Three Things to Consider When Choosing a Forex Broker

by Andrew McGuinness     Jul 16, 2019

If you're looking for a way to make extra money on your own time from anywhere in the world, the Forex market provides a unique opportunity that can help get you started on the path to living the life that you know you deserve! Forex trading is fun, takes relatively little information to get started, and you can hop in after learning the basics from your preferred Forex trading educational resources, many of which are available completely for free online. However, if you want to make your first trade, you'll need to open a Forex brokerage account to get started. Just like when you get involved in stock trading, you'll need a broker to assist you in making your trades between the currency pairs that you're interested in. But with so many brokerage firms competing for your business (and all of them claiming to be the best), how can the beginning Forex trading hopeful possibly know which brokerage account is right for them? Read on to learn three things to watch out for when comparing Forex brokers.

Reliability. When you work with a broker providing stock trading services in the United States, you can usually rest assured that your money is going to a reliable source; there are laws in place that prevent stock brokers from running off with your money that carry harsh penalties if violated. Unfortunately, the fast-paced world of Forex trading is currently far less regulated than that of the American stock exchange and equity markets. As a result, a number of shady businesses and fly-by-night companies have popped up in recent years trying to scam Forex trading hopefuls by promising things like insanely low rates, promises of instant wealth through insider trading secrets, or other lucrative assets to add to your Forex profile. Before you send any company a few thousand dollars to start on your Forex trading journey, make sure you do a little bit of research on their business. See how long the business has been in place, and look for previous customer testimonials outside of the website of the business. Believe us, avoiding a scam will save you tons of time and stress, which is well worth the cost of a few hours of research.

Spreads. The good news is that in Forex trading, you don't have to pay your broker a fee like you would to your broker when stock trading. The bad news is that brokers make up for this loss in the "spread;" that is to say, the difference between the "buy" value of a currency and the "ask." These spreads are typically very small (less than 0.05 cents), but over time the costs of these spreads can quickly add up. Each brokerage firm has their own spreads, which may even be at unique rates for each currency pair. Watch out for brokers that overcharge on the spread, as they are essentially taking money out of your pocket!

Leverage. Did you know that in Forex trading, you aren't actually trading your own money? That's right; when you trade, you "borrow" money on leverage, which allows even small time traders to compete in the market. Typical leverage is 100:1, which means that for every $1 you have in your Forex trading account, you can trade $100 worth of currency. The higher the leverage, the higher your earning potential. However, a higher leverage also means higher risk for your broker, which is why they limit the amount of leverage that they will supply you with. The determination of your leverage often has to do with your credit score; if your score is high, this shows that you are a reliable borrower, and are not likely to trade frivolously. On the contrast, if your credit score is low, you are consider a "high-risk" trader, and brokerage firms will be less likely to give you more leverage. Be sure to compare brokers for leverage rates before you make a final decision!

One of the Brokers that we believe combines all elements mentioned above is XM. You can go through everything XM offers by reading our XM Review, or you can browse through all our Forex Broker Reviews!

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