How to choose a forex broker
- December 1, 2021
- Reading time: 9 minutes
Forex broker wanted! Sounds easy, but how to select the right one for you? Choosing a forex broker is a time consuming matter and moreover a hassle. You know it’s important, but all forex brokers look the same so where to look out for. In this article we will explain where to pay attention to and how a broker looks like “under the hood”.
Why do I need a forex broker?
Whenever you trade, your orders will be send to either an exchange or, like in cfd trading to a liquidity provider. To have access to this liquidity for several asset classes you need a broker. It’s like a market place where your buy order always finds a seller. A broker is “the middle man” and sends your order to a liquidity provider (banks and spv’s). Another reason why broker are needed is the leverage at which you can trade. Forex brokers allow you to trade with a leverage, giving the opportunity to trade 30x or even 500x your initial investment. With only $1000 you can move $500K in the market.
How important is regulation?
Regulation is one of the most important aspects that needs to be verified. Without a decent regulation, your money is at instant risk. For example if your broker is located on a sunny island, you can already tell that regulators are not as organized as when the broker is located in London or Frankfurt. Things like money withdrawals, trustworthy banks, stop hunting are all matters you have to consider in case you would opt for such a broker.
I am not saying all those exotic island brokers are bad, but fact is, they are there for a reason and have more “freedom” than a European or UK regulated broker. The #1 reason why many brokers offer an off shore route has to do with the fact that in Europe the maximum leverage they can offer is 1:30. And that rule made most brokers decide to have an off shore brokerage service. Looking at the huge numbers of high leveraged traders, it appears that these brokers are right…traders just love high leverage.
Spreads and commissions
For any trader, the costs are an important factor. Thus yes, fees are relevant. However, most brokers offer the similar commissions and spreads. Because many brokers use the same liquidity providers it looks like there is not much difference. However, whatever a broker advocates, it’s not always what you get. Especially a fast execution is extremely important, something that is hard to check.
We like to believe that a $10 fee for a standard lot is more than enough for brokers to still make a buck. That results in a 0.10 pip all in spread or $8 round turn in a raw ecn account. For smaller accounts the fees could a bit higher as well.
Bear in mind that if you are introduced to a broker the spreads might be slightly higher.
ECN, STP or Market Maker
Some years ago forex brokers introduced the “raw ECN account”. At that time something new, since pretty much all brokers at that time were market maker thus took the other side of your trade.
So what is the difference between these broker models?
Market maker
A market maker will always take the other side of your trade. They are your counterpart. This means that the spread you will see on your screen is fixed. Many brokers like this model since it allows them to advertise with “trading at zero costs”, which in fact is not true.
A market maker employs risk managers, who are dealing with a lot of stress. After all, they have to decide whether your trade needs to hedged or not. Common practice is “netting” which means that at each day only the nett long positions or nett short positions will be hedged. For example, if there are 1200 contracts long the EURUSD and 1000 short, the risk manager could then hedge 200 longs.
Thats why regulation is so important since brokers need to always check if their solvability is complying with the rules. If you trade with an off shore market maker there is a reasonable chance that in case of bankruptcy, you will not see your money back. Chances that this will happen are much higher because the local regulators simply check these companies rarely.
All and all it always looks funny when a counterpart broker offers their clients trade schools and academies knowing they only benefit from their clients losses.
Whats positive about this type of brokers is that you can trade micro or even nano lot sizes. This allows you to trade in a live account with just a few bucks. Still, be aware that a lot of these brokers are not there for your interest!
ECN / STP
An ECN broker connects traders straight to liquidity providers (Banks or hedge funds, institutions). For doing so traders are charged a commission per trade. A big difference is that trading in an ECN account you will be able to see the bid and ask prices.
If your are trading with let’s say a few hundred dollars I don’t think it will much of a difference. The moment you start be a more experienced trader with larger trading volumes or you prefer to trade with forex robots, then an ECN account is the most obvious to select.
Deposit and withdrawal fees
Simply put, do not pay for any withdrawal or deposit. In case a broker does charge for it, you could do a wire transfer. By choosing a broker you could test the speed of withdrawing money from your account. Just make a withdraw request and see how long it takes.
Lot size
Many online forex brokers offer different account types ranging from standard accounts, to mini accounts, to micro accounts. The size of the account depends on the lots that you wish to trade.
Basically you can trade with 3 different lot sizes;
- A standard lot is a lot that consists of 100,000 units of the base currency
- A mini lot consists of 10,000 units of the base currency
- A micro lot consists of 1000 units of the base currency.
Which trading platform should I use
In cfd trading the most popular trading platform is undisputable the Metatrader 4 terminal aka MT4. It’s younger version is the MT5 platform but still did not surpass it’s younger sisters popularity. Another platform that can be used is cTrader which is also compatible with many brokers.
Some brokers such as Saxobank opted to offer their own trading terminal.
For new traders the MT4 platform is probably the best choice. Simply because its very easy to understand and therefore it has a short learning curve. There are enough indicators at your disposal, it has a great EA market place and charting is pretty much ok.
A trading platform always comes for free once you open an account with a broker. All platforms do offer a trading app which makes trading easy on the go.
What leverage
Leverage is one of the main reasons traders lose money over time. My advise is to be very careful with using a high leverage, since markets only need a little volatility for your account to blow up. The most used leverage is 1:400 but can only be offered via an offshore route. I think it’s fair to say that a 1:30 leverage is the best way to start trading with. It’s less risky and because of a lower leverage traders tend to lose less.
Clearly if you are an experienced trader, a higher leverage does not necessarily mean a larger risk as long as you know what you are doing. Furthermore, a higher leverage also means that profits can be substantially higher.
If you are a new trader, it’s recommended to opt for a 1:30 leverage. Firstly you can trade with an EU regulated broker and also your risk factor will be lower.
Customer Support
Customer support is for some traders the most important variable to choose a forex broker. I trade with over 7 brokers and I have to say that support I am receiving is similar. Due to sophisticated CRM systems, brokers managed to automate their support.
But, in case you want to see tick data or perhaps a question about a stop loss that was hit, it could take more time for a broker to respond.
I always like it when I see a name showing below an email including a direct phone number and address. Problem is often that the larger the broker is, the longer it takes to get a response. For example, try to get help from a chat operator, could take over 30 minutes!
For me personally support is not a big deal. Trading with MT4 is stable so no technical issues occur and for trading advise your broker is probably the last person to contact.
Conclusion
By choosing a forex broker just use your common sense. Things like regulation and withdraw policies are the most important factors to consider. Check out some independant review websites such as trustpilot and see how other people share their trading experience with a forex broker. Make sure you check if the review looks genuine since many of these reviews are fake. Welcome to the internet era..
In case you are new to forex and you are looking for a broker, you can always contact us where we will try to help you make a good choice.
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Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. Between 74-89% of retail investor accounts lose money when trading CFDs. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.