How to Pick a Forex Broker: Everything You Need to Know

How to Pick a Forex Broker: Everything You Need to Know

You can place bets on world currencies through forex (foreign exchange) brokerage accounts. You can also, purchase or sell currency pairs that lead to economic developments around the globe. The forex market operates 24/7. Opening in the U.S. on Sunday afternoon and closing after the stock traders conclude their business on Friday afternoon. The scale of currency trade is immense, accounting for an estimated $4 trillion a day, which is greater than the world’s stock or bond markets.

Forex traders take long and short selling positions on currency pairs. Which measures the exchange rate between two types of legal tender, such as euro (EUR) and US dollar (USD). A long position opens up a trade that makes money when the exchange rate rises higher; short-selling gains when it rises lower. Unlike stocks, an investor may not borrow money or securities from a forex broker to set up a short-selling account but does have to pay a rollover charge.

Brokers keep the money in an account that changes value every night in response to regular gains and losses. They manage fees that can include commissions, access to professional advice, and withdrawal requests. Some brokers conceal their fee schedules in a legal jargon hidden deep in a fine print database. This ensures that prospective clients need to do their homework before opening an account. Here’s an in-depth look at how to pick a forex broker to help you prevent unexpected surprises.

How to Select Your Forex Broker

Choosing a forex broker allows you to first find out what kind of investor you are and what your aim is to invest in currencies.

Each broker that includes forex investments has advantages and disadvantages. Control, the degree of protection offered by these businesses, and transaction fees are some of the most critical items to consider. Safety features vary from broker to broker. Some brokers have built-in security features, such as two-step authentication, to keep accounts secure from hackers.

There are several forex brokers that are limited. Brokers in the United States are governed by the National Futures Association (NFA) and the Commodity Futures Trading Commission (CFTC). Forex brokers are also governed by France, Germany, Switzerland, Austria, Canada, and the United Kingdom. Not all brokers, however, are regulated, and traders should be wary of unregulated firms.

Brokers also vary in their channels in terms of account minimums and transaction fees. Before you jump on a trading site, you may want to build a budget for your investment life. Find out how much you’d like to spend, how much you’re willing to pay, and what your ambitions are. There are a lot of considerations to consider when selecting the best forum for you. Make sure you take as much into account as possible before you get involved.

Understanding Forex Currency Pair

Before you sign up for an account, it’s important to know the fundamentals of forex trading from currency pairs to pips.

The currency pair compares the value of two currencies through the numerator/denominator relationship. With the base currency at the top and the quota currency at the bottom. In the EUR/USD currency pair, the most common forex trading instrument in the world, EUR is the base currency and USD is the quote currency. The EUR/USD quote indicates a ratio that approximately matches what you pay for when you visit Paris and need to swap dollars for euros. USD equals $1.00 in this equation, so the “EUR/USD 1.23000” quotation means that the euro is 23 percent greater than the US dollar.

Every ratio is quoted in two to five decimals. It also comes in a flipped over the version that generates a new currency pair that travels in the opposite direction. For example, EUR/USD measures the value of the euro against the US dollar. While USD/EUR measures the value of the US dollar against the euro. As a result:

If EUR / USD = 1.25000/1.00 = 1.25000 = 1.25000

Then USD / EUR = 1.00/1.25000 = .80000

Historically, traders in various countries took long and short positions with their local currency at the bottom (the quote currency). But this changed after the value of the forex increased earlier this decade. Today, most participants around the world are exchanging currency pairs with the largest number. The most common variant is also likely to have a narrower bid / ask range, reducing trading costs.

Forex traders make money on long EUR/USD bets when the ratio is higher and lose money when it is lower. Conversely, traders make money on short EUR/USD bets when the ratio decreases and lose money when it comes together. Although brokers can sell hundreds of currency pairs, four big pairs attract huge trading interest:

  • EUR / USD – the dollar and the pound
  • USD / JPY – US Dollar and Yen of Japan
  • GBP / USD – British Pound and US Dollar
  • USD / CHF – U.S. dollars and Swiss franc

Pips and Benefits

Forex quotes show two ratios, a higher selling price, and a lower bid price. The last two decimals are always drawn in a very large print, with the smallest price rise called a pip (percentage in point). Profits and losses are determined by the amount of pipes taken or lost after the role has been closed. Both positions begin with a small loss because traders have to buy at the selling price and sell at the bid price. With the difference between the two numbers being called the spread.

This is a standard operating procedure since most forex brokers do not charge any commissions or fees for the execution of trade. Instead of depending on the spread of bids/asks as their main source of income. Major currency pairs usually present narrower spreads than smaller pairs, but many brokers now offer fixed spreads. Meaning that they will not expand and contract in response to market conditions, even if this is to your advantage.

Traders need to pick a lot of scale for their forex positions. A lot is the smallest exchange size available for a currency pair. 100,000$ is considered a regular 100k lot when trading the USD and used to be the smallest position permitted by many forex brokers. This has changed with the introduction of mini lots at 10,000 units ($10,000 when trading USD) and micro-lots at 1,000 units ($1,000 when trading USD).

