Forex: 7 Factors to Consider before Choosing a Broker
Once you understand the basics of Forex trading and how you can make money of it, the next step is to start investing. However in order to invest, you have to go through broker. You cannot start investing directly in the foreign currency market.
So how to choose online broker for Forex trading?
Globally there are many online brokers offering their services to investors spread across the world. Therefore it has become very difficult for beginners how to choose the right online broker.
This article provides detailed information on the factors to consider when choosing the Forex broker to invest money.
1) Broker’s Reliability
The most important factor when choosing an online broker is the reliability. The online broker will be in charge of receiving money and executing the trade. Therefore it is essential to choose a transparent and professional broker.
Three Ways to Assess Reliability
i) Regulated Broker: One way to assess the reliability of a broker is to check whether the broker is regulated broker and which is that governing body. But remember, the fact that a broker is regulated does not automatically make them a trustworthy entity. But at least it provides an additional guarantee against brokers who are not subject to any supervision or regulation. A regulated broker has to follow series of rules that ensure the protection of investors money, the solvency and security of funds and the proper marketing, information, transparency and development.
Most of the country has its own regulatory body and there are regulatory bodies that are more prominent than others. In United States, Commodities and Futures Trading Commission (CFTC) and Financial Industry Regulatory Authority (FINRA) are highly valued. Whereas Financial Conduct Authority (FCA) is financial services regulator in United Kingdom.
Forex brokers also have to follow regulations and compliance to keep investors’ funds in different bank accounts separate from those of the company. This way, the clients’ capital will not get affected by the financial situation of the broker nor be seized by its creditors in the event of a possible bankruptcy. In addition, in some countries there are compensation funds for investors who protect a certain amount of their capital (e.g. fixed deposit in bank).
ii) Customer Testimonials: Another way to analyze the reliability of an online broker is to use the review clients testimonial that can be easily found in forums, comments on blogs and most importantly social media pages. When valuing these opinions you must remember that negative opinions about a broker are very common in the face of a bad experience (often caused by their ignorance) than positive opinions. But still such comments can help in identifying common patterns of behavior and practices followed by the broker.
iii) Broker’s Website: You should also thoroughly check the broker’s website before registering a trading account. A transparent broker that publishes detailed information about its operations, resolve customers doubts, clearly mentions contact and complaint procedures for any incident should always be trusted. Don’t hesitate to contact the customer service department for any detail that you don’t see clearly. You will also be able to check their degree of response, speed and quality. Also make sure to keep all your communication over E-mail. This way, you will have written proof which will be helpful in case of any future dispute.
2) Minimum Deposit
Online brokers can offer one or more trading accounts. When they give the possibility of several accounts it is because each one of them generally improves the trading scenario of the previous ones but it is usually in exchange for a higher minimum initial deposit requirement. If the broker asks you 10,000 USD to start investing and you do not have that amount you can move on to the next. But currently there is no requirement of minimum deposit amount. And in most cases you can start investing in Forex with deposits of $100 or even less. That is, the more budget you have to invest is likely to get better conditions.
3) Minimum size order
Another factor is the minimum size allowed for transactions. For example, a lot is a standard quantity for trading a financial product. In the case of Forex market a lot represents 100,000 units of the currency you want to buy or sell. In order to allow retail investors with little capital to participate, many brokers choose to offer minilots (equivalent to 10,000 units or 0.1 of a standard lot) or even microlots (equivalent to 1,000 units or 0.01 of a standard lot). Therefore, the minimum allowable trading size is another factor you should take into account when choosing an Forex broker.
4) Leverage Available
Something similar happens with leverage, the instrument that will allow you to invest with a larger amount of money but only providing a small part as collateral. It is a very useful instrument for investors with little capital but it also entails a greater risk. Because if the transaction does not go as expected, it will generate loss for the total deal.
3) Available investment instruments, trading platforms and allowed strategies
Investment Instruments: Check whether broker offers the possibility of investing in various financial instruments or instruments we are looking for (Forex currencies, raw materials, precious metals, CFDs, stocks, indices, energy, futures, ETFs, …).
