Guide: How to Choose a Forex Broker [year]
With hundreds of Forex brokers to choose from, selecting the right one can be both challenging and time consuming. To ease the process, we’ve tested and reviewed dozens of the top Forex brokers and compiled our findings into thorough Forex brokers reviews. But don’t just take our word for it – each Forex broker review also includes feedback from real traders, so that you can make a comfortable, informed decision.
The basic criteria to use in choosing a broker are few and simple. Without doubt, your number one priority should be ensuring the safety of your funds. Firstly, this means making sure that the broker you choose will not steal your deposit. You can best take care of this by making sure that you only use a broker based in and regulated by a financial authority in a respected financial center. Secondly, you need to make sure that even if the broker operates honestly, but goes bankrupt for any reason, that you will be able to recover your deposit. One measure that can be taken here is to only deposit with brokers whose regulators offer deposit protection for clients (such as regulated brokers in the U.K. or Australia, for example). This means that even if your broker goes broke, the government will bail you out by paying back your funds up to a certain amount, although it might take some time. Beyond that, try to choose a broker with a healthy financial situation and a good reputation. Once you have taken these precautions, you can look at what your potential brokers offer in terms of range of available assets to trade, spreads and commissions, overnight financing charges, and speed and reliability of trade execution – and make your choice accordingly.
Choosing the best Forex broker for you?
Choosing a Forex broker is a very personal process and making the decision often requires guidance from others who are more familiar with the available options. But reading information online lacks the personal touch that many traders crave and may not provide guidance for your specific trading needs. Speaking to a professional can help you determine the best broker for you by explaining the trading platforms that can meet your needs, focusing on brokers that excel in your geographic area, or helping you find trading tools that will help you strengthen your trading strategies.
Things to Consider When Choosing a Broker
Regulation, Safety of Funds & Legal Issues
Regulation and compliance are - beyond the shadow of a doubt - the most important things to consider when choosing a broker. An unregulated broker can essentially do as it pleases with its traders' funds. Such a broker might be nothing more than an online scam, so it worth being extremely wary of any unregulated brokers.
Regulatory Compliance
The activity of a trustworthy broker should always be governed by an official regulator designed to protect and promote the integrity of brokerage operations. All types of abusive practices linked to the sale of futures and options should be out of the question, as traders should be protected against fraud as well as manipulation. A US broker must be registered with the US Commodity Futures Trading Commission (CFTC) as a merchant and retail Forex dealer. It also must be a member of the NFA (National Futures Association). These credentials are usually listed in the About Us section of the broker's website. Equivalents of these trade associations and regulatory bodies are present in nearly every country in the world. Depending on where their broker is based, traders should always research and look for these credentials. In this respect, it's also worth researching the year when the broker obtained its license as this might carry some significance as well, in regards to the overall reputation and operational history of the broker.
Safety of Funds
Regulated brokers must comply with a set of rules that are meant to safeguard investor assets. This is the primary reason why regulation is so important. Every regulated broker is subject to a "Net Capital Rule" which prescribes a minimum amount of capital to be kept in liquid form. This way investors are protected with a 'safety net' in the event that a broker is forced to close. In addition to the requirement of maintaining minimum capital requirements, regulated brokers in most jurisdictions are required to keep all client funds separated in segregated accounts so that client funds won't accidentally (or purposely) be used for any reasons other than to execute the client's trades. Some nations, such as the United Kingdom, even offer government-backed deposit insurance for its regulated brokers so that clients can recover part or all of their funds even if the broker manages to misappropriate them.
Broker Types
The type of broker used can have an impact on one's overall trading performance and results.
Dealing Desk vs. ECN Brokers
Dealing Desk brokers work similarly to the dealing desks provided by various financial institutions and banks. A Forex broker who uses a dealing desk and is registered as a Retail Foreign Exchange Dealer and Futures Commission Merchant (or equivalent in another country) can offset trades. The No Dealing Desk system on the other hand offsets positions automatically and then transmits them to the interbank market. Brokers working through a Dealing Desk system do not work directly with market liquidity providers, therefore only one liquidity provider remains in the equation, and that gives birth to a fundamental conflict of interest.
