Choosing Forex broker should be one of the main focuses of every novice trader. Once we have known the essence of Forex and details of the currencies that we use to trade on the world’s largest market, the task ahead is choosing Forex broker for trading.
As you know, the broker works as an intermediary, which is essential for sending the commands to the market. Your duty is to try to pick the best possible broker which is strongly regulated. But, you cannot wait for more than a week to take this decision. In order to help you choosing a broker, here are some guidelines you should consider when evaluating the Forex brokers and choosing the best for you.
Choosing Forex broker
Choosing forex broker is not an easy task to do. A broker is a company that carries out buy or sales orders of currencies from its customers. To participate in the Forex market, you should do so through a broker. For this, you should transfer a sum of money to an account at the broker of your choice. Usually the broker will provide a platform (computer program) to see the prices of currency pairs and place orders for buying and selling. The brokers earn commissions for their services and usually charge a spread in trades. There are a lot of brokers and there can be much of differences between the services they provide.
Types of Broker
Before starting the discussion on choosing forex broker, lets have a look on the types of broker:
The term ECN comes from electronic communication network, i.e. they are connected to a network of financial agents, from which they obtain liquidity. These agents from whom ECN broker obtain liquidity may be banks or other brokers connected to the ECN network. Spreads of ECN brokers depend on market liquidity, so they are usually not fixed. ECN Brokers can generate their revenue by charging a commission on transactions, rather than spread. Most brokers are not ECN. Examples of ECN brokers are HYCM, Dukascopy, MBT trading etc. ECN Brokers generally allow scalping.
Whenever you sell or buy a currency pair, there must be someone on the other side to take the counterpart of the trade, if it were not so, transactions would not be possible. In the case of Market Maker brokers, they set the bid and ask prices. The difference between the bid and ask spread is winning of the Market Maker. The vast majority of transactions of a market maker are matched by an opposite transaction of a client in the same market maker, but it can happen that in a given period of time, there can be trades that do not have counterparties. In this case, the market maker must be willing to take the other hand, that’s why they are called market makers.
The market makers brokers earn through the spread, not through commissions. Some market makers are able to achieve execution without slippage, but there are customers of some market makers brokers who complain that in some cases, their orders are executed with delay, delay would mean losses for customers and potential profits for the broker.
The market makers are able to offer “micro lots”. In the Forex market, one standard lot is 100,000 units. Large banks only operate with standard lots. To allow small investors operating amounts more consistent with their profile, lots ‘mini’ 10,000 units, and batches “micro”, 1,000 units were created. Market makers are able to offer micro lots.
Non Dealing Desk
Other brokers are brokers with NDD (No Dealing Desk). With NDD you do not need to trade on artificial market created by the Market Makers, but you can have access to liquidity directly. NDD Brokers provide external liquidity and liquidity prices to its customers. They can be either ECN or placed in an intermediate position between market makers and ECN. External liquidity providers are connected to the platform and broker performing competing bid and ask offers.
The NDD broker system automatically selects the best deals for their clients. Some brokers allow you to view the liquidity in the market at a particular time, ie, the best prices and various prices more (market deep), and next to each price available liquidity. This would give the advantage of greater transparency in the implementation, because if the best price is illiquid and we see that is decreasing, we can infer that soon the price will not be available, and would predict short – term trends when there is difference in liquidity between supply and demand.
In the case of NDD, spreads they are variable, not fixed, since they depend on market liquidity. NDD Brokers do not earn spread, but they charge a fee for each transaction.
Market Maker brokers VS. ECN Broker: Choosing forex broker
Although often goes unnoticed, it is important to know whether your trades are being sent to the market directly or is it staying at the “Dealing Desk” of the broker.
If your command of trades on your trading platform does not reach the market, remains on your broker’s dealing desk, then we are talking about a broker which is a Market Maker. This concept is a source of frequent debates, since being the broker as the counterpart of our own trades; it is possible that they may act against our interests and in favor of their own. If it covers your position, when you win, it loses, and vice versa.
On the other hand, we have the brokers with ECN execution without dealing desk, what they precisely do is- they send the orders of their clients directly to market, avoiding any possible conflict of interest.
The ECN option is much more transparent than the previous one, even if the broker is reputable and prestigious, this point is always critical when choosing a broker. In addition, the requirements in ECN accounts tend to be somewhat more restrictive in terms of initial capital and leverage available.
But, that’s not all. A broker can offer some ECN accounts and some Dealing desk accounts at the same time.
Some features to consider when choosing Forex broker:
Regulation of Brokers
Since the Forex market transactions are conducted between individuals, it is important to know which agency regulates the activity of the broker.
If the broker is in the United States it will be registered with the Futures Commission Merchant of United States (FCM).You can check the assets of your broker on their website.
If the broker is not in the United States, you can find out which agency regulates their activity. If the broker is regulated by Europe, Australia and Canada, that is also a good sign, because these countries have high capital requirements and appropriate regulatory standards.
