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Choosing a forex dealer is a topic most traders are passionate about. Because the retail forex market is dominated by short-
and medium-term traders, most forex dealers have a focus on quality and ease of execution to cater to that trading style.Various dealers do have significant differences, and you need to understand these in order to pick a preferred dealer. So let’s
discuss the internal characteristics as well as the external benefits you should look for in choosing a dealer.Also read: How to Close Out Options Trades with Triple-Diget Profits
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1. Regulation
The forex market is nearly unregulated, and this
means that there are plenty of small “bucket shops” out there soliciting business. Recently, there have been some changes to
regulations in the United States and Australia that have cleaned up the dealer market somewhat. This is helping good dealers stand
out from bad ones.Dealers usually have to register with some regulatory agency or association. You can find out a lot of information about them
— including principles’ names, history, disciplinary problems and complaints by checking out the regulatory agency’s Web site.
Below is a list of the best places to look for that information.United States: The National Futures Association (NFA)
BASIC systemUK: The Financial Services Authority (FSA)
Australia: The Australian Securities & Investments
Commission (ASIC)If your dealer does not appear in any system, that is a big red flag. If you don’t know where, or if, a dealer is registered,
call them and find out.
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2. Capitalization
As a registered financial service provider, a dealer is required to maintain a minimum level of capitalization, or money in
reserve. This has a direct impact on their ability to remain solvent, and is a good indication of the size of the company and
its ability to remain in business.Net capitalization requirements for forex dealers in
the United States just went up to $15 million, and will go to $20 million as of May 16, 2009, which has helped to clean out some
of the seedier operations. You can find out what your dealer’s capitalization levels are on the Commodity
Futures Trading Commission (CFTC) Web site.If a dealer can’t meet minimum requirements or keeps their capitalization private, you should worry about their ability to remain
solvent in adverse market conditions.
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3. Service
The most common complaint I get from traders about their dealer’s service is that dealers are abrupt and rude, or that they
can’t answer difficult questions. Investigate a dealer’s service and dealing or execution departments. You can do this by doing
some research and calling the service department at different times of the day with difficult questions.Make sure that you opt for the dealing desk or execution department a few times to get a feel for how they treat you. You can
learn a lot about a dealer by calling them a few times.
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4. Pairs and Products Offered
All dealers are not created equal. Dealer product lines differ in two main areas:
Pairs offered: Some dealers offer close to 100 different crosses, which can be great for fundamental or strategy traders.
Product offerings: Some dealers offer futures, commodities and options, as well as spot
forex. We are big advocates of using options in your forex
activities, so this may be an important factor for you, as well.
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5. Spread
The spread between bid and ask prices on the majors tends to be relatively uniform across most major dealers. The largest differences
exist in the crosses. Be aware that most dealers offer one of the following two spread models:Fixed spread: You always pay the same spread, regardless of market conditions.
Variable spread: This spread is narrower on average than a fixed spread, often 1 pip or less on the majors, but can become
very wide during periods of market volatility. Very short-term traders may lose a trade because the spread widened rather than
the market price actually reaching their stop limit.For more fundamental or longer-term traders, the spread is less of an issue, so competitive spreads are usually sufficient.
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6. Rollover
Rollover, interest payments and the “tomorrow-next policy” are all terms for the interest charge/payment offered by dealers
on individual pairs.Call the dealer about its policy and whether higher payment rates and lower charges are available with lower margin levels,
higher balances or just upon request.
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7. Charting and Execution Platform
Dealing platforms fall into two basic categories:
Execution-based platforms: These platforms are oriented around speed of order entry and execution. You will often see
this advertised as “one-click trading.” This is great for scalpers and day traders. These kinds of dealers make executing an
order very fast and specialize in simple trading interfaces.Information-based platforms: These platforms place a much heavier emphasis on charting and research technology. Some
of the benefits of this type of dealer are:- Customizable charting and system development
- Display of positions, orders and P/L on the charts
- Mechanical system execution
- Chart pattern search and identification
- Institutional-grade news feed and analysis
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8. Multiple Dealers
We think you should avoid constraining yourself to one dealer. Picking a dealer isn’t a marriage, so feel free to shop around
and trade with dealers that suit each strategy you use in your portfolio. This is also a great way to add some diversification
to your trading.While it is rare for a big broker or dealer to go out of business, it has happened. When it does, the results are catastrophic
for traders with all their eggs in one basket. Many forex traders interested in options may have to split their account between
an options broker and a forex dealer anyway.
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9. Know What’s Important to You
When picking a forex dealer, you must prioritize qualities based on what is important to you. You cannot compromise on
the internal qualities we listed (regulation, capitalization and service), but the external qualities (pairs and products offered,
spread, rollover, charting and execution platform) depend on what you want and need as a trader.Long-term traders may value a higher quality news feed and charting research tool than a short-term trader or scalper. Many
dealers will say they are a one-size-fits-all solution, but we have not found this to be true.
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10. Paper Trade
Paper trading is not just for new traders. Paper trading a dealer’s application is a critical step before making a decision.
Almost all dealers will allow you to set up a paper account to really test the technology and service levels. Spend the time
to get to know an application before you make a decision. Too many traders are impressed with surface features in a day or two
of paper trading and then make a bad decision.More from John Jagerson:
