If you're new to Forex trading and are looking for your first Forex broker, this is the guide for you. I'll give you the most important things to look for and show you the little tricks that expose hidden fees and shady broker tactics.
In order to find the best Forex broker, you'll have to research the broker, do small tests, ask about hidden policies, and find out if they are regulated. Also decide if a ECN or DD broker is best for you.
This guide will walk through all of the steps, in detail.
Check the Reputation and Reviews of Brokers
This is the easiest part in the entire process. Just do some internet research on the brokers that are out there.
The first thing to look for is how long the broker has been in business. It's actually fairly easy to start a Forex brokerage in some parts of the world.
So if a broker has only been around for 6 months, it's not a good idea to be the lab rat that will help the broker work out all of the bugs in their systems.
Another good way to check the reputation of a broker is to ask full-time or active traders which broker they trade with. If an active trader has been with a broker for many years, without any issues, the broker is probably reliable.
Also read through forums, Facebook Groups or anywhere else that traders hang out. See which brokers those traders like and why.
However, keep in mind that many unsuccessful traders want to blame their shortcomings on everyone else, instead of taking responsibility for their results.
So some broker reviews may be negative, when it's not the broker's fault. Keep an eye out for reviews that say things like:
- The broker keeps triggering my stops
- The broker screwed me out of a trade
- The broker is trading against me
While those statements could certainly be true, it's usually the sign of a trader who doesn't want to take responsibility for his or her trading.
Learn to read between the lines.
Trade Their Demo Account
Most reputable brokers offer a demo account. So take advantage of this opportunity to see how well their trading platform works.
Since you're trading with play money, you're free to stress test the platform and do things that you probably wouldn't do with real money.
Trade oversized lot sizes, see what it takes to trigger a margin call, experiment with different types of orders. See how hard it is to enter trades quickly and try exiting trades from other devices, like your phone.
In other words, try to break their trading platform. This will expose the strengths and weaknesses of the platform.
Test Their Customer Service
Another thing that you can do in your preliminary research is to reach out to their customer service and ask questions. It doesn't matter too much what you ask them.
This is just a test of their customer service.
All you're looking for is the following:
- Response time
- How well they communicate
- How thoroughly they answer your questions
Ask all of the questions you have on your mind, no matter how basic you think they are.
Sure, there are companies that have great customer service before you become a customer, then forget about you after you sign up.
But if you test them out beforehand, there's a much better chance that they'll also have great service after you become a customer. If they have terrible service before you're even a customer, then that broker should be avoided.
Be sure to test multiple contact methods, chat, email and phone.
Understand How Your Account Balance Effects Lot Sizes
The next thing to consider is how much money you have to trade with.
A trader who has $5,000 in risk capital will usually choose a different broker than someone who has $500,000 to risk.
This is mostly because of minimum lot sizes. Brokers that have small minimum account sizes usually allow smaller minimum lot sizes, like nano lots or micro lots.
On the other hand, brokers with higher minimums may only allow mini lots as their smallest lot size.
If you trade lot sizes that are too big for your account, you are guaranteed to blow out your account.
To learn more about how Forex lot sizes work, watch this video.
Are There Trading Restrictions?
Some brokers don't allow certain types of trading. For example, some brokers do not allow you to scalp or use trading robots.
Most traders don't scalp anyway. But if that's your jam, then you should ask potential brokers if they restrict any types of trading in their accounts.
Check for Hidden Fees
There can be some fees that you only find out about after you actually deposit money into your account. So be sure to ask about them before you open an account.
These can include:
- Unusually high transaction fees for withdrawing/depositing money
- Inactivity fees
- Minimum activity fees
- Monthly fees for keeping your account open
You should avoid brokers that charge these fees, at all costs. There are brokers that don't charge these fees.
Find Out if a Broker is Regulated
Next, find out if a broker is regulated or not. Sure, they can still do shady things even if they are regulated, but it's much less likely.
You can usually find the regulating body on the bottom of their website or on their “About” page. There's usually an ID number that identifies the broker.
But don't stop there.
The broker might be posting a fake ID number or using someone else's number. This was what they were doing in the Shiroma scam.
So take the ID number and actually contact the regulator to see if it's a real number. You can usually search by broker name or ID on the regulator's website.
On top of seeing if the ID number matches the broker name, you can find out if there are any violations or legal actions against the broker.
If there actions against the broker, be sure to read through them to see how serious they really are. Sometimes they are minor and can be ignored.
The broker doesn't have to be regulated in your country, but understand how much protection you have in the broker's country, if you choose to do business with them.
Dealing Desk or ECM?
Another question that people ask when choosing a broker is: Should I go with a dealing desk (DD) or electronic communication network (ECN) broker?
If you're just starting out, a DD broker is usually a better choice…in most situations. Most of them only charge a small spread (instead of a commission), and they usually have minimum lot sizes that are favorable to smaller accounts.
Another benefit of a DD broker is that they can take the other side of your trades. Some people see that as a negative, but the upside is that it provides you additional liquidity that you might not get on the open market or through an ECN.
As you get better at trading and build your account, consider moving to a ECN broker. They can usually offer tighter spreads and the commission fee structure usually makes larger trades cheaper than with a DD broker.
An ECN broker passes your trades directly through to a trade matching marketplace, eliminating their interest in any of your trades because they are not taking the opposite side. This gives you an extra layer of protection against trade tampering.
You can see our picks for great Forex brokers here.
Test the Withdrawal Process
This is a very important step and is part of the 3 step broker test process. Once your research has identified a potential broker that you want to trade with, do not give them all of your money at once.
Only deposit a small amount of money, an amount that you're willing to lose.
Then wait a couple of weeks…do a few small trades…then withdraw some of the money. Doing this will show you how easy the process is and if the broker has any hidden fees associated with withdrawal.
Doing this test might seem a little tedious, but it's a small price to pay to make sure that you won't get screwed later.
After you've gone through all of the steps above and are satisfied, you can be reasonably sure that you have a solid broker and you can go full speed ahead with trading.
How to Avoid Scams (The Biggest Red Flags)
Don't suffer the same fate as the person above. Here are some things to look for in fake/scam brokers.
If someone contacts you randomly via email or a social media network and says that they are a broker, and offers to manage your money, run away.
Real brokers don't manage money, they are only in the business of executing trades.
Another red flag is when a broker charges a large fee for withdrawing money. I've heard that this can be as high as 25%. Another variation of this scam is they tell you that you have to pay “taxes” or a “trading fee” in order to withdraw your money.
Next, read through the broker's website. If it looks like they used Google Translate, then run away. A real broker will have a well-written website that clearly explains what they do.
Finally, beware of Forex “brokers” that insist on cryptocurrency as the funding source.
Forex trading involves trading fiat currencies, so you should fund your account in fiat. Scams ask for cryptocurrency because it's non-refundable.
Final Thoughts on How to Choose the Best Forex Broker
One final word of wisdom…if you have a significant amount of money, do not place it with one broker. Consider using 2, or even 3 brokers.
What constitutes a “significant amount of money?”
That's for you to decide.
But consider this…if that broker went bankrupt and you lost all of the money in that trading account, how sad would you be? If you would be very sad, then consider using multiple brokers.
If you go with a broker that has been around for awhile and that many active traders are using, you should be safe.
But do your research before you send in your money.