The larger the unit size, the less pipes required to make a profit or make a loss. You can see how this works in the following example, in which both companies gain the same profit.

  • Normal EUR / USD pip = 0.00001
  • You “make” 1 pip when you buy $100,000 EUR / USD at 1.23000 and sell at 1.23001.
  • (.00001/1.23000) x 100,000 = $8.10 per pip x 1 pip = $8.10 in benefit
  • You “make” 10 pipes when you buy $10,000 EUR / USD at 1.23000 and sell at 1.23010.
  • (.00001/1.23000) x 10,000 = 81 cents per pip x 10 pip = $8.10 benefit.

Of course, the sword cuts both ways, for a long or short trade with a large unit size going toward you would result in losses faster than a small unit size exchange. This means that it is important to research your new venture in depth before you jump in with real money and build risk management skills that include correct position size, keeping time, and stopping loss techniques. Free pip calculators, which are widely available on the Internet, will help immensely with this mission.

What’s the “Margin”

New forex accounts are opened as margin accounts, allowing clients to purchase or sell currency pairs with a total trading size that is far greater than the money used to finance the account. U.S. brokers usually allow individuals to open accounts for as low as $100 to $500 while offering up to a 50:1 margin [2], creating considerable leverage – which is another way to suggest that your trade size would be greater than your current account balance.

A $500 account with a 50:1 margin broker, for example, lets a forex trader place long and short bets of up to $ 25,000 or 2.5 times the size of a mini lot. Leverage can be dangerous, with the ability to wipe out accounts overnight. But high margin makes sense because currencies tend to move slowly in quiet periods and bring little default risk; ensuring that the dollar or the euro is unlikely to rise to zero. Even so, forex volatility can escalate to unprecedented levels during crisis times. Such as the wild British pound and Euro gyrations in 2016 after the British voted to exit the European Union.

In comparison to stockbrokers, forex brokers charge no interest for the use of the margin, but positions kept overnight can incur revolving loans or debits[4], defined by the relationship between interest rates in the currencies that constitute the pair. In this equation, the overall exchange value decides the credit or debit, not just the portion of the balance of the account. At the simplest level, the investor will be compensated on a nightly basis when holding a long position in the higher interest-bearing currency and will pay on a nightly basis when holding a long position in the lower interest-bearing currency. Remove this formula when you’re selling short.

Tips to set up a Forex broker

Take your time searching for a reputable forex broker to make sure your money and trades are treated properly. All U.S. forex brokers must register with the National Futures Association (NFA), a self-regulating government body designed to provide transparency. Go to the NFA website to check the enforcement of the broker and look for grievances or disciplinary measures that could impact your final decision.

The protection of your funds and private information is more critical than any other concern when you open a forex account because brokers may get hacked or go bankrupt. Unlike stockbrokers whose clients’ accounts are secured by the Securities Investor Security Corporation (SIPC) when the brokerage closes, U.S. forex brokers do not have account insurance. Perhaps worse, a forex broker will recover more than your account balance through legal action if it doesn’t provide negative balance insurance. This guarantees you won’t be asked for more money than your account balance if your place crashes.

Regulatory capital requirements grew significantly after the financial crisis of 2008. But this did not stop a surge of bankruptcies in 2015 when the Swiss franc crashed overnight. Many accounts plunged into negative balances in minutes. Potentially incurring further liabilities and those who survived lost everything when the broker shut down. Take-home lessons from this terrible situation: prospective clients should stick with the most respectable brokerage companies. Preferably to those connected to a major bank or a well-known financial institution.

The U.S. forex industry uses the terms “introducing brokers” and “white labels” to advertise its services and develop its companies. Introducing broker refers to a smaller deal that refers clients to a large broker in return for rebates or other rewards. In white branding, the small business rebrands the trading platform of the large broker. Allowing the large organization to carry out transactions in the background. Both practices will increase operating costs, enable these companies to expand bid / ask spreads, and increase fees.

Before you send some money to a broker, check its financing and withdrawal procedures. Several need lengthy waiting times before you can exchange when you fund through checks or wire transfers, while others demand high fees when you withdraw your funds or close your account. Account closing, in particular, can be frustrating when a broker asks you to fill out lengthy forms, take surveys, or talk to a representative who is trying to change your mind. It may also take up to a week or longer to get your money back from a less reliable service.

Customer services can include convenient access to support and trading desks via chat, phone, and e-mail. Look for 24/7 coverage, which means you can meet the broker at any time between Sunday afternoon and Friday afternoon in the United States. Before you fund an account, test the speed of the broker to answer your questions by opening the chat interface and calling the phone number. Check how long you have to wait for the response of the customer representative.

Forex Trading Tool

Currency pairs are traded via the interbank market, a trading mechanism used by major banks and financial institutions but without a central exchange like NASDAQ or the New York Stock Exchange. Forex brokers take their cues from those transactions. They are not forced to give or ask clients the best interbank bid and may deliberately show larger spreads at less desirable rates. Thus, contributing to profits as they complete those transactions through the system.

