Top 5 things to look for in a Forex Broker (might not be wha

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Top 5 things to look for in a Forex Broker (might not be wha

Postby backthegreenback » Tue May 11, 2010 2:11 pm

There are many lists offering advice in choosing the right forex broker. While many will list regulatory authority or net capital position as the most important factors to look for when evaluating brokers, these may not be the best factors to consider when you begin trading. Let’s not kid ourselves – brokers are not charitable institutions. They are in business to make money. That said, how a broker generates profits is often overlooked or downplayed during the evaluation process. The following are important questions that need to be asked:

1.) Does the broker use a Direct Market Access model? This is important for you as a customer to know whether or not your broker is following standards in relation to pricing and execution. In addition, trades will be sent direct to the “market” for execution. In world of forex, this refers to the interbank market where multiple banks provide streaming prices where clients can buy and sell.

2.) Does the broker provide Straight Through Processing? If not, your broker is likely acting as a market maker and taking the opposite side of your trade. Simply stated, your interests are not aligned with those of your broker. This is true even if your broker has a large capital position and is a regulated firm.

3.) Does your broker offer a segregated account for their customers’ funds? If not, your deposit is co-mingled with the brokers assets and becomes part of their balance sheet. This may prove problematic if you dispute a balance figure or the broker is deemed insolvent. Claims for returns of customers’ funds can be delayed for weeks or even months as evidenced by multiple broker closings all over the world over the past five years. Many of these firms were regulated by well known agencies in the U.S., U.K. and Japan.

4.) Does the broker offer a professional trading system like Currenex? If this is the case, then the customer can be assured that they are trading on prices from multiple banks and not trading against the firm’s dealing desk.

5.) Does the broker require documentation when customers open a new account? While it may be an an inconvenience if your broker requires a copy of a government ID and bank statement, this practice confirms your broker is adhering to strict international anti-money laundering rules and regulations. If your broker does not require this information, then you should be concerned that the firm may be closed down if they are found to be in violation of these laws. If this happens, then the safety of your funds is in jeopardy.
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