How To Choose A Forex Broker

With hundreds of Forex brokers, selecting the right one can be challenging and time-consuming. To ease the process, we’ve tested and reviewed dozens of the top Forex brokers and compiled our findings into thorough Forex broker reviews. But don’t just take our word for it – each Forex broker review also includes feedback from real traders so that you can make a comfortable, informed decision.

The basic criteria to use in choosing a broker are few and simple. Without a doubt, your number one priority should be ensuring the safety of your funds. Firstly, this means making sure that the broker you choose will not steal your deposit. You can best take care of this by making sure that you only use a broker based in and regulated by a financial authority in a respected financial center. Secondly, you need to make sure that even if the broker operates honestly but goes bankrupt for any reason, you will be able to recover your deposit. One measure that can be taken here is to only deposit with brokers whose regulators offer deposit protection for clients (such as regulated brokers in the U.K. or Australia, for example). This means that even if your broker goes broke, the government will bail you out by paying back your funds up to a certain amount, although it might take some time. Beyond that, try to choose a broker with a healthy financial situation and a good reputation. Once you have taken these precautions, you can look at what your potential brokers offer in terms of the range of available assets to trade, spreads and commissions, overnight financing charges, and speed and reliability of trade execution – and make your choice accordingly.

Regulation, Safety of Funds & Legal Issues

Regulation and compliance are – beyond the shadow of a doubt – the most important things to consider when choosing a broker. An unregulated broker can do as it pleases with its traders’ funds. Such a broker might be an online scam, so it is worth being extremely wary of unregulated brokers.

Regulatory Compliance

The activity of a trustworthy broker should always be governed by an official regulator designed to protect and promote the integrity of brokerage operations. All abusive practices linked to the sale of futures and options should be out of the question, as traders should be protected against fraud and manipulation. A US broker must be registered with the US Commodity Futures Trading Commission (CFTC) as a merchant and retail Forex dealer. It must also be a NFA (National Futures Association) member. These credentials are usually listed in the About Us section of the broker’s website. Equivalents of these trade associations and regulatory bodies are present in nearly every country. Depending on where their broker is based, traders should always research and look for these credentials. In this respect, it’s also worth researching the year when the broker obtained its license, as this might carry some significance as well, in regards to the overall reputation and operational history of the broker.

Safety of Funds

Regulated brokers must comply with a set of rules that are meant to safeguard investor assets. This is the primary reason why regulation is so important. Every regulated broker is subject to a “Net Capital Rule,” which prescribes a minimum amount of capital to be kept in liquid form. This way, investors are protected with a ‘safety net’ in the event that a broker is forced to close. In addition to maintaining minimum capital requirements, regulated brokers in most jurisdictions are required to keep all client funds separated in segregated accounts so that client funds won’t accidentally (or purposely) be used for any reasons other than to execute the client’s trades. Some nations, such as the United Kingdom, even offer government-backed deposit insurance for their regulated brokers so that clients can recover part or all of their funds even if the broker manages to misappropriate them.

Broker Types

The type of broker used can have an impact on one’s overall trading performance and results.

Dealing Desk vs. ECN Brokers

Dealing Desk brokers work similarly to the dealing desks provided by various financial institutions and banks. A Forex broker who uses a dealing desk and is registered as a Retail Foreign Exchange Dealer and Futures Commission Merchant (or equivalent in another country) can offset trades. On the other hand, the No Dealing Desk system offsets positions automatically and then transmits them to the interbank market. Brokers working through a Dealing Desk system do not work directly with market liquidity providers. Therefore, only one liquidity provider remains in the equation, and that gives birth to a fundamental conflict of interest.

An ECN broker, on the other hand, offers its traders direct access to the other market participants through an Electronic Communications Network. Why is an ECN broker superior to a Dealing Desk one spreads-wise? Simple: because it deals with price quotations from several trading entities, it can offer much better bid/ask spreads.

The business model of an ECN broker is entirely fair, as it eliminates a major conflict of interest: because it matches trades between various traders, it cannot become the sole market-maker. Thus, it cannot trade against its own clients. Another advantage of the ECN is that because of its lower spreads, such brokers can charge a fixed commission on every transaction. However, you should not see ECN brokers as a panacea. Under certain conditions, their liquidity can dry up completely, creating much greater slippages than Dealing Desk brokers’ clients might be suffering. Another sad reality is that many brokers describe themselves as the ECN type but have an element of a dealing desk within their operation, so they are not “true” ECNs.

Fees & Commissions

This brings us to the third most important brokerage selection factor: costs

Brokerage fees – Price isn’t everything

Brokerage fees are fees that the broker charges for the services it offers, which are services focused on facilitating transactions between buyers and sellers. The amount of these fees depends on the broker type and the type of service to which the trader signs up. For the purposes of retail traders, the situation is best summarized by saying the Dealing Desk Brokers charge spreads only, while ECN Brokers charge spreads as well as commissions.

