By this point, you have some idea as to what makes currencies move and how to design a trading strategy that profits from these movements. Now, all you need to do is find a suitable forex broker [and proceed to open an account. [Of course, this assumes that you’ve decided to open an account with a forex broker, rather than a conventional brokerage or futures broker].

Check the Credentials

The first and most important step in selecting a forex broker is to check their credentials. In order to take advantage of regulatory discrepancies (i.e. different margin requirements), many traders are tempted to open an account with an overseas or offshore broker. While this is not inherently problematic, it could make it very difficult to recover your money in the event of a dispute, broker insolvency, or outright fraud. Thus, if you are prudent, you would be wise to select a broker that is registered in your home country.

For that matter, you want a broker that is registered, period. In the case of US brokers, the organization that they should be registered with (and regulated by) is the Commodities Futures Trading Commission (CFTC). Some brokers might try to sell themselves on the fact that they are not registered and hence can offer you better terms- DON’T be fooled. Along the same lines, you are strongly advised to check the National Futures Association’s Background Affiliation Status Information Center (BASIC) to see if the broker has been the subject of serious allegations and/or has been involved in serious disputes with customers. You can also use BASIC to confirm a broker’s registration with the CFTC.

You’ll also want to make sure your broker is well-capitalized, and ideally, that it is tied to a large financial institution. This serves to minimize the risk of broker insolvency. Other questions that you may want to ask, include: How many years has it been in business? How many customers does it have, and how much volume does it transact?

Fees, Shorty, Fees!

By nature, most forex traders churn their portfolios constantly, and may make dozens or more trades per day. On a nominal basis, broker fees will be considerable, and it is the most important criterion for many traders. [That doesn’t mean it has to be, nor should it be for traders that don’t engage in high-frequency trading].

As I explained on Day 1, brokers don’t technically charge commissions; rather, they earn money from the bid/ask spread. Unlike brokers of other securities, most forex brokers also function as market makers, with the result that there is considerable variation on spreads. Not only do these spreads vary by broker, but also by currency pair, as you can see from the chart below. [Note: Data has not been externally verified, and may change over time, so its worth looking into current market specifics while opening your account].

Most good brokers will tell you that they have relationships with several “price providers” (aka market-makers), in order to keep spreads low, increase liquidity, and limit market manipulation. Those that use “dealing desks” to execute trades will often take positions against their own customers, creating a serious conflict of interest.

Broker Policy

Before selecting a broker, you should thoroughly review their policies. While spreads are not set in stone, broker policy should be. For example, what are its margin rules? Will it ever liquidate your account (potentially costing you dearly) if a margin call (i.e. a leveraged trade moves against you) is triggered? In addition, how does it treat rollover (interest charged on overnight loans)? How does it determine the interest rate paid on the long currency? Does the broker guarantee automatic execution at quoted prices? Is there an account minimum, and what is the minimum trading size? Do spreads vary depending on the size of the account? Can the broker guarantee liquidity?

Tangibles and Intangibles

Up until this point, there hasn’t been much opportunity for brokers to distinguish themselves. All good brokers are registered with the CFTC, offer instant execution at reasonable spreads, and have similar policies dealing with “mundane” matters.

Thus, it is mainly through service and other intangibles that brokers can really stand out. Some brokers offer a more comprehensive assortment of currency pairs, and perhaps even a handful of exotics. Others will try to out-compete their competition by offering fabulously large leverage. Some offer different types of accounts (with their corresponding privileges), and unique types of orders.

Take a look at a few platforms, since this will be the main way that you interact with your broker. Does it offer advanced charting and a suite of technical analysis tools? Is Profit-and-Loss (P&L) calculated in real-time or only after the position is closed? Some brokers offer real-time news and data feeds, access to exclusive expert commentary, and the ability to back-test (more on this below) trading strategies based on historical data. Pay special attention to those that use MetaTrader4 (MT4) – of which there are several reputable brokers- because it is the most critically-acclaimed and user-friendly trading platform. Of course, there is amazing forex software that is available for download, but ideally, you’ll want to select a broker for whom this software is seamlessly integrated with the trading platform so you don’t have to toggle between programs.

Finally, what kind of customer service does your broker offer? Is there a 24-hour help desk? Can you speak directly to a live person, or are you limited to sending an email? This might sound trivial, but in the event of a “crisis,” it could save you aggravation and even money.

Opening the Account

Once you’ve selected your broker (or narrowed the list down to a mere handful), you can open a demo account and play around with the broker’s software. Your goal at this point is not to test out specific strategies, but rather to get acquainted with a platform(s), and make sure you feel comfortable with it before you commit to opening an account.

When you’re ready to open the account, you’ll need to select an account type. Most brokers will offer a mini/micro account and standard account, and some will even offer a premium account. This account types differ primarily in terms of balance requirements and leverage limits. After filling in the necessary paperwork (including the required margin agreement), make sure you read the fine print before signing your name.

Before sending a check to your broker and activating your actual account, you should first familiarize yourself with the dynamics of the forex market by trading through a demo account…

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