In UK, you will find FCA regulated broker. In Australia, there is ASiC. And there are lots of other regulation authorities around the globe granting regulations to brokerage firms.
The fact that a broker who is not registered in these organizations, such as the FCM or FCA, that does not necessarily mean that they are less reliable. A number of brokers from Cyprus, Russia, New Zealand, Mauritius and Belize are also doing well!
Size and type of account
Generally Forex brokers offer different types of accounts according to the amount invested. Each of these accounts will have different characteristics. The accounts where more money is invested will offer greater benefits to investors. The differences can be in:
- Reduction of Spreads
- Quality of customer service
- Possibility of leverage
- Number of markets to trade
Evaluate the brokers taking into account the amount you want to invest.
The spread is a fundamental part of the cost of trading, which is why it is essential that you consider the spread. The spread is the difference between the price “ask” (which you pay when you buy) and the price “bid” (which you receive when you sell). The spread is measured in terms of pips, taking into account the size of the lot. Usually, for the same broker, each currency pair has different spreads, due to the difference in liquids of each pair. But spreads also differ among brokers. Additionally, the spread of a single broker can vary over time, also because of the different liquidity. During the hours of operation of the Forex market, spreads may be lower. But there are brokers that offer fixed spreads over time.
So, spreads may vary:
- Between different brokers
- Between different currency pairs
- In different time periods
Evaluate the spread of brokers before deciding which to operate.
The main players in the Forex market are large banks, which form a market called Interbank. The brokers, who are not in that group of large banks, are called retail brokers (Retail Brokers). Within the retail brokers, there are brokers that are ECN while others are Market Makers (market makers). There are also NDD brokers.
Leverage offered by the Broker
The ability to provide leverage varies between brokers. For example, a broker may offer you leverage of 100X while another offers a leverage of 300X. At the same time, according to the invested amount, the possibility of leverage can vary. Note that the leverage is a double – edged sword, because it increases the volatility of its performance and can lead to total loss of a position.
The platform is an element vital to your operations in the Forex market. You must trade with a platform you can trust and with whom you feel comfortable. While some brokers allow you to use platforms like MetaTrader, others only allow trading by proprietary platforms. Evaluate the platform using a demo account before transferring the money to your broker.
The term slippage defined the difference that can exist between the expected price of an order, and the price at which the order was executed effectively. For example, if you are positioned long in the pair EUR / USD, trading at 1.4005 and have a stop order at 1.4001, but the price quickly drops to 1.3998 and if stop order is executed at 1.4000 instead of 1.4001, there is a 0.0001 slippage or a pip (or USD 10 per batch).
Some traders think that the broker benefits from slippage, since actually sold to 1.4001 but we paid only 1.4000, keeping the pip difference. Others believe that the slippage is inherent in volatile periods where many large orders are executed simultaneously, so that not all orders can be executed at the price expected. In this case, if the EUR / USD down quickly and there were no buyers at the price we wanted to sell. Reviewers and say that the profit for the broker is soweth the same spread. The slippage can occur in orders at market price (market orders).
If you have experience with several brokers and some of them suffered frequent slippages, you decide on your own if you want to continue operating with that broker.
Also note that some brokers offer the ability to “freeze” the price for a short period of time, to ensure that your order is executed at the expected price. These brokers are market makers.
Tips and key points when choosing a broker
- Obviously, the spreads that are offered will be an important part of the decision. At the end of the day, what we want with our trades is the highest possible return, and that involves trying to minimize the associated costs.
- It is absolutely critical, and often overlooked by starters that the broker should have a very clear policy of withdrawing funds from the trading account. It should be as simple as possible and no fees for it. You must be cautious about those brokers who provide promotional gifts to open an account with them, because it often leads to withholding of balance. Some brokers may not allow a withdrawal before completing a certain volume of trades.
- For a greater guarantees and incur the least possible risk, the broker must be regulated by an entity of a reference country : American NFA, FSA of UK, the Swiss FINMA, the Spanish CNMV, Australian Asic… and if possible, go with special care with some brokers regulated by the rules of tax havens or countries with lower economic potential.
- The platforms offered by the broker to trade are more important than it may seem at first. We must be choosing Forex broker that provide this will facilitate the possible future changes of broker without having to relearn the trading platform.
- From these key points, you can assess other details that are important to your trades. Before opening a real account, open a demo account to get familiar with all trading aspects of a broker.
Recommended Broker for New Traders
We hope this article was helpful to determine what are the factors you should consider while choosing Forex broker. If you are relatively new in Forex trading business, considering these factors, we would like to recommend HYCM Broker for you. Read HYCM Broker Review to learn more on this broker.
|Chapter 3||Getting Started with Forex Trading|
|Lesson 1||Choosing Forex broker|
|Lesson 2||Best Trading Platform|
|Lesson 3||Introduction to MT4 Platform|
|Lesson 4||MT4 Platform functions|
|Lesson 5||Opening Demo Trading Account|
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