The foreign exchange market is the world’s largest decentralized financial market. It’s a way bigger than the all other capital markets of the world combined. Daily trading turnover is more than 5 trillion dollars. A trader must choose a forex broker to get access to the market. There are so many retail forex brokers out there and not all of them are good and safe. Choosing best forex brokers who are suitable for your trading style is very important.
But this task could be tougher especially if you don’t know what you should be looking for. Let us guide you to filter and choose a good broker that will serve your requirements. There are a number of things you should consider before you pick the right one.
Let’s find out how to choose a forex broker in three steps given below:
1. Regulations and Security: of the choosing broker
The first and foremost quality of a good broker is – it must be well regulated by trusted regulators. Different countries have different jurisdictions.
NFA and CFTC are for the USA. Financial Conduct Authority (FCA) of UK is very famous for its reputation which covers the risk up to £50000 for an account. Obviously this isn’t cover for your trading losses.
ASIC of Australia is well known and CySEC is also popular, which is from Cyprus (EU). There are few other FX authorities which worth to consider like JFSA of Japan, BaFIN of Germany, SFBC of Switzerland, AMF of Canada.
Only a registration with these authorities does not necessarily mean your broker is regulated by them. Make sure your broker is regulated by your chosen regulator, having a simple registration number is not enough.
What should I do if my country doesn’t have FX jurisdiction?
This is a very common question by traders from 3rd world countries like Bangladesh, India or other Asian and African countries. Actually, you can trade under an FCA, ASIC or CySEC regulated broker. FCA is my favorite however, ASIC and CySEC are fine too. They even offer better leverage which might be helpful for traders who have smaller funds.
What about the security of investing fund and personal information?
You should ask about the capital solvency of the broker if you don’t find it on their website. Ignore the low invested brokers. Check the financial ability every three months with your broker (once you’ve decided). IronFX (a former leading broker) recently started holding all withdrawals requested by traders due to financial insolvency. You don’t want to be a victim of such a situation. A legal battle in court might take years to reach a verdict and even then, the terms may not be favorable to you. Don’t forget to check the liquidity providers of the broker. A good broker always puts your funds segregated with different banks.
A broker often collects personal data like ID cards, credit cards, birth certificates, passports, bank solvency papers to verify the trading account. So, you must inquire about their server security. This is equally important. FXCM, Oanda and other few leading brokers got hacked more than once between 2010-2015.
2. Types of Retail Forex Brokers: MM or STP broker?
There are basically two types of retail forex brokers. 1. Dealing Desk broker or Market Maker (MM), 2. No Dealing Desk broker (STP, ECN) and but there is a modern version of MM broker called ‘Hybrid Broker’ let’s discuss each of them.
Dealing Desk Brokers: Not always a villain
A dealing desk broker makes money through fixed spreads, swaps and from losses of a trader. All market maker (dealing desk) brokers process trading orders manually or sometimes by a computer system which runs into their own trading environment. They trade against you. Don’t be scared by that. In forex trading, there is always someone taking opposite side of your trades. In a real trading environment, other traders trade against your positions. You only make money when someone loses theirs.
Experienced traders often chooses a good MM broker to trade, as they have no problem with the liquidity. They provide their own liquidity.
But most MM broker serves their own interest and they may manipulate the market price and spread. Due to artificial price quotes they often re-quote during higher volatility. Sometimes, they do few bad practices like wider spreads to hunt the Stop Losses, add extra pips while you close a position, negative slippage is very common. It means they hang your trade for a couple of minutes and they don’t give you any profit if the price goes with your trading direction during that extra period but charge you if it goes against you!
However, well regulated and reputed MM brokers have a better trading environment, as competition between MM brokers is high these days. We don’t recommend any Market Making broker to new comers.
No Dealing Desk Brokers:
A no dealing desk broker act as a bridge between traders and liquidity providers (interbank). Positions taken by traders are automatically transmitted straight through the interbank. They are called STP brokers.
STP Brokers: They might not give you the best trading experience!
STP Brokers are often known as good brokers. These brokers have variable spreads and prices directly come from liquidity providers. All executions are automatic and there are no re-quotes. You might have slippage but no re-quotes. And their slippage is actually different than an MM broker. Sometimes a delay in execution can happen but you always got the price you executed, so this type of delay doesn’t affect your profit! And they don’t take the other side of the trade. They either take a small commission on trading volume or add a markup with the raw spread. They get 1:100 leverage from Liquidity Providers. Few drawbacks for a new trader such as: No swap free account, minimum contract size is 10k or 0.10 (in MT4), no negative balance protection etc!
What is ECN, True ECN, ECN+STP broker?
Electronic Communications Network (ECN) brokers are popular these days. They connect their traders to interact with other participants in the ECN network. The other participants could be a bank, retail traders or even hedge funds firms etc.
ECN brokers can offer much tighter spreads than everyday broker as they consolidate price quotations from different market participants. Their system is automatic and there are no re-quotes with the price. They can’t trade against their traders because they are matching trades for them with other participants. And they allow their traders to see ‘Depth of market’. ECN brokers usually charge fixed commission on trading volume.
