A guide to choosing your perfect forex broker
The forex market is the world’s biggest financial market with foreign exchange transactions averaging up to $5 trillion in value each day. For beginners, who are new to forex trading, such figures can be very intimidating simply because they are so big. However, worry not as you have come to the right place where we’ll help you understand exactly how the forex markets work, and how you can get started easily.
Firstly, you will not be trading the entire trillion-dollar market as all you have to do is focus on the money you want to trade with. Another thing is that the forex market has no central trading location, like the stock market, which is why you will need to choose a forex broker, who will give you access to this global market. So, now you know that you need to choose a broker in order to trade the forex markets, but the question is, how do you find a reliable and trustworthy broker?
These are the six main things you should look out for to determine whether the broker you’re thinking of is perfect for you.
1. Are they regulated?
The very first thing that you should check when choosing a forex broker is whether they are regulated. The reason for this is that a regulated broker has to abide by the rules set by their regulatory authority, which keeps them accountable. Most of the rules set by regulators are meant to protect traders and investors, which protects you in case your broker acts unethically, you can simply report them to the respective regulatory authority.
Every trustworthy broker must be regulated as this is not something you should compromise on. The question you should be asking yourself is, would you trust your stock investment portfolio or life savings with an unregistered investment firm? Probably not. This is the same reasoning you should apply when choosing a broker, you should never trust your hard-earned money with an unregulated forex broker.
Now that we agree on that, let’s look at the different regulatory authorities and their jurisdictions.
The UK’s Financial Conduct Authority (FCA)
The FCA is the regulatory authority that monitors forex brokers that serve UK clients. It is regarded as the toughest regulator and any firms that are licensed by the FCA are quite trustworthy. The FCA also guarantees customer losses on deposits up to £50,000 in case a broker goes bankrupt, which honestly helps me sleep much better at night.
Australian Securities and Investments Commission (ASIC)
ASIC is also one of the toughest regulators in the Asia-Pacific region and is highly regarded due to its stringent rules. Like the FCA, forex brokers have to meet strict reporting measures as well as maintain enough liquidity to ensure that client funds are protected at all times. If you reside in the Asia-Pacific region, then an ASIC-regulated broker might be your best option.
The Cyprus Securities and Exchange Commission (CySEC)
The CySEC is another popular regulator among brokers who serve middle-eastern and African traders as its reporting rules and licensing requirements are not as stringent as those of the FCA and the ASIC. However, the CySEC is an effective regulator and does not take kindly to brokers who violate its regulations. It is a good option for you if you reside in countries that do not have their own regulators and are not served by brokers regulated by the FCA and the ASIC.
The Commodity Futures Trading Commission (CFTC) and the National Futures Association (NFA)
The CFTC and the NFA are the only regulatory authorities charged with licensing Forex brokers who operate within the United States. The laws governing Forex trading in the USA are quite different from those in Europe and the rest of the world, which has resulted in very few brokers being licensed to operate in the country. Therefore, if you are a US resident, you should thoroughly vet your chosen broker to ensure that they are licensed by either the CFTC or the NFA before opening an account and depositing funds, lest they be a fraud.
Other less know regulators include the Investment Information Regulatory Organization of Canada (IIROC), the Monetary Authority of Singapore (MAS) and the Swiss Federal Banking Commission (SFBC). Always confirm if your country has a regulator who oversees Forex trading activities and find out if there are any licensed brokers operating in your country.
Word of advice: you can use a broker licensed by any of the above authorities in most countries, except for U.S. residents who have to trade only with brokers licensed to operate in the USA.
2. Account types and transaction costs
Forex brokers offer different types of accounts and not every account offered is suitable for you. You have to choose an account type based on your trading goals, the funds you have allocated to trading and your trading styles. This is a very wide topic, which we will go into detail in another article, but we’ll cover the basics right now.
The key things you need to consider before deciding on an account type include:
How much money do you have to trade with?
For newbies, it is prudent to start off with a small account where you can test your ideas before diving full in with a substantial account. What you can be sure of is that you will make trading mistakes at the beginning. Therefore, you have to decide how much money those mistakes will cost you, which is largely determined by the size of your trading account. There are some brokers that offer cent and mini accounts, which allow you to place trades risking way less than one standard lot, which is good for beginners.
Also, consider that the accounts that allow you to make trades with lots that are a fraction of the standard lot may have higher leverage, but you should not use high leverage until you become profitable. As a beginner, you should not trade on margin as you may not have the requisite experience to manage margin trades successfully, which could compound your losses. Margin accounts are best suited to traders who have some experience in the markets.
Does the broker offer demo accounts?
