because the dealing desk offers fixed spreads, this greatly affects the individual trader's profitability, since the forex trader is locked out of trades when market spreads drop below the broker's fixed differential. Instead of simply executing a market order, the broker responds with a reorder which guarantees the dealing desk broker a fixed, undisclosed profit while at the same time depriving the forex trader the opportunity to take maximum advantage of a pricing move.

10. Spread Fees. Spread fees are actually always variable and never fixed. The Forex is an extremely fluid market. Spreads are constantly fluxuating. When forex traders trade through a non-dealing desk, they may see a dozen or more banks posting rates, the most attractive appearing above all the others. In fact, most forex traders who use a dealing desk are not aware that during peak trading hours, spreads can drop to zero. During off-peak hours, speads are generally higher.

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Non-dealing desk brokers charge a nominal tranasaction fee for each trade. The dealing desk broker, however, offers trades based on higher fixed spreads. Whether the actual interbank spreads are high or low, dealing desk brokers simply boost their rates to guarantee their profits into their fixed spreads. They also generate an undisclosed amount of income trading against their forex trader clients.

There are a couple disadvantages. ECNs and non-dealing desk brokers usually require a larger account size, while a forex trader can find dealing desk brokers, or Market Makers, that require as little as $100 to open an account. In addition, many of the larger non-dealing desk brokers do not offer mini accounts or high leverage, and there is usually a little more paperwork involved in order to get started. Also, none of the ECNs and non-dealing desk brokers use the Metatrader 4 Platform.

Interactive Brokers, Hotspot FX, and MB Trading (EFX) are all ECNs and have tighter spreads than the Market Makers. An ECN refers to Electronic Communications Network, and provides a marketplace where multiple market makers, banks, and forex traders can enter competing bids into the platform. They do not operate a dealing desk. If a forex trader is used to trading through a Market Maker, switching to an ECN takes some adjustment. In addition, ECNs do not use the Metatrader 4 Platform, but usually have their own platform.

EFX offers both direct access STP and ECN trading, with a minimum account size of $400 for a mini account. STP refers to Straight Through Processing, a technology that allows customers to place orders that match off electronically with these banks without interacting with a “middle man” whose job is to try to make money trading between customers. Their spread fees generally range from 0 to 3 pips and the commission fee is $5 per $100,000. However, the interest rates are not the best and they use their own forex trading platform.

Hotspot FX is an ECN that requires a minimum $7,500 account size. Their spread fees generally range from 1 to 3, and their commission fees are $3 per every $100,000.

Interactive Brokers Group LLC, at http://www.interactivebrokers.com, is an ECN with a good reputation. It require a minimum account size of $5.000, spread fees generally range from 1 to 3, and their commissions fees are $2 per every $100,000. However, it provides no mini accounts, provides no demo accounts, and does not use the Metatrader 4 Platform, which makes it difficult to learn the program before trading live.

FXCM is one of the largest Forex Brokers. They state that they have no dealing desk. However their spread fees never go lower than 2 pips and they are not an ECN broker. The minimum account size for a mini account is $300 and they do not use the MT4 Trading Platform.

Other Forex Brokers

Other popular Forex Brokers include Oanda, MGFOREX, GFT, Gain Capital, GFX, and Saxo Bank, ODL, ACM, FX Solutions, Interbank FX, FXDD, DirectForex, IKON Global Market, IKON Royal, Core Options, PFG, etc.

ODL, InterbankFX, IKON Royal, Alpari, and FXDD all use the Metatrader 4 Platform. However, these are all Market Makers (middle men for the actual broker).