Hybrid Model Brokers: Understanding “A book” and ‘B book”
You can call it an upgraded version of traditional MM brokers. It is very difficult to tell from the outside if a broker is STP or MM. Most MM brokers in modern days’ practice both MM and STP altogether by a hybrid model.
90% traders lose money and 10% earn. A broker can get massive revenue if they can identify those 10% traders and send them to the real market. They categorize traders and put them into an ‘A’ book and ‘B’ book.
This is the actual STP market. Experienced traders, instructional traders, consistently profit making traders, traders with large investment usually get listed for A book. An MM broker doesn’t want to deal with them so they send the orders of these customers via an STP model to the market.
New traders, traders with smaller funds, traders who use higher leverage with trades, traders who lost ~30% of the balance, traders who have more than 50% drawdown. Broker don’t pass their trades to the real market but keep them themselves. There is only one way to get rid of B book which is making a consistent profit. If you make profit consistently broker will automatically put you in the A book.
However, you will see the real face of B booking brokers if you have more than 50 percent floating negative positions. They will do everything to wipe your account (bad one). Pending orders are often misplaced, they will hunt your stop losses by widening spreads. Slippage that remains 5-10 minutes, sometimes even hours!
3. Internal broker information: Check list for choosing a broker!
Commission Cost and Spreads:
Check the details about the average spreads in normal time for major pairs as well as cross currency pairs. 1-2 pips for major pairs and 2-5 pips with the cross pairs are okay if a broker doesn’t charge commission. Make sure you understand the commission terms If the broker charges commission. A charge of $3-$10 for each standard lot are common among brokers.
Swap rates and rollovers/ Islamic accounts:
This is the most important thing to check if you are a swing trader. A swing trader might hold a position for weeks or even months. Higher swap rates can eat a significant portion of your profit. Some brokers charge swaps rollover daily basis whilst some follow other time frames.
You should read and understand the conditions of an Islamic account if you need those. Most brokers offer conditional swap free for a limited number of days. Like 7 days, a month or something similar. And all currency pairs might not be swap free.
Margin Call and Big events interference:
You should ask how your trades will be closed if margin call happens (this is important if you are a new trader). All trades at once or one by one? (e.g. starts with larger volumes). STP brokers can’t offer less than 100% but MM broker can offer 20-30% margin for stop out!
Brokers often lower their leverage and increase the required margin ahead of significant events like fed rate hike, ECB major decisions, political events like Election on G10 countries by showing low liquidity cause. Ask them about it. Most often brokers provide 1:30 for the risk-related currencies, and 1:50 for others. Make sure you understand them when it happens.
Negative balance protections:
Forex trading involves high risk. A sudden and massive move against you can exceed your investment. The broker could file a lawsuit against you if you don’t clear the due payment. SNB’s floor ending decision for EURCHF caused a massive market move in few seconds in January 2015. No Stop loss worked due to heavy server load and people who had trades on the wrong side went into freefall and ended up with huge negative balances.
So, for your own safety, you should choose brokers who offer a negative balance protection so, your loss won’t exceed your investment. However, only MM brokers can offer this facility.
Deposit and withdrawal:
First, you should ask them the minimum deposit and withdrawal policy of the broker. And if there any fees during these process. Does the broker carry fees of the payment gateway?
Sometimes brokers accept digital wallet based currency for deposit but not for withdrawal (e.g. Axitrader). And there are other brokers they only allow you to withdraw your fund the same way you deposited. You should ask them how they process incoming and outgoing money.
Sometimes it saves money and time if you can transfer funds between two brokers. Few brokers allow multiple B2B transfers, few one-time transfer, few are one-way transfer (only accept incoming). You should also ask if there any fees for that.
Trading platforms and Servers:
Make sure your preferred trading software listed with the broker you want to choose. I would say you to choose a trading platform that is available across the different operating systems like Windows, Mac, Android, iOS. The nearest trading server from your location would give you more accurate and faster trading experience.
Due to the regulatory body, not all brokers allow hedging practice. You make sure your broker allows that if you hedge in your trades.
Minimum Trading Volume / Contracts Size:
This is significant if your investment capital is smaller. Some brokers have different minimum contract size policy for their currency pairs and CFDs (S&P, Gold, Oil). Such as 1k (0.01 lot) with currency pairs and 10k (0.10 lot) with Gold (CFD). You should ask the support about their minimum trading volume policy. A true ECN broker can’t offer you less than .10 lot size, this is the minimum by most liquidity providers.
No services are perfect and therefore you must pick a broker that you could easily contact when you need. A 24/5 live chat or a call back customer support is good. Quick response from a support is crucial for me.
Last but not the least, choosing an online forex broker is not that easy. You should always prioritize your trading methods. A broker could promise the whole world when you ask them. But you should consider trading a demo account with them first and see how the trading environment actually is. I would suggest you choose two or three top brokers for demo practice and pick one from them for funding with real money to get the best for you.
To become a successful forex trader, you have to learn trading first. Only picking a good broker won’t make you profitable. You can learn forex trading for free and strategies those work on our website.
Wish you all the best.