An ECN broker on the other hand, offers its traders direct access to the other market participants through an Electronic Communications Network. Why is an ECN broker the superior of a Dealing Desk one spreads-wise? Simple: because it deals with price quotations from several trading entities, it can offer much better bid/ask spreads.
The business model of an ECN broker is an entirely fair one, as it eliminates a major conflict of interest: because it matches trades between various traders, it cannot become the sole market-maker, thus it cannot trade against its own clients. Another advantage of the ECN is that because of the lower spreads it offers, such brokers can charge a fixed commission on every transaction.However, you should not see ECN brokers as a panacea. Under certain conditions, their liquidity can dry up completely, creating much greater slippages than Dealing Desk brokers’ client might be suffering. Another sad reality is that many brokers describe themselves as of the ECN type, but have an element of dealing desk within their operation, so are not “true” ECNs.
Fees & Commissions
This brings us to the third most important brokerage selection factor: costs
Brokerage fees - Price isn’t everything
Brokerage fees are fees that the broker charges for the services it offers, which are services focused on facilitating transactions between buyers and sellers. The amount of these fees depends on the broker type, and the type of service to which the trader signs up. For the purposes of retail traders, the situation is best summarized by saying the Dealing Desk Brokers charge spreads only, while ECN Brokers charge spreads as well as commissions.
Commissions & Spreads (Fixed or Non-Fixed)
The key difference between fees and commissions that all traders need to understand, is that fees represent a flat charge, while commissions vary depending on the delivered financial product and the size of the transaction.
Premium services offered by the broker?
Full service brokers offer all sorts of additional perks and premium features, some of which are indeed extremely useful. Such services do cost extra though. In this respect, what you should be looking for is a broker who includes as many premium services as possible, as cheaply as possible. In the premium service category, we have features like advice and research covering a wide range of traded assets, retirement advice, tax planning etc. You need to carefully weigh whether you need such services or not. If you're only looking to execute trades, there's no point in getting embroiled in any premium-service intricacies. Discount is probably the way to go then.
Does the broker credit or debit daily rollover?
Another factor to consider is daily rollover. The daily rollover is interest credited or debited to the entity holding a Forex position overnight, depending on the relative interest rates of the currencies involved in the trade. Positions which are kept open past 5PM EST are considered positions held overnight. In such cases the broker will consider which national currency the trader bought relative to the other national currency of the pair. If the interest-rate difference favors the bought currency, the trader will have rollover interest credited: in theory, at least. If it's the other way around, the interest will be debited. The problem is that most brokers make sure their clients pay for holding most positions overnight, and there is nothing to stop them doing this beyond the true market cost.
Most brokers roll over open positions automatically. It is important to know that the rollover interest (whether it's debited or credited) is calculated on the full amount involved in the trade and not on the margin alone. Another important thing regarding the rollover interest is that it represents a separate revenue stream from the capital gains and as such, it will be taxed separately too, as interest income.
Trading Terms
Time to shed some light on the expressions and terms you may have come across within this guide but that haven’t been fully explained until now.
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Margin
Through a margin account, the investor essentially borrows from the broker, with the intention of controlling larger positions than he'd be able to control based solely on his own invested capital. There are special margin accounts that traders can use for this purpose. The margin percentage is set to 1-2% in the case of accounts which trade in 100,000 currency units. What this means is that in order to control a $100,000 position, a trader needs to deposit $1,000. Margin accounts come with their own risks, and special operating procedures meant to reduce risk for the trader as well as for the broker.
The difference between margin and leverage is simple. Let’s say a broker requires a deposit of $1,000 to make trades worth up to $100,000. The leverage is the factor by which the deposit is multiplied to reach the maximum trade value: in this case, 100, so the leverage is 100 to 1. The margin is simply the amount of deposit required as a percentage of the maximum trade value. Here, it is 1%. It is just the flip side of the earlier calculation.
Leverage = Maximum Trade Value / Deposit
Colloquially, “margin” is often used to refer to the cash deposited with a broker.
Initial Deposit
The initial deposit is the first deposit a trader makes with a broker. This deposit may be subject to special rewards, such as bonuses.
Bonuses & Promotions
Bonuses and promotions are marketing tools used by the broker to "sweeten" its offer, and thus to attract more business. You might want to consider whether a really top-quality broker would feel the need to offer such incentives.