Small Forex Currency Brokers, however, are under attack by the new National Future Association (NFA) rule, which now requires a $5,000,000 bond for liquidity backing in order to qualify for active status. Many smaller brokers have been forced to merge with others to satisfy this new requirement, or have been forced out of business completely. The latest talk is that the NFA has a bill coming before congress that, if it passes, will increase the requirement to $20,000,000 if this bill passes it will undoubtedly force many other Brokers out of business which can be either good or bad for forex traders. Forcing crooked or unethical Brokers out of business may be a good thing, since they make a bad name for the Forex industry. However there are bad Brokers among both the large and small Forex Brokerage firms alike. In addition, some smaller Brokerages may be much better to work with than the larger. NFAs intent may be to reduce the number of Forex Brokerage firms they need to regulate, thereby making it easier keep track of and regulate ethics and legality. Some smaller brokers suspect, however, that this is all a lobbying effort on the part of the big brokerage firms to eliminate some of their competition.

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Resources Provided by Forex Brokers

It is extremely important to demo the broker’s platform before trading live. This is not only to get to know the platform before trading, but the charts, features, indicators, and forecasting and analysis tools on the various platforms vary tremendously.

In addition, Forex Brokers do not provide high quality trading education and training. They do, however, usually provide the basic forex trading information to try to get a forex trader started.

Many Forex Brokers also offer an array of trading and market services to the general public that are very helpful, such as Market News, Economic Announcement Calendars, Currency Correlations, and Currency Calculators. Some of these include http://www.dailyfx.com and http://www.forex.com, http://www.mataf.net and http://www.fxtrade.oanda.com. There are also some websites that offer free basic forex education resources, such as http://www.wikapedia.com, and http://www.investopedia.com, etc. However the free basic forex education articles online, will not give a forex trader what he needs to become a successful forex trader. Online Forex Trading Communities, such as http://www.forextradingrooms.com, can also offer some trading tips from amateur forex traders. The problem is that all those who attend these communities are searching for the same thing: how to become successful. That is the only reason they are attending in the first place. It is rare, if not impossible, to find a very successful forex trader who is willing to give away his or her secrets for free in a public forex chat room.

The avenues above can be helpful to a point, but they do not even come close to the much greater advantages that come from having a high quality forex education program and experienced Forex Masters and Mentors to guide the forex trader one-on-one, step-by-step through proven concepts and strategies, and from their own proven experience. If the forex forex trader is really serious about becoming a truly successful forex trader and learning how to make a living from currency trading, there is no better way to learn faster, more effectively, more efficiently and profitably, than to learn from the best Forex Gurus and Master Forex Coaches. Yes, the forex trader will be charged tuition for their one-on-one instruction, assistance and expertise, but it is well worth such a small, upfront investment compared to the massive losses of time and money that the forex trader will incur while currency trading without their help. Business Coach Pros, at http://www.businesscoachpros.com, is probably the best source for high quality forex education, training, and one-on-one Forex Coaching and Mentoring available anywhere. To explore this option, go to their website, and click on “Forex Trading” at the top of the Business Coach Pros homepage.

Summary

About ninety percent of all forex traders are unsuccessful because they don't want to take the time to learn the charts, patterns, indicators, signals, Elliott Wave, strategies, the workings of forex trading and the different types of brokers. They read a couple books, talk to a few people, and believe they are ready to trade. They want to make money fast. They become overconfident and take unwise risks. They watch someone execute a single trade, making $20,000, and think, “I can do that!” They do not realize how much there is to learn about forex trading. Because it is so volatile, a currency trader really needs to know what he/she is doing.

The less than ten percent who do become successful forex traders, invest in getting themselves properly educated and trained. They work hard to learn everything they can about the forex market, inside and out, and they learn it well. They are diligent. They construct their trading plans, test them, modify them, and perfect them for months, even years. They are disciplined, wait for their entry and exit points, and stick to their trading plan without question. Very few forex traders become successful because they don’t get the proper forex education and training necessary and develop the self-discipline needed, to be a truly successful forex trader. This includes thoroughly researching their broker, using their demo account looking for any problems or inconsistencies, and validating each of their policies and practices. Just as with any worthy endeavor, becoming a successful forex trader is not luck. It requires a great deal of education, hard work and diligence.

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