I’ll walk you through how I go about finding a forex broker to work with Megadroid.
I think it’s really important to do your own independent due diligence for any forex broker that you’re considering using. That basically means creating a checklist of the important criteria, and only proceeding if they “tick all the boxes”. It’s important not to be swayed by marketing hype (bonuses, contests, fancy websites), or recommendations on various “review” websites. Focus on the important questions and make sure they’re all answered.
This is the 5-Point checklist I use:
- They must support the MT4 trading platform
An obvious point, but the Megadroid robot needs the MT4 trading platform to operate. It won’t operate on other trading platforms.
- They must have a EUR/USD spread of 2 pips or less
The spread on the EUR/USD must be 2 pips or less most of the time. Megadroid will not trade if the spreads are raised above this level. Most brokers satisfy this criteria, but there are a few that have spreads as high as 3 pips on EUR/USD. If in doubt, call and ask them.
- They must be either a US, UK, Swiss or an Australian regulated forex broker
For me this is the most important factor. It’s all about the safety of my deposited funds. The forex industry is largely unregulated or poorly regulated at this stage, and there have been countless examples of unregulated brokers with flashy websites and no physical address going out of business overnight with people losing all their funds. Even if they don’t go broke, unregulated brokers are more likely to reverse profitable trades and conduct other unethical practices. A word of caution. There are many brokers that share the same name but are located and regulated in different countries. For example Alpari has brokers in US, UK and Russia with each broker regulated in a different manner. Many US brokers have recently setup branches outside the US so as to avoid NFA rules that limit the maximum leverage they can offer. You won’t have NFA protection if you open an account at one of these branches though.
US forex brokers
I will only use US brokers that are regulated with the National Futures Association (NFA). You should be able to find the NFA number on the broker website. Then go to the NFA Website, and enter the NFA number in their search box. You’ll find all sorts of interesting information about the broker, including any complaints or regulation breaches. The owners and senior management are listed there as well. I also have a look at the Commodity Futures Trading Commission (CFTC) website. They require brokers to lodge financial data each month. They post this data here. April’s data is here. The whole point of this is to make sure your broker is well capitalized. The important number is “Excess Net Capital”. Each broker is required to have a certain level of capitalization, and the “Excess Net capital” reflects how much they are beyond that minimum requirement. The more the better. This table also gives you an idea of the true size of your broker. Often a broker website gives the impression that they are big, when in fact they are tiny. Some have an adjusted net capital of $8 billion, whereas others are as low as $1.5 million. The bigger brokers are generally safer.
UK forex brokers
I only use UK regulated brokers that are regulated by the Financial Services Authority (FSA). In the UK they have something called a Financial Services Compensation Scheme (FSCS) that in some cases can compensate you for money lost if a FSA regulated broker goes out of business.
Swiss forex brokersAustralian forex brokers
I only deal with Swiss brokers that actually have a Swiss Banking License. This is a relatively new requirement imposed by the Swiss authorities on forex brokers. Before that their regulation was surprisingly poor. Don’t accept a “pending” application for a Swiss Banking License, because if the broker doesn’t get approved they’ll likely go out of business or move offshore.
Australian brokers are regulated by the Australian Securities and Investments Commission (ASIC). ASIC require each broker to have an Australian Financial Services Licence (AFSL). Using a brokers AFSL number, you can perform a search on the ASIC website and find out some interesting background information about the broker.
- They must have a real physical address and real phone support
The first thing I look at on a broker website is their contact information. I look for their address. You’ll find the less reputable brokers won’t list it, or make it very hard for you to find it. If you do find it, type it into Google Maps and have a look at their premises to make sure the address is real. Most likely it will be real if they’re a properly regulated broker, but always make sure. Phone support is crucial. I stay away from brokers who only offer Call-Back phone support, meaning you type in an online message, and someone will call you back when they’re ready. Proper brokers don’t work like that. You should have direct phone support whenever the markets are open. I find it a good idea to actually ring up the broker after I’ve done my due diligence, and test out the phone support.
- Make sure there are no recent problems with the broker
As a final check I visit a few websites just to make sure people aren’t experiencing recent problems withdrawing funds from the broker or having other difficulties. This is a bit tricky because stuff posted on “review” sites and other forums is notoriously unreliable. Fake positive and negative broker reviews are commonplace unfortunately, but if I find a huge number of posts complaining about difficulty withdrawing funds from a broker, that usually grabs my attention. The websites I use are Forex Factory (Brokers section) and Forex Peace Army (Scams section).