Commissions & Spreads (Fixed or Non-Fixed)

The key difference between fees and commissions that all traders need to understand is that fees represent a flat charge, while commissions vary depending on the delivered financial product and the size of the transaction.

Premium services offered by the broker?

Full-service brokers offer all sorts of additional perks and premium features, some of which are extremely useful. Such services do cost extra, though. In this respect, you should be looking for a broker who includes as many premium services as possible, as cheaply as possible. In the premium service category, we have features like advice and research covering a wide range of traded assets, retirement advice, tax planning, etc. You need to weigh whether you need such services or not carefully. If you’re only looking to execute trades, there’s no point in getting embroiled in any premium-service intricacies. Discount is probably the way to go then.

Does the broker credit or debit daily rollover?

Another factor to consider is daily rollover. The daily rollover is interest credited or debited to the entity holding a Forex position overnight, depending on the relative interest rates of the currencies involved in the trade. Positions kept open past 5 PM EST are considered positions held overnight. In such cases, the broker will consider which national currency the trader bought relative to the other national currency of the pair. If the interest-rate difference favours the bought currency, the trader will have rollover interest credited: in theory, at least. If it’s the other way around, the interest will be debited. The problem is that most brokers make sure their clients pay for holding most positions overnight, and there is nothing to stop them from doing this beyond the true market cost.

Most brokers rollover open positions automatically. It is important to know that the rollover interest (debited or credited) is calculated on the full amount involved in the trade and not on the margin alone. Another important thing regarding the rollover interest is that it represents a separate revenue stream from the capital gains, and as such, it will be taxed separately, too, as interest income.

Trading Terms

It is time to illuminate the expressions and terms you may have encountered within this guide that haven’t been fully explained until now.

Margin

Through a margin account, the investor essentially borrows from the broker with the intention of controlling larger positions than he’d be able to control based solely on his own invested capital. There are special margin accounts that traders can use for this purpose. The margin percentage is set to 1-2% in the case of accounts which trade in 100,000 currency units. This means that to control a $100,000 position, a trader needs to deposit $1,000. Margin accounts come with their own risks, and special operating procedures are meant to reduce risk for the trader and the broker.

The difference between margin and leverage is simple. Let’s say a broker requires a deposit of $1,000 to make trades worth up to $100,000. The leverage is the factor by which the deposit is multiplied to reach the maximum trade value: in this case, 100, so the leverage is 100 to 1. The margin is simply the amount of deposit required as a percentage of the maximum trade value. Here, it is 1%. It is just the flip side of the earlier calculation.

Leverage = Maximum Trade Value / Deposit

Colloquially, “margin” is often used to refer to the cash deposited with a broker.

Initial Deposit

The initial deposit is the first deposit a trader makes with a broker. It may be eligible for special rewards, such as bonuses.

Bonuses & Promotions

Bonuses and promotions are marketing tools used by the broker to “sweeten” its offer and thus attract more business. You might want to consider whether a really top-quality broker would feel the need to offer such incentives.

Customer Service

Customer service is very important for new traders and experienced investors alike. Whenever one runs into any sort of trouble with his or her broker, it is the duty of the customer service agent to iron everything out. As such, the customer service staff’s expertise, skills, and availability should be factors within the broker selection balance.

Availability

Funds deposited into trader accounts through third-party checks typically take some time to clear. Once they do, they become “available”. Availability hinges on the bank from where the check originates and the availability schedule of the broker.

Trading Platforms

The trading platform is the gate between the retail trader and the markets. It is also the tool through which the trader performs his trading. A proper, simple, fast and user-friendly trading platform is critical to trading successfully.

Ease of Deposit & Withdrawal

Being able to make deposits and withdraw money from your broker quickly and easily is highly important. This all depends on the type of withdrawal and deposit options your broker supports. The selection of these payment solutions needs to be as large and as diverse as possible. It is also a good idea to check the withdrawal time, as many traders complain that it can take up to a week to withdraw when they want their funds available quickly.

Minimum Balances

The term “minimum balance” refers to the amount of money the trader needs to keep in his/her account to keep the account open and to receive the services he/she has signed up for. Obviously, the smaller this amount is, the better it is for the trader.

Instruments

Forex trading defines an instrument as a tradable asset and any asset underlying a derivative. Commodities, stocks, indices and currency pairs are all trading instruments because value is held and/or transferred through them.

Now that you have learned what you should consider when

choosing a Forex broker, you can browse through our Forex Broker Reviews section and choose a perfect match.