Make Sure That The Forex Broker You Choose Is The Right One For You
Would you lend your money to someone you didn’t know or trust?
Would you enter into a business transaction with someone, even though you didn’t know if they could meet your requirements?
But many traders do exactly that when they open up an account with a forex broker.
If you are starting out in trading, choosing a forex broker is a big decision. It feels like an unfamiliar world, there are tons of brokers to choose from, and lots of different factors to consider.
It can get overwhelming.
This Guide is designed to make choosing a forex broker that a little bit easier.
It’s All About You
Stop looking for the “best forex broker” because such a thing doesn’t exist.
Your choice will be a lot easier if you switch it around slightly to look for the “best forex broker for you”.
Don’t start by looking at all the different options and features that forex brokers offer.
Instead, start by thinking about the options and feature that are important for you, and then choose a forex broker that meets your criteria.
We all have different things that are important to us, and not so important.
One trader might not care too much about how tight a broker’s spreads are for instance, because he does not trade very often. But he uses an expert advisor to help him trade, and so it is an absolute must that his broker supports Metatrader 4.
Another trader might use hedging as part of his trading strategy. So having a broker that allows hedging might be an absolute requirement for him. If hedging is important to him, he might (rightly or wrongly) be prepared to compromise on where that broker is based and regulated.
Does that make sense?
Now let’s take a look at some of the questions you should be asking...
1 – Is the Forex Broker regulated?
This is the most important factor for many when it comes to choosing a forex broker. Most people will prefer their broker to be regulated by one of the following regulatory authorities:
- UK= (FCA) Financial Conduct Authority
- USA = (NFA) National Futures Association
- Australia = Australian Securities and Investment Commission (ASIC)
If your broker is regulated by one of the above authorities, you can be confident that it is well capitalised and monitored. And in the event of bankruptcy/rogue behaviour, your funds should be protected.
2 – Does the Forex Broker support your preferred Currency Pairs?
Many traders develop the habit of trading a few specific instruments.
Most forex brokers offer all of the major currency pairs, and a good selection of the minors too. But check to see exactly what instruments they offer. If you want to trade the EUR/USD, the DAX and the Dollar Index, a broker that only offers EURUSD is of little use to you.
So be sure to check out their list of supported instruments before sending them your money!
3 – Are their Spreads Competitive?
The market for forex brokers is competitive now. It used to be the case that retail forex traders would be charged a spread or more than 5 pips on even popular currency pairs.
Spreads have fallen drastically in recent years, and we can now trade popular forex pairs with spreads at 2 pips or below.
If your forex broker charges you 3 pips or more on EURUSD, GBPUSD, etc, then they are expensive.
With so many options out there now, there is no reason not to insist that the forex broker you choose has competitive spreads.
4 – Does the Forex Broker charge Additional Commissions or Fees?
It used to be the case that forex brokers not only charged the spread, they charged commissions, charged for price data feeds, and other services too.
Now it is rare for them to charge anything other than the spread. But it is worth checking, just to make sure that you do not get any nasty surprises after you have signed up.
5 – Do They Offer The Account Type You Want?
Forex brokers allow you to open different types of accounts, depending on the size of the trades you plan to enter.
If you are trading with a very small amount of capital, you could consider a broker that offers fractional lot sizes. This allows you to open trades that have almost no minimum size. So, in theory, you could be risking only pennies per pip on each trade you open.
Micro accounts allow you to trade 1,000 units of base currency per position (or “micro lots”). That works out to be $0.10 per pip on most major currency pairs.
Mini accounts are 10 times bigger than micro accounts. If you open a Mini account with a forex broker, you will be trading 10,000 units per position (“mini lots”). That works out to be $1.00 per pip on most major currency pairs.
Standard accounts are 10 times bigger again. So if you open a Standard account with forex broker, you will be trading 100,000 units per position (“standard lots”). That works out to be $10 per pip on most major currency pairs.
These are the main account types for you to consider. As you can see, the amount of money you have available to trade will have a big impact on what type of account to choose.
If you are resident in the UK or Ireland, you might be interested in opening a Spread betting Account. At the time of writing, all gains made as a result of spread betting in the UK and Ireland are tax-free.
6 – What are their Minimum Deposit Requirements?
Some brokers have Minimum Deposit Requirements. This means that if you want to open an account, you have to deposit a certain amount of money with them.
The minimum deposit required varies based on broker and the type of account you want to open. For example, standard accounts will often have a deposit minimum of $1,000 upwards.
But if you want to open a micro or fractional lot account, the minimum deposit required can be very low, under $50 in some cases. Some brokers have done away with minimum deposit requirements entirely.
