8 things to watch out for when choosing a forex broker

New traders looking to invest in the forex market need to learn about FX, and before trading, conduct proper due diligence. (Image: Supplied)
New traders looking to invest in the forex market need to learn about FX, and before trading, conduct proper due diligence. (Image: Supplied)

Forex trading has been a growth story of SA’s capital market’s evolution, but the industry has often been plagued by stories of con artists & scams. In fact, almost every year we hear about new Forex scams being exposed by the Financial Services Conduct Authority (FSCA) - like Whatsapp forex stokvel, and investors have been constantly warned by SA regulator against these illegal & unregulated schemes.

These fake forex scams seem so common, that it is easier for new investors to believe that forex trading & all brokers are scam.

But the truth is that in most cases, hardly any of these scams have anything to do with forex. These scams are mostly crafted by scammers with little financial background – who only want to create Ponzi schemes using forex, cryptos, stocks as a lure to attract investors. They often target general public via Social media, as means to quick income & financial freedom.

Forex Brokers SA highlights real problems as - first, the lack of education about forex & CFD trading among new forex investors; and second, the unregulated forex brokers & con artists who want to take advantage of uninformed investors.

Right now, for any new traders looking to invest in the forex market, it is even more important to learn about FX, and before trading, conduct proper due diligence, and only trade with FSCA regulated brokers.

Although we can never be 100% safe as an investor but following this - '8 points checklist' can greatly reduce your chances of opening an account with a fraudulent firm.

1. Regulatory Oversight

It is best to start by looking whether the brokerage that you are choosing has a regulatory license & approval in SA. 

Market Regulators protect investors against scams or fraudulent activities by the brokerages. They also provide oversight on the brokers registered with them, which ensures fair trading conditions, and transparency, accountability by the broker during any issues between the client & the broker.

In South Africa, the market watchdog Financial Sector Conduct Authority (FSCA) supervises and regulates the market related activities of financial institutions that operate in the country. Internationally, major market regulators like FCA of UK, ASIC of Australia, CySEC of Cyprus - all do the same for protecting the investor interest by regulating the market.

Some brokers show their offshore regulation & register clients under those regulations, which isn't good enough to ensure proper protection of funds or good trading conditions.

In most cases, you will find information of the broker’s regulations on their website’s about page, in the footer section, or on their signup page. Always ask your broker for their FSP license number before investing.

Most regulators including - FSCA have a public search where you can search licensed brokers by entering broker’s name or by their FSP number.

There are around 100+ FSCA regulated brokers that offer forex & CFD trading to retail traders in a regulated environment.

2. Investor protection

This is an important consideration, as this ensures that your funds deposited in the broker’s platform will be safe to an extent. In an event a brokerage goes bankrupt or similar worst case scenario, an investor's risk will be limited.

The amount of protection offered is often pre-defined and limited.

For example in the US, the investor protection amount is upto $500,000 while for Europe it is usually €20,000. This protection is usually offered by State run Investor Protection Funds or some independent insurance providers.

South Africa does not have any state backed investor protection fund currently. But, some FSCA regulated brokers may still offer you some protection.

For example, HotForex (HF Markets SA Pty Ltd) which is regulated with FSCA has a Liability Insurance program for investor protection to a limit of €5,000,000 in case of risks against errors, omissions, negligence, fraud - that may lead to financial loss to the broker. Brokers usually display this information on the ‘funds safety’ page on their website.

Another important factor to check for safety of funds is - whether your broker has segregation of clients’ funds from the operational requirements of the company. This limits any brokers to use the clients’ deposited funds for working capital requirements.

3. Trading & Non-trading Fees

Before opening an account with a broker, you should always check what trading fees is charged by the broker, and if there are any other maintenance or hidden charges.

Mostly brokers make profits by charging you a fixed commission or fees per trade based on the volume. This is called the spread.

