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Criteria for Choosing a Forex Broker

Choice paralysis is a problem endemic to modern life, where we have too many options to choose from, and as variety and complexity increases, it becomes nearly impossible to choose "correctly".

With the rise in popularity of Forex Trading over the past 10 years, there has been a corresponding increase in the number of online brokers for this market.

I remember when I could count the retail forex brokers on my hand, and it was relatively easy to spend a couple hours comparing the advantages of each one before making my decision to open an account. Now the numbers have mushroomed to over 200+ brokers. New ones are opening up every week, with more and more options and features added to each broker. As they all try to compete for our money, they scramble to outdo each other in laying out their advantages, giving us more free bells and whistles than we know what to do with, offering us a range of platforms and routing technologies (STP, ECN etc.), a range of different deposit methods (Wire, PayPal, Skrill etc.), a range of different services and contact methods. There is seemingly no limit to what they will do to get our money.

Account Deposit Bonus

Many do that with "deposit bonuses" of 10-30% added to our account on joining, though often the fine print rules for the bonus ensures that the money is not so freely distributed.

Sometimes welcome bonuses can be legitimate, but often the fine print can make the bonus nearly unattainable. For instance, I have seen how the fine print will indicate that an account less than 2K in size must trade 250 round turn lots within the first month or two in order to receive it. But such a stipulation forces the client to over-leverage and over-trade their account to oblivion in order to receive the bonus. With 250 round turn lots, the client loses $5000 in transaction costs (2 pip spread X 250 = 500; 500 X $10 per pip = $5000), most of which goes to the broker. Losing $5000 in transaction costs on a $2000 account size only to gain a 30% welcome bonus is NOT good math for you, the Client: read all bonus terms. 

Forex is Beautiful

Well, they may not send a beautiful agent from their country of origin to seduce and tempt you to open an account with them. But some don't mind seducing with eye-candy. I have seen some brokers splash their pages with pictures of beautiful women and/or cars, and even go so far as sponsoring beauty pageants, as if a beauty contest has anything to do with forex. 

The attractive welcome bonus or female face splashed on a broker page may lure some hapless traders when far more important criteria should be examined.

While we all sense and agree that it can be good to be given all these brokers and options to choose from, having this many to choose from seems to exceed the reasonable limit, causing many of us "shopping" for the right broker to be faced with choice paralysis: too many choices leading to decision paralysis due to information overload. Instead of making the right choice we end up losing our motivation to choose. Often the time it takes to make the decision is too long, there are too many lingering doubts, and the broker decision is deferred for another day.

One sure-fire way to cut through the extensive brokerage choices and options is to undertake the process of elimination.

While in the cereal aisle at the local grocery store, it can be quite daunting to choose the right cereal. However if you select based on the following three criteria ("Nothing too sugary", "Nothing that looks like rabbit food" and "Something that has a reasonable amount of fiber"); you realize quickly that you are down to three choices out of a possible fifty. The same is true for brokers. Once you select on the correct criteria, you end up mass-eliminating, knocking out the volume so you can get back to making a more enjoyable choice, the choice between a few.

The criteria for brokers can be put in a few simple questions:
  1. Is the broker's spread or transaction cost low enough, and can the spread be further reduced by rebates from Cashbackforex.com?
  2. What types of execution technologies does it employ (MM, STP, ECN or hybrid)?
  3. Is the broker registered with a respected authority?
  4. What kind of tools does the broker provide?
  5. What kind of leverage and margin policy does it have?
  6. What type of customer support does it provide?
  7. If you do not have sufficient capital, check whether the FX broker offers mini, or better yet micro accounts that require low startup funds?
We will explore the criteria behind each question in the following articles.

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