Regulations, commissions, channels, account minimums, and fees are only some of the criteria that you should consider when selecting an online Forex broker and CFD broker. To aid you with your broker selection process, we have prepared a guide with a list of key considerations that you need to look at when selecting a broker.
The Forex market is the world’s largest financial market with a turnover of more than $4 trillion a day. Despite its size, this market does not have a central exchange for Forex traders to conduct their transactions. Instead, Forex traders are expected to perform their trading activities through an intermediary, the Forex broker. This demonstrates the importance of the role of the broker in the trading process. When it comes to selecting a broker, traders practically have thousands of Forex brokers to choose from on the Internet. But the real question is how can you be sure that the broker you have selected is the correct one to meet your trading needs.
To help you pick a broker, we have prepared a guide with a list of key factors that you need to look at when selecting a broker.
Rules of Procedure
The first thing you should look at when selecting a broker is whether the broker is regulated by a competent regulatory agency (read more about Forex and CFD broker rules). Through working with a controlled broker, you will have the confidence that the broker has complied with the operating standards imposed by the regulatory authority. Some of these basic regulatory provisions include sufficient capitalization and management of separate accounts to protect clients’ assets. In addition, the legislation provides for the security of funds should the company become insolvent and ensure that the broker meets strict standards as a financial service provider.
Countries with financial regulatory agencies that are backed by strict regulatory compliance include:
- Australia (ASIC)
- Eurozone (Mifid and local regulators)
- India (SEBI)
- Japan (FSA and JSDA)
- Switzerland (FINMA)
- UK (FCA)
- USA (CFTC and SEC)
Platform & Software Trading
As the trading platform is your market gateway, you want to make sure that you can rely on the trading platform that you are using. Most brokers will offer traders a choice of trading platforms to choose from. Most of the time, trading platforms are provided by third-party business solutions providers such as MetaQuotes Software. There are also some brokers who have taken the initiative to develop their own proprietary trading platforms in an attempt to differentiate themselves from other brokers in the industry. Often, these proprietary platforms are the best trading platforms, as they are specifically designed by the broker’s client base.
However, a good broker should be able to provide a good selection of platforms. This is because some traders prefer to trade on a desktop computer, and some traders prefer to trade on their smartphones. It should be noted that the most common trading platform you will find among the different brokers in the industry is the MetaTrader 4 platform. It is estimated that at least 85 percent of brokers in the industry are using the MetaTrader 4 platform. So that means there’s a very strong possibility that this is one of the platforms you’re going to use.
Look at the features that trading platforms have to offer. They’re coming with:
- Comprehensive charting package
- Large range of technical indicators
- One-click trading on the trading platform
- Risk management tools such as stop order loss and stop trailing.
While all of these may seem trivial initially, they will later play a crucial role in ensuring that you enjoy a seamless and productive trading experience.
But when it comes to selecting a platform, it’s really a matter of personal choice. Most of these platforms are going to have the same basic features. The best way to find out which platform is right for you is to try it out with the demo account provided by the broker. For those brokers who do not provide a demo account, they may not be worth considering.
Commissions and spreads
This market, unlike other traditional financial markets, mostly operates on spreads rather than on commissions. That’s why most brokers advertise their services as free commission.
So how are brokers making money?
Simply, they’re earning a spread by charging traders. The spread is the difference between the purchase price and the sale price. For example, if the price of the Bid & Ask for the EUR / USD currency pair is 1.0875/1.0878, this means that the spread is 3 pips.
As a Forex trader, you will come across three types of trading cost structure charged by a broker:
- Fixed spread – where the spread does not change, and you know the spread amount before you trade.
- Floating spread – this spread is variable and always variable depending on market volatility.
- Commission fee – this is calculated as a percentage of spread by brokers. You should be aware of the amount to be paid before you trade.
Generally, fixed spreads would be the preferred option for traders looking for consistency with their trading costs. Traders looking to pay for a smaller spread will prefer floating spreads. At the end of the day, what is easier depends on your particular trading needs.
The kind of spread that you will collect depends to a large degree on the kind of business model that the broker works on.
Company Model of Broker
During your quest for a broker, you will come across words such as “STP,” “ECN,” “NDD” and “Market Maker.” In reality, all these words are used to define the business model under which the broker operates. And what do they all mean by that?
There are two main styles of brokers – Dealing Desk and Non Dealing Desk.
Dealing with Desk
Forex dealer or market maker processes the trading orders of their clients via a trading desk within their business. A trading desk broker takes the other side of the exchange to you, which means that when you open a spot like EUR / USD, the transaction will be conducted by the broker, and they will then be exposed to that exchange.
The broker of the Non-Dealing Desk (NDD) moves the exchange straight through to a third party. There are two types of NDD brokers (ECN and STP). They are basically the conduit between you, the seller, and the market maker or dealer.
ECN The ECN
With the first sort (ECN) when you click “Buy” on your trading platform, your business orders will be processed automatically on the broker’s computer trading system and transmitted via the Electronic Communications Network (ECN) without a trading desk (this is where the word “Non-Dealing Desk” (NDD) comes from).
With the second type of NDD broker, after receiving your trade orders, they will pass the trade orders directly to another party to be executed by the market maker’s trading desk. In this case, the broker is known as a Straight Through Processing (STP) broker.
Both Forex ECN and STP brokers are intermediaries to a variety of dealers or market makers in the global Forex industry. Market makers or dealers shall transmit their prices to the ECN or third party liquidity provider along with the amount for which the quotation is valid. The ECN / STP would, in turn, allocate the prices to traders/market makers linked to the scheme. It should be noted that the ECN / STP does not conduct trades, but rather serves as a conduit for the transmission of trade orders from the trader to the trading desk from which the trader took the price.