Trading Platform: Another very important factor is the trading platform with which we are going to invest. For a beginner, most important is the simplicity of the platform to help him understand how to invest and take his first steps. For a more experienced trader, it may be necessary to assess other aspects such as the functionalities available, speed, instruments to help him analyze the market make his trading decisions. The more beginner-oriented brokers often offer their own trading platforms while those oriented to more experienced profiles often offer powerful platforms such as MetaTrader 4, MetaTrader 5, cTrader, etc.
Strategy Used: In addition to the platform, you will need a broker that allows the strategy you are going to use. For example, if you are going to invest using an automatic trading system based on Expert Advisors software or use strategies such as scalping (a common way of trading for day traders that consists of trading in a very short term, opening and closing trades after a few minutes or even seconds). Forex broker should accept these strategies.
4) Type of execution offered by the online broker
You must also consider the type of execution broker offers. Online Forex brokers can be categorized into 2 main types according to the execution of the orders made:
- Market Maker: They are the type of brokers in which the operations are not carried out directly in the market but on the trading desk of the broker itself. Market maker brokers create an internal market for their clients and allow them to buy or sell at any time. In case of not finding this inverse operation, it is the broker himself who acts as counter party of the operation. For this reason, in most cases there may be a conflict of interest between the broker and its clients. Due to this operation, it is especially necessary in the case of Market Makers to work with reliable, regulated and professional brokers. The main advantage of market makers is usually their maximum availability to execute trades, without price quotes and with more stable quotes. For these reasons they may be more recommended for beginners or for trading strategies that are favored by these advantages.
- Brokers of the type STP or ECN (Electronic Communication Network): They are the ones who act solely as intermediaries of their clients’ operations in the market. This type of online broker interconnects with the main liquidity providers worldwide (such as banks, financial institutions, other brokers,…) and get the best buy and sell prices available at all times. They do not have a non-dealing desk and there are no conflicts of interest with their clients as they never act as counter parties. For the same reason they usually allow any strategy (scalping, hedging, automatic trading,…). ECN brokers generally offer lower spreads than market makers but these prices tend to undergo greater fluctuations and sometimes have re-quotes before executing the orders requested. These brokers are recommended for experienced traders.
5) Spreads and Commissions
Spreads: Vary depending on the type of broker (market maker or ECN). They also vary depending on the currencies, whether the currency pair is traded high or less in volume.
According to the instrument in which you are going to invest, you must check what spread each broker offers and compare it with others.
However, if you are a beginner, it is more advisable that you take into consideration other factors mentioned in this article, than to look for the broker that offers you the lowest spread. Once you are experienced, going for spread and commission can be considered.
Commission: Keep in mind that there are brokers who may charge additional commission. You will also find brokers that work with fixed and variable spreads depending on the trading account.
6) Customer Service
Customer service offered by the broker also plays a key role when selecting a Forex broker. When you are a beginner, it is expected that you will have queries and at that time an expert advice is what you will require to solve them. So look for a broker offering good customer service, fast response and shows professionalism in response. Nowadays most of them give support over phone, E-mail, Skype, online chat, call back,… You can try this service before registering with a broker and see how they respond. Try for a broker who can offer solutions in the language you understand.
Many online brokers choose to assign a relationship manager to each client so that you have direct attention with a person in charge of advising you and helping you in your first steps. Practically all brokers in the market also offer free training to their clients: manuals in e-book format, complete courses, books, face-to-face seminars, webinars and much more. Take advantage of this training whenever you think it is useful.
7) Test Demo Account
Another popular way to test an online broker’s platform and trading conditions is to first open a demo account. Most brokers offer free demo accounts with fictitious money for you to run test trades without putting your real money at risk. Sometimes these demo accounts can be unlimited in time (so you can use them at first to familiarize yourself with the trading platform and then to test new strategies), other times they are enabled 30 days.
Keep in mind that demo accounts, despite trying to simulate a real account, keep certain technical differences with real accounts (different speed of execution, no re-quotes, …). It’s good that you start with the demo to try but that you move as soon as possible to a real account because in the demo you act without pressure because there is no real money at stake and that’s not the right way to learn.