How to Choose a Forex Broker

General Information

The broker’s influence on trader’s trading results is so great that the right choice of the broker is one of the keystones of success.

With Forex trading rapidly rising to popularity, forex brokerage services became popular as well. This could not but result in much poorer quality of services, which along with a sharp increase in the number of offers and powerful advertising campaigns causes much difficulty to traders. In the circumstances many beginner traders fall victim to low-skilled companies or even pure fraud.

The article will review the search pattern and criterias on how to choose a Forex broker.

Points of Importance

Criteria of choosing Forex broker can be divided into two big groups:

  1. The company reputation and quality of services;
  2. Trading conditions.

The first group includes regulation, order execution, deposit and withdrawal procedures and other issues concerning the broker’s honesty and decency.

The second group comprises conditions of trading with the broker.

Regulation

Brokerage activity in all countries (except for some offshore areas) is a licensed activity.

The most important thing you should pay attention to when choosing an online broker is a license.

But simply having a license is not enough to prove the broker’s reliability. It is important to know who issued the license. The point is that not all countries monitor and regulate foreign exchange trading the same way.

Therefore a trader should choose a foreign exchange broker registered in the country with proper consideration for forex and stock market regulation issues.

The countries with strict regulation rules are as follows:

  • USA;
  • UK;
  • Canada;
  • Eurozone;
  • Japan;
  • Australia;
  • New Zealand;
  • Switzerland.

Main Forex Market Regulatory Bodies

Being regulated by the following bodies is a strong proof of the broker reliability:

  1. US Forex Regulators
  • SEC. Securities and Exchange Commission;
  • NFA. National Futures Association;
  • FINRA. Financial Industry Regulatory Authority;
  • CFTC . Commodity Futures Trading Commission.
  1. UK Forex Regulators
  • FСA. Financial Conduct Authority;
  1. EU Forex Regulators

EU countries adopted the Markets in Financial Instruments Directive (MiFID), which sets out conducts of business, organizational and authorization requirements for financial market participants.

  • ESMA. European Securities and Markets Authority;
  • Bafin. Federal Financial Supervisory Authority of Germany;
  • Danish FSA. Danish Financial Supervisory Authority;
  • CySEC. Cyprus Securities and Exchange Commission;
  • Swedish FSA. Swedish Financial Supervisory Authority.
  1. Japanese Forex Regulators
  • FSA Japan. Japanese Financial Supervisory Authority;
  • FFAJ. Financial Futures Association of Japan.
  1. Australian Forex Regulators
  • ASIC. Australian Securities and Investments Commission;
  1. Swiss Forex Regulators
  • FINMA. Swiss Financial Market Supervisory Authority;
  1. Canadian Forex Regulators
  • CDCC. Canadian Derivatives Clearing Corporation;
  • BCSC. British Columbia Securities Commission;
  • OSC. Ontario Securities Commission.
  1. New Zealand Forex Regulators
  • FSPR. Financial Service Providers Register.

An important feature of a regulated broker is that when making a contract the customer puts a signature on a notice of risk, which must be approved by the regulator.

The broker’s cooperation with the above financial regulating bodies is a proof that its customers’ funds will not be drowned in the boundless ocean of online trading. But this will not secure clients’ assets against various force-majeure circumstances sometimes faced by the most reliable and regulated brokers.

The use of segregated accounts intended for holding customer funds separate from the broker funds can protect against such situations.

Thus, traders should give preference to those Forex brokers, who are offering an opportunity to register segregated accounts.

Deposits and Withdrawals, Initial Deposit

Initial deposit requirements apply to trading conditions, while the deposit operation indicates the quality of broker services.

High minimum deposit puts traders (especially beginners) on the alert. It is considered that cooperation with a new broker should start from a small deposit.

The trader should realize that a serious broker requires serious attitude from its customers. Thus, it will be hard to find any US or UK broker offering to register accounts with $25 USD deposit. The case is not even that it is more difficult to service such deposits technically. Let’s look at the situation from viewpoint of the broker company management.

