The United States is by far the most regulated market in the world. Therefore, it is important that you, as a U.S. trader, choose a regulated forex broker. The aim of this post is to help with choosing the right broker to trade with by providing you some in-depth information about the U.S. market.
The forex market in the U.S. is by far the most active one among the markets around the world. According to the U.S. financial regulations, brokers registered with the Commodity Futures Trading Commission (CFTC) or National Futures Association (NFA) are allowed to accept U.S. traders. Hence, there is only a limited choice of online forex brokers as far as U.S based traders are concerned.
How US Traders Can Choose an Online Forex Broker
As a U.S. trader that wants to participate in online retail forex trading, you must be aware of a few things before choosing a platform provider. These include the following:
- Regulation
- Reliable trading platforms
- Competitive trading cost
- Suitable trading accounts
- Responsive customer service
- Other services offered
- Regulation in the US
The forex market is an Over the Counter (OTC) market. It is difficult to regulate the market as it does not have a central exchange. It is because of this nature of the forex market that the Federal government has made it compulsory for financial services providers to become registered members of the CFTC or NFA. This ensures protection to U.S. based traders from scammers. The main regulatory agency that oversees the operation of the forex market is the NFA which was established in 1982. It is not only a self-regulatory agency but also a non-profit organization. NFA’s responsibilities include the following:
Approval and issue of a license to forex brokers
Ensure that all approved brokers comply with the capital requirement
Monitor and stop fraudulent activities
Review audited reports that the brokers submit
The NFA makes sure that all the forex brokers operate with integrity, transparency, and in compliance with the regulatory requirements. In addition, the NFA provides a verification system called Background Affiliation Status Information Center (BASIC) which enables traders to log in and verify whether a broker is a regulated broker or not.
- Trading Platform Software
Typically, online forex brokers make use of two types of trading platforms. Platforms designed by them referred to as proprietary platforms, and those that are provided by third parties referred to as generic or white label platforms. While Sirix and cTrader are examples of proprietary platforms, MetaTrader 4 by MetaQuotes is an example of white label platform software. MetaTrader 4 is one of most popular forex trading platforms. It makes sense to try out different platforms and find out which one suits you the best. The trading platform has a very important role to play in forex trading and, therefore, most brokers make available different kinds of platforms to their customers. These include the following:
Desktop Platform: Traders have to download the software and install it on to their desktop personal computers.
WebTrader: In this case, the trader need not download any software. The web-based trading platform can be accessed from anywhere through a web browser.
Mobile Trader: These are mobile apps and are for those that are always on the move.
Evaluate the different types of platforms on the basis of the following aspects:
User friendliness
Availability of required tools such as advanced charting systems that allow you to incorporate indicators
News stream to keep you updated
Economic calendar for upcoming events
Ability to trade directly from charts
- Commissions, Spreads, and Leverage
Trading cost is an important aspect to be taken into consideration when trading forex. Higher costs can reduce your profitability to a great extent. Therefore, it is essential to study the spreads offered and commissions charged for trades by different brokers.
In the forex market, brokers generally do not charge any commission on currency trades. Only No Dealing Desk or NDD brokers that transmit traders’ orders to the Interbank typically charge a small commission. The advantage of trading with this type of broker is that you can access the Interbank spreads.
Normally, the trading cost you will have to pay is the spread. Spreads may be of two types fixed and variable. Fixed spreads are often higher compared to variable spreads. Fixed spreads are suitable for those that want to have an idea before executing the trade. Variable spreads change on the basis of volatility in the market.
Most US traders have to deal with is the leverage restriction. Regulatory requirement specified by the NFA is that forex brokers in the U.S. should only offer up to 1:50 leverage to their clients. Leverage enables you to invest more money in a trade. So, 1:50 leverage will allow you to invest 50 times more amount than you are planning to invest in a trade. Leverage has to be used with care. It provides extra profits but also raises the risk level.
- Types of Accounts
Most forex brokers provide a host of account types. This is to help you choose one that suits you the best. These include the following:
Micro and Mini Accounts: The difference between these two accounts is the lot size. The lot size for a micro account is 1,000 units and that for a mini account is 10,000 units. These accounts are referred to as “beginner friendly” accounts.
Standard Account: The lot size for this type of account is 100,000 units.
VIP Account: VIP accounts are for high net worth customers. Benefits offered for VIP clients include fund management facility and dedicated account manager.
- Customer Support Service
When it comes to the customer support services, the brokers have to be evaluated on the basis of following aspects:
Responsiveness to queries
Communication methods (telephone, live chat, and email)
Duration of availability of customer service (24 hours preferably)
Languages supported by the customer service department
- Other Services
It is also important to check whether the broker you are planning to work with also provides additional services like VPS, educational resources, social trading, free trading signals, ability to trade from the chart, news feed, economic calendar, etc. They help to improve your profitability.
In conclusion, it is slightly more difficult for US traders to choose a forex broker than their counterparts elsewhere in the world. However, they can make it a hassle-free affair by evaluating the brokers on the basis of the aspects discussed above.
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