Doing Due Diligence on Your Forex Broker - Part Two

01/06/2009 11:03 am EST

Focus: FOREX

John Jagerson

Co-Founder and Contributor, LearningMarkets.com

The growth in the forex market and its relatively open regulation has created an environment where very innovative products and dealers can flourish. However, it has also created opportunity for companies that are run without proper controls, and that may pose a risk to your account.

Doing some simple due diligence on your broker or dealer can help reduce the risk that you will run into one of these bad firms yourself. There are a few specific suggestions that I will make in the video that can help you make a good decision when you are choosing a dealer. This research is not only helpful when choosing a dealer. It should also be repeated on a regular basis to check up on your dealer.

1. Check the registrations and complaints records. In several jurisdictions, there are easy to use public records (such as the BASIC system run by the NFA in the United States) that can be used to make sure your prospective dealer is registered correctly and does not have unexplained complaints lodged against them. If these records don't exist for your dealer, it is one more unknown risk you will have to decide whether or not to live with.

2. Watch capitalization requirements. Most dealers in the major markets must meet minimum capitalization requirements. This helps create a barrier to entry for some of the "bucket shops" in the business. The information is easy to get and to check up on at regular intervals.

3. Good reviews are available, but you have to be careful to avoid the hype and scams. Reviews of dealers do exist, but there are a lot of them that are merely marketing scams. Two that we have found to be very useful are www.forexdatasource.com and the Readers' Choice Awards from www.traders.com. These are available for low or no cost and the results may really surprise you.

4. Diversify your dealer. There is no reason that you have to get "married" to only one dealer. In fact, the principles of diversification apply here as much as they do to any other investing activity you undertake. Consider using more than one dealer so you have more flexibility and a broader experience.

A mistake that traders make is to assume that they have no choice but to take the word of their broker's sales representative. You have many resources available to you and should make dealer due diligence a priority before choosing a firm to open your account.

Click here to watch the video.

By John Jagerson, of PFXGlobal.com and LearningMarkets.com.

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