Prospective clients should search for conflicts of interest by reviewing the procedures for the execution of trade on the broker ‘s website. Specifically, find out if the broker has a trading desk that makes the market, taking the other side of the customer’s company. A more accurate broker may post quotes directly from the interbank system via a wholesale liquidity supplier or an electronic communications network (ECN) that manages actual purchase and sale transactions. There are third party organizations with direct ties to the professional sector.

Forex traders open and close positions through broker trading tools, which should include a combination of stand-alone, web-based and mobile platforms. Metatrader has emerged as the industry standard for stand-alone apps in recent years, offering a comprehensive range of features that includes real-time quotes, price charts, reports, analysis and personalized watch lists. Learn more from the Investopedia MetaTrader 4 Guide.

Web-based trading provides an alternative to stand-alone applications, but also has less features requiring account holders to have access to other tools to complete their trading strategies. Ios apps offer the most functionality, but the fewest bells and whistles in a slimmed down interface that typically enables one or two clicks of trading. It’s better to use full-featured stand-alone apps wherever possible, saving your smartphone experience while you’re away from your trading desk.

Most forex brokers offer demo accounts that allow prospective clients to view stand-alone, web interfaces and mobile platforms, enabling them to trade forex pairs with play money. This app shows the same quotes, charts and watch lists as the real system , making it an invaluable resource to check the consistency of the broker’s bid / ask pricing. Be wary if the broker doesn’t provide a sample account because it may use an obsolete or outdated platform.

Place any of these accounts alongside real-time quotes from a broad financial platform and you’ll quickly find out which forex brokers are offering the best bid and asking for rates under normal market conditions. If necessary, take a second look just after a Federal Reserve rate decision or other market-moving occurrences to see how currency pairs change under extremely unpredictable conditions.

Order Forms of Entry

The Trade Execution screen on the demo account provides a lot of useful information. Look for a range of trade entry and stop order forms as well as safety clauses that may include assured stop loss and close all orders. Many of these order routing methods are designed to protect the trader against unnecessary slippage, which shows the disparity between the planned and actual price of execution.

The following types of orders should be the minimum requirement for any broker you choose:

Market Order – the order will be delivered immediately at the best available price. This may cause an unnecessary slippage in fast-moving markets. The execution of cents or dollars away from the bid, or the price indicated at the time of entry.

Stop Order – sends a conditional purchase or selling order that transforms into a market order at the chosen entry price.

Limit Order – Sends a conditional purchase or selling order that can only be filled at or better than the entry price.

Stop-Limit Order – sends a conditional purchase or selling order at two rates, stop and cap. The order is translated into a limit order at the chosen stop price, only to the limit price. The order will be canceled automatically if the quotation passes through the maximum price without being filled in.

Guaranteed Stop Loss – Sends an order that is guaranteed to be filled within the criteria demanded. As long as the quotation passes through that point.

Close All – sends an order to close all open positions at the best rates available. This can lead to excessive slippage under fast-moving market conditions.

Does Forex Broker Offer Trading Education and Software Service?

Reputable brokers provide clients with a range of tools to make better choices and develop their trading skills. Look for a web-based education section with a range of webinars and tutorials on the fundamentals of forex markets, common currency pairs and market forces that generate buying or selling pressure. These documents may provide comprehensive details on how central banks influence currency markets when they increase or lower interest rates and how traders should plan for such periodic events.

The training section should also provide advice on broker trading sites, currency pairs, and market order styles. Look for videos, guides, or other tutorials that show you how to create custom watch lists, set up technical charts, and view easy-to-read quotation screens. These instructional materials can also clarify how to access news and data directly from the sites. That way you don’t have to browse the Net to search for information.

Extensive research and economic analysis software can illustrate currency pairs that may provide the best short-term profit opportunities. This segment can include free third party feedback and perspectives from industry experts as well as real-time news and live webinars. Look for analysis that covers the globe rather than just local markets and offers a detailed regular economic calendar that lists all market-driven economic releases around the world.

Internet trading has gained immense popularity in recent years and is now open to most renowned brokers. This feature allows account holders to connect with each other through a social forum, exchanging business ideas, strategies, and perspectives. Some social platforms have taken this idea one step further, providing a copy trading app that lets you imitate the buying and selling decisions of other clients.

Any type of ranking system that enables clients to quickly access the most influential members will feature the best social hubs. These contacts can be extremely useful for customizing trading platforms, which often feature API interfaces that allow third-party add-ons. It’s even more helpful when the broker offers a robust add-on library, with contributions that make it easier to manage your business.

The Bottom Line

Take your time looking for a forex broker because it can be expensive to make the wrong decision. Top brokers can deliver comprehensive services, low trading costs, and access to the global interbank market. They’re also going to treat your money with respect. Even if you open a small account in hopes of turning it into a small fortune with your trading skills.