WHAT TO LOOK OUT FOR WHEN SELECTING A FOREX BROKER.
Scrolling through social media checking out forex trading content, I came across a question repeated across random posts, which forex broker do you recommend? I pondered on that question asking myself whether there are certain irreducible minimums one should seek before settling on a forex broker. Do note, these are my personal thoughts and bias limited to forex trading in Kenya.
Regulation and Licensing
There are instances where forex brokers have suddenly closed their operations and left with depositors’ funds. Usually these are brokers regulated or licensed in foreign markets but operating in other markets. For safety, I do recommend you pick a broker regulated and licensed in your jurisdiction. The licensing in your jurisdiction ensures the brokers comply with rules and regulations cutting across the capital markets. In Kenya, forex brokers are licensed by Capital Markets Authority (CMA) as Non dealing online foreign exchange brokers https://www.cma.or.ke/licensees-market-players/
Account types
To cater to various trading styles and experience, forex brokers do offer a variety of accounts that vary in features. What you might not know is that these features do represent revenue streams for the brokers. In simple terms, these features are used to entice you and that’s how the brokers do make money from you.
Commissions
Irrespective of your trading style, you want to avoid accounts that do charge a commission. You cannot underestimate the impact of commissions on your profits. Usually they will offer an account with low or nil spreads but charge a commission. You would be better off with an account with slightly higher spreads but NO commissions. If they don’t make money from commissions, swaps will get you.
- Swaps
On some level you have to accept that brokers must make money. Swaps are the cost of holding securities in this case trades overnight or over the weekend. In my experience, to the trader, swaps are cheaper than commissions. Why are they cheaper you may ask? Suppose you sold EURUSD. Further, suppose the Euro interest rate is 4.5% while the USA rates are 5.5%. Effectively the cost of holding this trade for long period is 0.055-0.04, the positive difference means the trader earns something extra. Suppose we went long/bought, the cost of holding this trade would be 0.04-0.05. By now you have surmised that swaps may or may not affect your profits (50/50) but commissions will affect your profits.
Do note I have not shared much about spreads. My trading orientation, swing trading has taught me that spreads play a very minor role in trader success or failure for that matter.
In addition to spreads, deposit bonuses have a way of enticing prospective traders into believing the bonus is extra capital for trading. Usually this attracts reckless trading, my recommendation, avoid them.
Deposit and withdrawal methods
As I mentioned in the opening statement, my opinion is limited to Kenya. You want to work with a broker who offers deposit and withdrawal methods that are convenient and inexpensive. Luckily the brokers I have interacted with do offer multiple methods, bank transfer, card transfer and mobile money otherwise known as Mpesa to Kenyans.
Forex Copy trading
This is a bonus, and not a mandatory requirement. Forex copy trading offers high risk investors the opportunity to invest in forex trading. This account is ideal for traders and high-risk investors alike. Traders get to showcase their skill and earn additional income through copy followers while high risk investors get to participate and earn from forex trading expertise. Therefore, a forex broker offering forex copy trading ranks top on my list. For more, check out my Forex copy trading video https://youtu.be/U8EBRCvsLiw?si=EpgYgSBbpK5VzUW7
In summary, these are the three key parameters one should consider before opening a forex trading account, number one and two are mandatory.