Customer Service
Customer service is very important for new traders and experienced investors alike. Whenever one runs into any sort of trouble with his or her broker, it is the duty of the customer service agent to iron everything out. As such, the expertise, skills and availability of the customer service staff should be a factor within the broker selection balance.
Availability
Funds deposited into trader accounts through third party checks typically take some time to clear. Once they do, they become "available". Availability hinges on the bank from where the check originates, and the availability schedule of the broker.
Trading Platforms
The trading platform is the gate between the retail trader and the markets. It is also the tool through which the trader performs his trading. A proper, simple, fast and user-friendly trading platform is critical in trading successfully.
Ease of Deposit & Withdrawal
Being able to make deposits and to withdraw money from your broker quickly and easily is highly important. This all depends on the type of withdrawal and deposit options your broker supports. The selection of these payment solutions needs to be as large and as diverse as possible. It is also a good idea to check the withdrawal time, as many traders complain that it can take up to a week to withdraw, when they wanted their funds available quicker.
Minimum Balances
The term "minimum balance" refers to the amount of money the trader needs to keep in his/her account to keep the account open and to receive the services he/she has signed up for. Obviously, the smaller this amount is, the better it is for the trader.
Instruments
In the context of Forex trading, an instrument is defined as a tradable asset, and any asset underlying a derivative. Commodities, stocks, indices and currency pairs are all trading instruments, because through them, value is held and/or transferred.
Broker Comparison
To make 100% certain you're picking the right broker, you should compare several of them, while keeping your own personal trading style and needs in mind.
What Kind of Trader Are You?
Your choice of broker should be influenced by the type of trader you are and by how much money you are going to deposit. No single broker is good for all traders, so determining your trading style before you start trading is always a wise decision.
Position:
- If you're a
position trader you are trying to hold a profitable position for a long time, for days, weeks, or even months.
Swing:
-
Swing traders look to hold a profitable position for a few hours or a few days at most.
Day Trader:
-
Day trading is the extreme sport of trading. It's essentially about buying and selling an asset within the same day, while taking advantage of leverage to rack up significant gains on very small price movements. The inherent risks associated with this style of trading are obvious.
Scalper:
-
Scalping takes day trading one step further. It is the practice of taking advantage of very small price movements, often by making a very large number of trades. The many small profits are compounded, and may result in large gains. It is imperative that really excellent trade entries and exits are used with this approach.
The Bottom Line
As it has been iterated several times in the guide above, picking the right broker exerts massive influence on how successful your trading venture will be. No detail should be left to chance. You need a well-regulated broker, where your money is safe, one that features a user-friendly trading platform , with tight spreads and fees, and which suits your trading style. Brokerage selection is a time-consuming task, but a necessary time investment into your eventual success as a Forex trader.
Do I need a broker?
If you wish totrade Forex or other assets, you need a broker. It is impossible to trade Forex by using a bureau de change, for example, as the fees are too high to make profit over a large number of trades.
Does it matter which broker you use?
Yes, it matters a lot that you use a broker which is well regulated, reputable, and which charges reasonably competitive trading fees. Provided these minimums are met, you have a chance to make profit over the long term.
How do I know if a Forex broker is trusted?
The best way to know if a Forex broker is trusted is to determine whether it is regulated by an upper tier regulator. Other good signs are the broker having been in business for a long time and having a large client base.
Can a Forex broker steal your money?
It is possible that a Forex broker could refuse to return your money, butit would be extremely unlikely for any regulated broker to attempt to do so.
What are the qualities of a good Forex broker?
The most important qualities of a good Forex broker are competitive trading fees, efficient trade execution, and general honesty and transparency.
What factors do you use to select a Forex broker?
The most crucial factors to use in selecting the right Forex broker for you are regulation and security, trading costs, and choice of assets. You can then distinguish between any qualifying brokers on more minor factors.
How do I choose a broker?
Determine your minimum requirements regarding regulation, geographical location, and choice of assets, then make a shortlist of qualifying brokers. You can then investigate and open demo accounts with the shortlisted brokers to determine which has the lowest trading costs and determine which is the best choice overall to meet your needs.
Which Forex broker is the best?
The best Forex broker for you will be well-regulated, offer competitive trading fees, and will allow you to trade the range of assets you are interested in with high-quality execution. There may be other important factors to consider depending upon your trading style.