You want to cooperate with a large company licensed by international financial institutes with trade volume of hundreds millions of dollars a year. The company’s customer base exceeds 500 000 people from all around the world. In one word, there is every reason to believe that the company put much effort and invested a lot of money to attract you. And what can you offer to attract it? $100 USD deposit?

As a rule, large brokers declare high deposits for the above reasons.

Thus, the minimum deposit says little about the broker. It rather allows the trader to once more evaluate its abilities and capabilities rationally.

Deposit and withdrawal operations are the simplest indicators of the broker’s decency. The funds are transferred using common financial instruments, such as:

  • Credit/debit card (Visa, MasterCard);
  • Bank transfer;
  • Online Payment Systems.

Every person can easily view financial instrument terms in detail. Comparing the information from payment systems and that from the broker, we can draw a conclusion about how quickly the broker is ready to fulfil our deposit/withdrawal requests.

Apart from request execution time, you should learn about the broker’s restrictions for such operations. For example, some forex brokers make a withdrawal only in the currency and the way a deposit was made. Naturally such restrictions are not critical but may bring some complications to traders. Potential customers should feel more concern about restrictions for the amount of deposit and profit. For instance, a customer can withdraw money from a trading account if its profit exceeds $100 USD.

Therefore customers should study all features of deposit and withdrawal procedures when choosing a Forex broker.

Forex Brokers Types

There are two big groups of brokers on Forex market:

  • Dealing Desk (DD) or Market Makers (MM);
  • No Dealing Desk (NDD).

The main difference between the two groups is their role in trading process.

Dealing Desk

Dealing desk brokers are intermediaries between the trader and the foreign exchange market. This definition is not quite correct as the dealing desk is a market simulator for traders. These dealers are offering artificial exchange rates. Since prices are artificial, market makers can set a fixed spread. This allows to execute orders without slippages. However, in case of high market volatility, requotes (request for changing exchange rate) are inevitable, slowing down order execution significantly (resulting in higher losses).

No Dealing Desk

No Dealing Desk (NDD) trading is based on five-digit (real) exchange quotations. NDD brokers set a spread in the size of a tenth of a standard lot using Straight-through Processing technology (STP). Orders are executed at a real market price (Market Execution). There are no requotes.

A modern ECN Forex broker is an NDD broker trading through Electronic Communications Network (ECN). This type of broker translates an order to a trader without interfering even in the spread. ECN automatically chooses best prices allowing to give low spreads to traders.

Customers of ECN brokers are charged a commission for every transaction. There won’t be any conflicts of interest between trader and broker in such trading scheme. The broker has a direct interest in trader’s progress, which will allow the latter to increase the number and volume of transactions, thus raising the broker’s profit.

To sum up the above it should be mentioned that for ordinary private trader the main difference between dealing desk and NDD broker is requotes or slippage.

Every trader can answer by itself what is worse, requotes or slippages. This question can be compared with a classic one “To be or not to be?” or sacramental “What is worse: to have and lose or wait and not get?”.

Reliability and Capitalization

Liquidity is one of the main factors to determine solvency and general reliability of not only Forex broker but also any other financial services companies.

Being well-capitalized is of great importance for Forex broker as in this case the company will most likely be able to obtain cheap loans, which in its turn will let it offer low prices to customers.

Every regulatory authority sets minimum capitalization level a broker must comply with.

Spreads, Commissions, Leverage, Margin

Spread type should be specified in trading conditions of every broker. There are two spread types: fixed and floating. Market makers set fixed spreads. But in practice fixed spreads are rare. The case is that brokers offering fixed spreads usually mention that the spread can change in case of high volatility. Yet, there are no criteria to assess the height of volatility.

Brokers offering narrow spreads often try to make up for their losses by means of requotes – offering new quotations they increase transaction value, thus raising the spread.

A broker makes money through spreads and commissions. The latter include:

  • Commission from every transaction. This charge is obligatory only at ECN brokers. High competition makes other brokers charge no commissions;
  • A fee for keeping a position open overnight or swap, which may be both negative and positive.

Many traders give too much importance to leverage when choosing a forex broker. With high leverage, trader’s risks are just rising.