Why is that important?
The business model of the broker is important as this will influence the kind of spreads that you will obtain and whether the spread will be fixed or variable.
Forex broker to beginners
For novice traders, look for brokers with the following characteristics:
- Comprehensive trading of educational tools – several brokers provide a package of educational materials to help traders improve their skills. They typically provide webinars, videos, classes, guides, and posts.
- Unlimited access to the demo account for practice trading – most if not all Forex brokers offer sample trading accounts to their clients. This is especially useful if you’re new to Forex trading, or if you’d like to test-drive a broker’s platform before you trade for real.
- User-friendly trading platform – there’s a whole bunch of trading platforms on the market, some more complex than others. As a novice trader, you won’t need a complicated platform with features like EA’s and complex trading strategies. That comes later, but now you’re supposed to be searching for a forum that’s fast and easy to understand.
Forex Broker to Practitioners
For skilled traders, their trading needs vary greatly from those of novice traders. Professional traders usually favor brokers who can supply them with:
- Comprehensive trading tools – as a professional trader, you will now need a variety of tools, including a commission calculator, economic calendar, and, of course, complex live charts, to implement trading strategies.
- High leverage – not for the faint-hearted, professionals will seek to use leverage to multiply their capital. Leverage increases the risk and also increases the reward.
- Low spreads – if you trade a lot, you want to make sure your spreads don’t eat away in your money. It is necessary to check the spreads you pay before choosing a broker, typically the larger the type of account you take, the lower your spreads are.
Forex Broker for Day Trading
Generally, for day traders, most brokers would be able to satisfy their trading needs. However, considering the shorter time span of trading with day traders, it is better for the forex broker to be able to provide a wide variety of trading opportunities for day traders. This could include a signal service, resources such as an economic calendar, market news alerts, and even earnings reports. If you are likely to do more short-term trading, make sure you are aware of the spreads before you sell.
Forex Scalping Broker
Scalpers are traders who keep their market positions for an exceptionally short period of time. Although they only keep a market position for a short period of time, the duration of their transactions is higher than the average trader. Their goal is only to make a small profit from all the trades they make distributed over a wide number of trades. Notice that not all brokers are capable of scalping. As such, if you’re going to trade as a scalper, you should always check with the broker that you’re going to sign up if they allow scalping.
Forms of Account
Most forex brokers in the industry give traders a range of trading accounts to appeal to various types of traders.
- Micro account – The smallest form of the trading account is the Micro trading account. Where one trading lot is equal to 1000 units of the traded instrument.
- Mini Account – The next level of trading account higher up the ladder is the Mini account where 1 lot represents 10,000 units.
- Standard Account – The standard account is where one lot is equal to 100,000 units.
With the Micro and Mini account, only a low minimum initial investment is required to allow you to start trading. For a regular account, while the minimum investment will vary from broker to broker, you would usually need a higher amount of trading capital. Given the varying minimum investment for each form of trading account, you can choose a trading account that is commensurate with your investment capital.
Many beginner traders tend to forget about the customer service aspect when making the choice of a broker to sign up. They do not know the value of customer service in their overall trading experience. For customer support, it’s not if you’re ever going to need their help, but rather when you’re going to need their help. Because no matter how experienced or competent a trader may be, there will always be a period when customer service assistance is needed. When the time comes, you want to be able to get in touch with the support team without any trouble. It is, therefore, necessary to verify if the broker you wish to register with is capable of providing you with reliable customer service.
Check to see if there are several ways to reach customer service. Most brokers can provide their clients with a variety of ways to get in contact with customer services, such as email, live chat, and phone. In short, you don’t want to be in a place where you have to spend endless nights thinking about what your broker’s going to do with your dilemma.
Added Value Programs
In an environment as competitive as the online forex trading environment, some brokers may try to differentiate themselves by providing additional value-added services. Such as free market research, real-time news feeds, and trading signals. Most of these value-added services are offered free of charge, although there are some brokers who may require you to deposit a minimum amount before you can access these services.
Questions to the broker
If you have any general questions about brokers, we will provide advice and guidance. But for more detailed details, you will read our reviews of brokers for in-depth analysis. Our video reviews cover a variety of facets of the trading cycle. Please note, it is important that if you have any concerns about the products or services provided by a broker, by asking the right questions, you can clear up any issues you might have before they become a problem later after you sign up.
The kind of questions you can ask are as follows:
- How the broker keeps your money safe
- The regulatory status of the broker
- The number of instruments available for trading
- Its Business Model
- The Customer Support Hours
- Their deposit and withdrawal process and if there are any fees involved
- If there are any restrictions attached to the value-added services offered
How do I choose a broker?
We’re here to help you with that! Check out our list above and select the most fitting broker for you.
Can I pick up a controlled broker?
Yeah, you can try to get a controlled broker to work with. This guarantees that you have options in the case of a dispute or should your broker face insolvency. Note that by using a controlled broker, you will also have access to an investor protection fund that will protect your deposit up to a certain amount.
What else do I need to look at when choosing a broker?
You should look at the variety of solutions on offer and even test-drive the platform you may like to use. Take a look at the additional services provided by the broker, for example. Signal support, training equipment, copy trading. Finally, remember to find out about spreads and types of accounts before you make a deposit.
As noted above, there are several aspects that you need to remember when choosing your broker. However, with the aid of this guide that we have provided, you should be able to see which broker is suited to your needs. In order to further facilitate your search, we have also carried out in-depth reviews and checked each of the brokers in our recommended list to ensure they meet the required criteria. If you’ve found the right broker to work with, you can focus more on your trading activities and trade more comfortably, growing your chances of profitable trading on the market.