How to Compare Forex Brokers?
There are many different brokers, and their trading conditions are always changing. To compare brokers, you need to know what makes brokers technically different, and then find one that suits you best. We only feature reputable brokers, so we have already started a shortlist for you. We have strict editorial guidelines for reviewing brokers that can be reviewed on our about us page.
- Market Maker vs ECN/STP There are two distinct ways that a broker can manage your trade after you have requested it to be placed on the market. Market makers may interfere with it indirectly while an ECN/STP broker will allow the trade to go market without that conflict of interest.
- Regulation is your only safety net with a broker. Ensure that your broker is regulated with one of the major three regulators (FCA, ASIC and CySEC) and you should be fine. Regulated by two is always better than regulated by one.
- Spreads on the most commonly traded currency pairs. Brokers with wide spreads are hard to make a profit with, as the broker will take the first part of your profit as their fee for handling the trade.
- Account types are key. A broker does not need to offer many, but they need to be clear, and you need to understand how they are different from each other. Before you fund an account ensure your expectations are aligned with what your broker has told you directly.
- The software platform support by the broker is essential. Many brokers will use MT4 or MT5 (MetaTrader) which is a traditional industry standard, but other brokers will offer platforms that include additional features like social trading that you may want.
- Customer support is important. Feel confident you can get the attention of the broker when you need it. Opening hours should be clearly posted, and if are assigned a dedicated account manager, that is even better.
- Withdrawal options are central to trust and is one of the highest priorities for professional traders. The rules, fees, and the timeline for getting your money back should be obvious. Companies that deliberately go slow here should not be engaged – read the small-print.
Things not to worry about when choosing a broker.
- You don’t need 3000:1 leverage on your account if you have some sense of risk management. You are probably only going to use up to 100:1 leverage for most of your trades, so don’t go straight for the broker with the highest leverage.
- Minimum deposit. If you are going to use leverage on your trades, you need to make a deposit that will allow you to hold the position open without your broker closing it for you. Brokers will close your trades in a margin call if you don’t have the funds in your account to protect against a loss. So, brokers with low minimum deposits are not better than those with $200 minimums.
How Much Should I Deposit?
The first decision a trader is going to have to make is how much money they want to invest in an account. Some brokers take deposits as small as $5 and some take a minimum of $1000. Forex trading does carry risk, so consider that all the money that you deposit can be lost.
Advісе given tо new trаdеrѕ is tо ѕtаrt оut small, whісh mеаnѕ looking fоr a Forex brоkеr who wіll lеt уоu ореn an account with about $250-$500. Micro accounts with a lower minimum deposit are available, but if you are going to use leverage in your trades, you will need to have deposited funds to be able to take the potential loss.
ASIC has good advice for those considering the amount to deposit into an account. It needs to be per your trading plan.
If you want to develop your plan, start by writing down your goals or setting up a simple spreadsheet. Think about what you want, when you want it and why. Work out how much you need to reach your goals and how much you need to set aside each pay period.
Source: ASIC’s Moneysmart Guide to Investing Between the Flags (pdf)- Page 26
If you are considering borrowing money to invest in this market, they continue with their warning as it comes with additional risk.
Borrowing to invest is a high-risk investment strategy for experienced investors only. If you are looking to use this strategy, ask yourself these questions:
- Do you have secure income from other sources such as your salary to top up the loan if you get a margin call?
- Do you have a high marginal tax rate to make the most of any tax benefits?
- Are you in it for the long haul? Gearing is generally a medium- to long-term strategy (at least 5 to 10 years).
- Is your strategy flexible enough to allow for changes in your circumstances, such as having children or a drop in income?
- Will you lose sleep at night if your investment performs poorly?
Source: ASIC Moneysmart Guide – Risks of borrowing to invest
How Do I Know If A Broker Is Well Regulated?
The next thing to consider is the regulation of the Forex broker. Regulation is the oversight of the broker, and while there are several active regulators around the world, ASIC is the Australian regulator. It could be that ASIC regulation is crucial to you, and thus our list of ASIC regulated brokers will be useful for you.
The vast majority of Forex brokers are regulated. But not all brokers are regulated by all authorities, and a broker can decide if they want to apply for regulation at any time they wish. It is often the case that the larger the customer base of a broker, the better chance that the broker has regulation is more than one jurisdiction.
A couple of the larger regulators of Forex brokers are:
ASIC (Australia)
ASIC is a stringent and traditional regulator. They are not usually the ones to set new policy, but they have a robust auditing procedure and have a good track record of protecting clients. ASICWebsite
CySEC (EU)
CySEC is a leading regulator as it relates to policy and was the first regulator to start banning bonuses and aggressive marketing to new clients – a change that had a strong positive impact on the industry. CySEC is the fastest to adapt to the changing market and works alongside other major regulators to maintain a safe trading environment. CySEC Website
FCA (UK)
Another traditional and some would argue, the best regulator of the group. Stringent policies surround FCA regulated brokers, and this is seen as the best regulation you can get. FCAWebsite
Can I Only Trade Forex?
Forex brokers are technically CFD Brokers, and Forex pairs are one of many different assets that can be traded. It is common for CFD brokers to offer CFDs in commodities, indices, stocks, EFTs and cryptocurrencies.
While cryptocurrencies are the newest introduction at most CFD brokers, there is an increasingly larger focus on expanding the selection of coins that are available to trade.
Is Customer Support Important?
Most customer service offices are open 24/5 and closed on weekends, and some are open 24/7. Some brokers will offer a designated account manager for VIP account types. The most common issues that customer service answers are questions about deposits, withdrawals, and information related to their trading conditions.
What Should I Look For With Deposit & Withdrawal Methods?
Forex traders value easy access to money in their trading wallets, and brokers have made changes to make withdrawals faster and free. It is now relatively standard for brokers to process a withdrawal request within one business day, but time until receipt of funds can vary as this is dependent on the transfer method.
Most brokers accept PayPal and other e-wallets like Neteller and Skrill for deposits, however, deposits using this method will require withdrawals to be made to the same account. This is to prevent any money laundering or tax evasion that could take place.
How do Forex Brokers Make Money?
Forex brokers make money by taking a commission either as a part of the spread, or commission per lot traded. This will also vary between accounts as well.
Thе ѕрrеаd іѕ thе dіffеrеnсе in price between the buy price and sell price in the quotes оf thе сurrеnсу pairs. The spread is not everything when it comes to choosing a broker, but you do want to make sure that their spreads are competitive. If your broker has wide spreads on the pairs you often trade, this will mean smaller profits on your trades.
What is an ECN & ECN/STP Forex Broker?
There are three types of brokers, of which ECN is one, each with different trading conditions offered. For more details on top-rated ECN brokers read this.
ECN Brokers: These brokers get quotes directly from the Interbank market, meaning they are as up-to-date as you can get them. The downside of these broker types is that if you put in an order and there is no liquidity available at the original price, the trader is going to get requoted for a different price.
STP Brokers: These brokers operate similarly to ECN brokers, but if there is ever not enough liquidity in the market, then the broker will become the counter-party to your trade.
Market Makers or Dealing Desks: There brokers set their rates for the currency pairs, and are always the counter-party to a trade. This means that as you buy a currency, they sell the currency to you. In essence, these brokers behave as their own market – hence the name.
Do Forex Brokers Trade Against You?
Market Makers (Dealing desks) do this and some STP brokers will, but not ECN/STP or ECN brokers. Market Makers do this to give you the liquidity when you need it – and also to make a profit when you make a loss. If you don’t want to have this conflict of interest with your broker, ensure that you use a non-dealing desk broker.