Brokers of all types have certain margin requirements to the customer accounts (its current state). If the customer does not meet the requirements, the broker withdraws the margin – closes trades (for example, the broker realizes that in the current trading conditions the trader has less than 10-20% of its initial capital left). Some companies follow the FIFO (first in first out) rule to close trades, others follow the LIFO (last in first out) method. There are brokers that close all the trades in such situation.

Accounts Types and Currency Pairs

Trader’s success largely depends on what type of trading account it chooses. Types of trading accounts brokers are offering differ in the size of minimum deposit in the first place. Based on this criterion, there are the following types of accounts:

  • Cent accounts. These are mini Forex accounts, with minimum transaction size of 0.001 of a standard lot. This type of accounts is characterized by too high spreads and rather slow order execution. Only dealing desk brokers are offering such accounts;
  • Standard accounts. This type of accounts can have minimum deposit requirements ($50-100 USD). Minimum transaction size is 0.01 of a standard lot. Order execution (DD or NDD) depends on a broker type. This type of accounts is the most popular among traders and investors;
  • VIP and ECN accounts. The minimum deposit starts from $1 000 USD. Apart from narrow spreads, there are a number of advantages in trading on VIP account, particularly instant order execution and trading through ECN.
  • Investment accounts (PAMM). PAMM account means that another trader is making trades on your account but you bear all the risks.

When choosing a currency pair for trading, customers should take into account the following features:

  • Volatility. This indicator shows how high the price could change. Some currency pairs are highly volatile while others are “quieter”. For example, GBP/JPY and GBP/USD pairs are highly volatile, while EUR/USD and USD/CHF ones are quieter. If you have no great experience and well-proven strategy, it is better not to trade highly volatile currency pairs to avoid big losses;
  • Activity periods. Every currency pair has its activity period, which usually coincides with trading sessions. For example, GBP/USD and EUR/USD pairs show high activity on the US and European sessions. Their trading is slow on the Asian session. It is dangerous to trade the currency pair not in due time – false signals and thus wrong decisions are highly possible.
  • Correlation. The global foreign exchange market is a single whole. All currency pairs influence each other. This influence can be of different levels and in different directions.

Trading Platforms Types

All the existing trading platforms are either web-based or desktop. To trade on a web-based platform, you just need to have an access to internet, while classic desktop platforms should be downloaded on your PC.

Functions of trading platforms at various brokers are not much different.

The most popular trading platforms are as follows:

  • MetaTrader 4 (MT4);
  • MetaTrader 5 (MT5);
  • cTrader.

Customer Service and Broker Reviews

Every broker has customer support with mostly similar practices and communication channels.

The same is with reviews. It is incorrect, to put it mildly, to choose a forex broker based on subjective opinions of strangers. You should remember that many positive reviews are made by order of brokers themselves. Negative reviews often come from people who had negative trading experience and want to accuse anyone but not themselves. In a word, it is not the matter to set much on.

Additional Questions

Before choosing a Forex broker, you should clearly specify your requirements. To do that, you need to know the main differences between brokers and have clear goals. If you set specific targets and goals, you will save time and effort.

Training

Everyone, who decided to start Forex trading, opens a demo account with a broker it chose. There is an opinion that in this way a beginner trader gains experience in foreign exchange trading and asset management. This opinion is questionable and often incorrect.

Trading on demo accounts, you can just learn how to open and close orders and contact the support center. Besides, demo accounts can help you to learn how the trading platform works.

The point is that knowing trading rules is not even half the battle. Trading psychology is an essential ingredient of success. The ability to take risks reasonably, admit a mistake in time and make an unpleasant decision is the main skill a trader should master.

Virtual assets trading quickly turns into the lottery or betting.

Only trading on a live account and risking your own real money you can gain actual trading experience.

Conclusion

Choosing a Forex broker is a very important step but there is no sense in “reinventing the wheel”. The easiest and most reliable strategy is as follows:

  • Make your own rating list of forex brokers based on the information from reliable sources (specialized publications, etc.)
  • Starting from the rating top, compare the broker’s requirements to its potential customers with your capabilities. The broker whose requirements you can fully meet is the best option for you at the moment.