It’s important not to confuse a minimum deposit requirement with being a recommended or safe amount of money to open an account with. Just because a broker allows you to open a standard account with $100 does not mean that it is a good idea to do so!
7 – How do you Deposit and Withdraw your Money?
It’s important to check the process of depositing and withdrawing money from your trading account.
Some forex brokers make the process of depositing and withdrawing funds very easy and quick.
Other brokers might insist that you use a specific method to deposit or withdraw money, or there may be a number of days to wait between you making the deposit and the money appearing in your trading account.
So it is important to check that you are satisfied with the process.
Things to consider include:
- Do they accept deposit by your credit/debit card?
- Do they accept deposit by Paypal/wire transfer/cheque/Skrill/Neteller/etc?
- Can you deposit in your preferred currency?
- If there is a currency exchange, what is the exchange rate?
- How long do deposits take to appear in your account?
- How long does it take for a withdrawal to appear in your account?
- Can you make a withdrawal via the same method that you made your deposit?
8 – What Trading Platforms do they offer?
If you have a preference for a particular trading platform, you’ll have to make sure that the broker you choose supports it.
Many brokers have their own software platforms, but also support a range of third party trading platforms. The most popular are MT4, MT5, cTrader, Webtrader, ProRealTime, etc.
MT4 is by far the most popular, and if you intend at any stage to develop or use expert advisors for automatic trading, you should make sure that your broker supports MT4.
If you use a particular type of indicator/chart/timeframe when trading, you should check that the options offered by the broker satisfy your requirements.
On a practical note, it is quite common practice for traders to do analysis/charting on one platform and then make their trades on another. So if your preferred broker did not support MT4 for example, you could use an MT4 demo account from another broker to do your analysis, and then use your live broker’s platform just to enter/exit your trades.
9 – How do they handle your Trades?
When you press “buy” or “sell” on your trading platform, your order is sent though to your broker. How your broker handles that order can vary, depending on how the broker is set up, and its business model.
It’s worth taking a moment to understand the main ways in which brokers handle your orders.
If your broker has a dealing desk that usually means that the broker is taking the other side of your trade. This is called market making.
If you sell EUR/USD, the broker will buy EUR/USD.
So if your trade is successful, the broker will lose money.
And if your trade is a loser, the broker you make money.
If the broker decides not to take the other side of your trade, he can hedge it with other banks or liquidity providers.
The other way in which brokers handle your trades is with no dealing desk. They simply send your trade straight into the interbank forex market. This can be via what’s called straight-through processing (STP) or via an electronic communications network (ECN).
Instead of making money when you lose it, STP and ECN brokers make money on the spread that they charge on each trade.
10 – What’s their Customer Service like?
Customer Service is one of those things that you might not need very often, but on the few occasions that you do need it, you want it to work well!
Consider the following:
- Do they offer customer support by phone/email/live chat?
- What hours are they available?
- Do they speak your language?
- How quickly do they respond to queries?
The best way to get an idea of a broker’s customer service is to send them an email asking a question, or open a live chat on their website, and assess the quality of their support in real time.
11 – How much Leverage do they allow?
Leverage allows traders to take bigger trades while only having small amounts of money deposited with their broker.
The more leverage on offer, the bigger the trades the trader can make (or the less money he needs deposited with his broker to take trades).
Leverage has an accelerating affect.
If you are a good trader and know what you are doing, using leverage appropriately allows you to grow your account quicker.
If you are not a good trader, and do not understand what you are doing, using leverage will just increase the speed at which you empty your account.
Forex brokers offer a wide range of leverage. Some of the bigger, well-known forex brokers cap the leverage they offer at 100:1. That means that for every $1 in your account, you can control $100.
Some of the smaller forex brokers, often those that are based in less well-regulated jurisdictions, offer much higher levels of leverage. Some brokers offer up to 2000:1, or even higher.
It’s important to remember that just because a broker offers high leverage, it doesn’t mean that it’s necessarily good idea to use it!
12 – What are their Margin Requirements?
When you open a trade with leverage, your broker allocates a portion of your account towards margin.
Margin works a bit like paying a deposit to your broker for the leverage that are using for your trade.
Remember, if you are trading with leverage, your broker is allowing you to control a position that is bigger than the amount of money you have in your account.
So, by setting aside a portion of your account as margin, your broker is making sure that you are sharing some of the risk of your trade.
Margin requirements vary among brokers and also among instruments. Some brokers require you to set aside 5% of the value of your trade as margin. Others require far less, as low as 0.5%, or lower.
If the margin requirements are very small, if means that your broker is allowing you to trade with a large amount of leverage.
Here is how it is calculated...
Say your trade is worth $5,000.
