How to Choose a Forex Broker

A Forex broker is a financial company that provides access to the Foreign Exchange market through a trading platform. By opening a simple trading account retail traders can buy and sell Forex currencies

 

What are Dealing Desk and Non-Dealing Desk Brokers?

■ DD Brokers: DD firms create a market within the real Foreign Exchange market. That means delays in order execution and re-quotes. Overall, DD brokers are not a good choice for intraday and scalping Forex

■ NDD Brokers: NDD firms provide direct access to the interbank market. That means better quotations and faster order execution. They include ECN and STP brokers.

• ECN (Electronic Communication Network) is an electronic bridge connecting large liquidity providers with retail traders

• STP (Straight-Through Processing) refers to the method of transferring retail trading orders straight to liquidity providers, without any dealing desk intervention

 

Compare Foreign Exchange Brokers

Table: Comparing brokers for trading the Foreign Exchange market

 

 

Crucial Issues When Opening a Forex Trading Account

The most important issue when opening a Forex trading account is to make sure that your funds are protected.

FUNDS SAFETY

• Reliable brokers maintain headquarters in a safe country (not offshore) and operate for more than 2 years in the market

• Regulation by a trustable authority such as FCA UK enhances funds' safety

• The segergation of the client's funds is 100% required

• The client's compensation scheme in case of insolvency is an important issue

TRADING FEES

• Trading spreads on EURUSD should be less than 1.2 pip without trading commissions

• The overnight rates should be very competitive, especially as concerns position traders

• There are brokers charging withdrawal fees and some others may charge maintenance (inactive) fees

TRADING OPTIONS

• Demo accounts and micro-lot accounts are useful to Forex beginners

• The more funding methods available the better (credit cards, internet wallets, crypto, etc.)

• The available platforms should at least include the industry's standard MT4 trading platform

• A wide Forex asset index also adds value to a trading account

 

How to Choose Forex Brokers

Choosing the right Forex broker is extremely important. There are five key factors that every trader should know before opening a Forex trading account:

(1) Suitability of trading account types

(2) Cost of Trading

(3) Margin Policy & Rollover Rates

(4) Execution Efficiency

(5) Safety of Trading Funds & Compensation in case of insolvency

In the following analysis, each of the above 5 factors is divided into several sub-factors.

 

(1) The Basics of a Forex Trading Account

1.1 What is the minimum deposit required to open an account?

Usually, the minimum deposit for opening a simple trading account is from $10 to $250. ECN trading accounts require a higher initial deposit, usually $500 to $2,000.

1.2 What are the available Deposit / Withdrawal Methods?

All brokers support Bank Wire and Credit Cards. Some brokers support also internet wallets such as Paypal, Skrill, Neteller, and WebMoney. Make sure that your broker allows you to withdraw all your profits via the same method as you have deposited funds.

1.3 What is the minimum lot size?

Get informed about the available lot sizes. Forex beginners should select a mini lot size account.

LEVEL OF EXPERIENCE	LOT	NUMBER OF UNITS
BEGINNER	Micro	1,000
SEMI-ADVANCED TRADER	Mini	10,000
ADVANCED / PRO TRADER	Standard	100,000

1.4 Is there any interest earned for the unused account funds?

99% of all Forex brokers don't offer interest on your unused capital.

1.5 Is there a Demo Account available?

Every broker that respects his clients must offer a Demo Account. Using a Demo before opening a Real Trading Account is important for every Forex trader. A Demo account offers a trading experience for free.

1.6 Is there a Trading Rebate Plan available?

A Forex rebate plan is a cashback program linked to your trading account paying you a cash rebate based on your trading volumes. ECN brokers sometimes offer a trading rebate plan. To join a rebate plan, you must find an IB.

 

(2) Cost of Trading

2.1 What is the spread on your favorite currency pairs –is it Fixed or Variable?

In general, EUR/USD, USDJPY, and GBP/USD offer the narrowest spreads for trading. On the other hand, minors, are traded on extremely high spreads, and that makes them unsuitable for day trading. Another parameter concerns the type of trading spread. Some Forex brokers offer trading accounts with fixed spreads, others with variable spreads.

• ECN/STP Brokers offer variable spreads (a more reliable choice of brokerage)

• Dealing-Desks offer fixed spreads

Focus on the currency pairs that you will probably trade most and find which brokers offer the best trading conditions. You can use also multiple trading accounts and take advantage of more brokerage choices at the same time.

2.2 Are there any Trading Commissions involved?

Usually, trading commissions are charged only by ECN and STP brokers. Some ECN Brokers even offer zero (0) spreads and make profits only by charging trading commissions. On the other hand, Market Makers don’t charge commissions, but they charge very wide spreads (EUR/USD at 1.6 minimum) while the execution is usually slow and there is slippage.

2.3 Are there any other charges?

Other charges may be incurred on withdrawals (fees) or account maintenance (not-active fees).

 

(3) Margin / Rollover Rates

3.1 What is the Margin Requirement?

If you want to trade on leverage, make sure you know about the margin requirements.

3.2 What is the Rollover Policy (SWAP Rates)?

This is very important for those traders maintaining their positions overnight (swing traders, position traders, carry traders, long-term traders)

At this point, you must answer questions concerning:

3.2.1 What are the particular SWAP rates for the particular currency pairs that you are interested in?

3.2.2 Are these SWAP rates negative or positive?

3.2.2 Are these SWAP rates better or worse than the rest of the market?

 

(4) Order Execution

4.1 What is the Forex Broker execution model (ECN, STP, or Market Maker)?

In general professional traders open accounts only with ECN/STP brokers which offer direct access to key liquidity providers.

4.2 Are there any delays in execution/price manipulation?

ECN brokers perform better in terms of execution speed without any price manipulation.

4.3 Which Trading Platforms Are Available?

MetaTrader4 is the Forex industry’s standard. Usually, most brokers offer a Web-Trader too. In addition, mobile trading is offered by all brokers nowadays (apps for Android, iPhone, and iPad).

4.4 Is Automated Trading an Option?

Automated Fx trading using Expert Advisors has become considerably popular nowadays.

4.4 Does that Forex broker allow Scalping?

In general, most ECN brokers are fully allowing scalping and most Market Makers don’t.

4.5 Additional Trading Features

Many additional features make trading easier. For example, a free VPS hosting for algorithmic traders.

Learn how to create fully customized automated systems: » Creating Custom EArs with EA Builder

 

(5) Funds Safety

5.1 Is a Forex Broker Regulated?

It is absolutely important to choose only among well-regulated Forex Brokers. Trustable authorities included FCA UK, ASIC Australia, etc.

5.2 Where is the Headquarters Base?

Generally speaking, it is better to choose among Forex Brokers that are situated in developing countries and not those who are situated in offshore countries where the legislative framework is more flexible in favor of a misbehaving corporation.

5.3 Compensation Scheme

Check always what you will get as compensation in case of your broker's insolvency. For example, the FCA UK (FSCS scheme) offers 50,000 GBP.

 

Rating Forex Brokers using all the Above Factors

To define the quality of a Forex Broker using multiple factors a mathematical model was formed “Rating Formula”. This formula uses 4 factors to rate brokerage services:

• (1) Safety of Funds | (2) Trading Cost | (3) Trading Options | (4) Technological Efficiency

Here is the version history of the Rating Brokers Formula: » Forex Rating Formula v.4.0

 

■ Choosing Forex Brokers

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