Some brokers may charge you lower spread, but they may charge other non-trading fees like inactivity charges, fees on deposit & withdrawal, account maintenance charges etc which makes their overall fees higher.

Also, few brokers increase their spread during high volatility. So, analyse the overall fees on different trading platforms and make sure you go with the brokerage which is offering the lowest spreads and commission per lot on your desired instrument, with no other hidden charges.

4. Available markets & products

Make sure the asset class or instrument that you want to trade is available with the brokerage, and that too at the lowest fees possible.

For example, if you are specialised in trading USD/ZAR currency pair, check if the broker offers it before signing up for a Live account.

Brokers usually have a page of the available trading instruments, along with the historical average spread on currency pairs, stock, commodity CFDs or Cryptos. You can search on that page if your desired instrument is available with that broker & what are their average fees.

5. Trading conditions

You cannot check the trading conditions of a broker without signing up for a Live account. But you can do some checks to make an informed decision:

Most brokers offer demo accounts where traders can get a feel for the platform by trading with virtual money, without depositing any money. Although demo platform would differ from live, but still you should check the demo accounts with multiple brokers or trade with brokers with lowest minimum deposit to test their trading conditions, compare the pros and cons.

Brokers often offer a variety of account types that fit the needs of different types of investors. So, compare the minimum deposit, available instruments, trading platforms on offer like MT4, MT5, ZuluTrader or cTrader with various account types at the broker.

Moreover, you also need to ask your broker about their deposit and withdrawal times, average spreads and commission, trade execution method – market or instant execution and leverage on offer and whether it is floating or fixed. In addition, you need to check if your broker is a Dealing Desk (DD) or ECN/STP broker and who is acting as their liquidity provider.

Requotes and slippages often occur in case of market execution. If they occur often, they tend to eat up the trading profits, hence it is important that traders should check the history of quotes by brokers. Checking the reviews of brokers online should help with this information.

You also need to check the Customer Support of the broker - whether they are prompt to handle queries, issues or grievances of the customers. You can check this by reading their replies on forums & review sites and chatting them online to see how helpful they are in resolving issues. It is also a plus sign if your broker offers customer support in multiple languages as you can get help in your local language.

Final decision should be arrived at based on the compatibility of the broker with your own trading strategy, rather than by looking at some general metric.

6. Background check & Broker’s history

A thorough background check on the broker is essential for the safety of your funds.

Start by checking the “About” page on the broker’s website for their experience operating in the industry. The longer they have been in the business, better it is.

Check information on the broker’s website & independent review websites about the broker’s experience in the forex industry, number of accounts registered with them, globally reputed awards received (if any) and adherence to global regulators – the more the better.

Next, see if the brokerage is being transparent about their workings. If it is listed publicly then it is a good sign, else check to see if they are transparent by publishing their annual reports, fees & commissions calculations, regulatory and account segregation matters.

A good reputation in the industry is also a sign you need to look for in the broker. Reputation comes from having good relationship with both customers and regulators as well. If the broker has been fined in the past for any irregularities or fraud, you may want to avoid it.

7. Beware of unrealistic promises and offers

Finally, be beware of any broker advertising forex as a method to become rich overnight.

If the broker is advertising claims of forex as a method where you can double your money, promoting illegal schemes, giving wild offers & prizes to trade, then that broker should be avoided at all cost as they are not offering legal investment options.

The scam brokers play with one of the weakest of human emotions – “Greed” to get your money.

Don't fall for bonuses or giveaways, and only trade with a broker that is FSCA regulated, has experience & offers good trading conditions, easy deposit & withdrawals.

8. Use the experience of others

You can get a better picture of the reputation of the broker by checking their reviews online on Review websites, where you can read about the experiences of others who have already traded with them in the past.

Look closely at how actively the broker responds to the negative reviews, dissatisfied traders & issues raised on the reviews & forums online.

This post and content is sponsored, written and provided by Forex Brokers.

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