Your broker requires a 0.5% margin. So it sets aside 0.5% of the value of your trade for margin. That’s $25.
So you are controlling a trade worth $5,000 with $25 of your own money.
$5,000 ÷ $25 = 200.
So the leverage your broker is offering you is 200:1.
It is important to check what your broker’s policies are when it comes to margin, because they can vary considerably.
For example, if you have a long EUR/USD trade and a short EUR/USD trade open at the same time, some brokers will say that the two positions cancel each other out, and so they do not require any margin for these positions.
Other brokers will treat the two trades as individual positions and will require the full margin allocation for both. So it is important to check.
13 – What happens during a Margin Call?
If the equity in your account falls below the amount your broker has allocated towards margin, your broker will start to close out your open trades on your behalf.
This is what’s called a margin call.
A margin call is an obvious sign that you have overextended yourself with your trading. So your broker steps in, takes control of your account, and starts to make sure that your losses don’t get out of hand.
Like almost everything else, forex brokers’ margin call policies vary. So it is important to know exactly how the broker will treat your account if you find yourself in a margin call situation.
The most important thing to check is if, in a margin call situation, your total losses are limited to the amount of equity in your account.
Brokers sometimes call this “negative balance protection”.
If you do not have negative balance protection, and your broker can’t close your trades before your account equity goes negative, you could be responsible for any losses that occur.
A good example of this was when the Swiss Franc floor broke in January 2015. Lots of traders were subjected to margin calls, but because of the lack of liquidity, brokers could only start to close their trades after a move of thousands of pips on some pairs.
Losses far exceeded deposits for many traders. In cases where traders’ losses were not limited to the amount of equity in their account, they were liable for those losses.
14 – How do they treat Carry and Rollover?
Rollovers happen when you keep a trade open from one day into the next day.
When you rollover a trade, often you have to either pay, or are paid, a small fee. The fee is based on the interest rate difference between the pairs that you are trading, and is known as the carry.
The amount you pay (or are paid) depends on what pairs you are trading, whether you are long or short, the size of your position, and your broker’s policies towards rollover and carry.
If you trade a strategy that is likely to involve holding positions for longer than a day, it is important that you check your broker’s rollover and carry policies.
In particular, check the following:
- Do they charge for rollovers?
- When do rollovers occur?
- Do they pay carry interest to clients?
- Do they charge clients carry interest?
- What are the carry rates?
- How do they deal with weekend carry payments?
- Do they have any other requirements that have to be fulfilled before a client can be paid carry interest?
There are many popular trading strategies that are based around collecting carry interest on open positions over long periods of time. If you intend to use one of these strategies, it is important that you are fully aware of your broker’s policies.
15 – Do they offer Guaranteed Stop-Losses?
Most brokers say that they’ll activate your stop-loss order as close as possible to the price that you specify for it.
Some brokers offer guaranteed stops, where they guarantee that the price you set your stop-loss at is the price they activate it at.
The advantage of guaranteed stops is that you have certainty about how much risk you are taking on a trade.
The disadvantage is that most brokers charge a higher spread on trades that have guaranteed stops.
So you have to decide if you are willing to pay extra for that peace of mind that guaranteed stops offer.
16 – Do they offer Bonuses?
Sometimes forex brokers offer bonuses for new clients. They might offer to match a deposit you make (“open an account with $1,000 and we will match it with another $1,000”) or some other incentive to open a new account.
Sometimes traders are skeptical of brokers that offer bonuses. And it is true that less reputable brokers do use bonuses to persuade traders to open new accounts. But just because a broker is offering a bonus does not automatically mean that you should avoid it.
They key is to do what is recommended throughout this Guide – do your homework and research the terms on which the bonus is offered.
Sometimes bonuses are subject to rules on when or if you can withdraw the bonus amount, how much volume you have to trade, etc.
So just check the small print to make sure you understand and agree with the terms that the broker is offering you.
17 – Read their Terms & Conditions
Nobody reads the terms & conditions, right?
Perhaps not, but whether you read them or you don’t, they set out the legal relationship between you and your broker.
And if anything goes wrong, or there is a dispute, the terms and conditions will suddenly become very important. So it is worth taking the time to read them in advance.
If there is anything that you do not understand, or are concerned about, get in touch with the broker and ask them to clarify your question.
So That's It!
I hope you enjoyed this guide on how to choose a forex broker.
If you follow the advice in this guide, you’ll choose a forex broker that suits you, and is able to best meet your trading requirements.
And that’s the most important thing.
If you enjoyed this guide, could you please do just one thing?
Click on one of the sharing buttons on this page and share it with your friends.
Thanks for reading, and good luck in the markets!