Opening a demo account is usually the best course of action for beginner traders in order to familiarize yourself with forex trading and your chosen broker’s trading platform. Regardless of your skill level, demo trading is quite crucial as it allows you to test your trading ideas and strategies in a live environment before risking any capital. This is quite important as it is advisable that you test whether your trading plan has an edge in the markets before graduating to live trades.
However, do not make the mistake of being careless in your demo trading account simply because you know that you have nothing to lose. This will create bad trading habits that will be carried over to your live trading account where you will most likely make losses. Treat your demo trading activities the same as you would treat your live trading activities and you won’t regret it.
What type of broker are they?
There are two main types of brokers, dealing desk brokers, also known as market makers and non-dealing desk brokers. A market maker is a broker that usually takes the opposite side of any trade that you enter, which simply means that your loss is the broker’s gain. This is not a bad thing, despite being paraded as such, given that a regulated broker is unlikely to manipulate your trades as this is unethical.
Most market makers also offer access to a dealing desk where a trader can call the broker and be guided on how to execute a trade. However, a dealing desk will not provide you with investment or trading advice, they will only guide you in executing your chosen trades.
For experienced traders, the non-dealing desk brokers who offer accounts such as ECN accounts, which are offered by brokers who are part of an Electronic Communications Network. Another account for pro traders is the Direct Market Access (DMA) account, which is quite similar to the ECN account as they both charge a commission based on the trade size, but typically offer lower spreads.
What types of accounts are offered?
Each broker may have unique names by which they categorize their trading accounts, but there are three main ones, which are micro or mini accounts, intermediate accounts and VIP/Premium accounts. The best type of account for most beginners is the micro/mini account as it allows you to trade with smaller amounts, which limits your risks. However, as you become more skilled at trading, you should consider the intermediate accounts depending on your account size. There is a wide range of accounts offered at this level to meet the needs of any trader with some experience in the markets. However, the VIP/Premium accounts are usually best suited to traders with deep pockets, who have an entirely different set of needs we will not cover in this particular article.
What deposit and withdrawal methods are offered?
Another crucial factor to consider when choosing a forex broker is the payment options they offer for making deposits and withdrawing profits. Most regulated brokers offer deposit options such as credit cards, checks, and bank/wire transfers among others. However, more and more brokers are now offering the option of depositing and withdrawing via online wallets such as PayPal, Neteller, Skrill, WebMoney among many others. These methods have gained popularity because online wallets serve clients across the entire globe, which makes it convenient for both the trader and the broker to transact. You should choose a broker who makes it easy for you to deposit and withdraw from your trading account from wherever you live.
3. What currency pairs are available to trade?
Most beginner traders would be best served to trade the major currency pairs, which include pairings of the US dollar, the Japanese yen, the euro, the British pound, and the Swiss franc, or some minors such as, the Canadian dollar, the New Zealand dollar and the Australian dollar. However, some beginner traders may feel like they can trade other currencies such as the Indian rupee, the South African rand and the Turkish Lira. Therefore make sure that you choose a broker who offers the main pairs that you would like to trade, which should be pairs that you are quite familiar with.
4. Languages in which customer service is offered
In the past, most major forex brokers served English speaking countries and it was quite hard to find a broker who offered customer service in your national language if it was not English. However, the growing popularity of forex trading globally has led to many brokers entering the market and offering customer service in other languages such as Chinese, Polish, and Vietnamese among many others. Therefore, nowadays it very easy to find a broker who offers customer service in your national language, in case that is what you prefer. This might not be a major concern for traders based in English-speaking countries, but it is a defining requirement for traders from other regions such as Asia and South America.
5. What trading platform do you prefer?
Before you get to choose the platform you prefer, the most important aspect of a trading platform is its friendliness to you the trader. This means that a high-quality trading platform will have clear buttons for selling and buying that are strategically positioned for easy access. There should also be clear sections where your trades are displayed and easy ways to close your trades from the same platform. The execution of trades on the platform should also be quite fast as a long delay in execution could cause the trade to move quickly against you.
Now, once you have determined all the above, there are three major types of trading platforms offered by most brokers. There are the popular MetaTrader 4 & 5 platforms that are used by many traders as they are quite simple and straightforward to understand and use. However, many brokers also offer custom trading platforms on their websites, which might be quite different from the common MT4 & 5 platforms. Other brokers offer advanced trading tools for the discerning professional trader such as the CTrader platform based on the C# programming language.
The easiest way to determine if the trading platform offered by your chosen broker is good for you is to open a demo account and practice trading on it to see whether it meets your needs.
6. Does the broker offer training and education?
This last point is extremely critical to beginner traders who may not be familiar with most of what goes on in the Forex markets. Many brokers now provide training and education resources that help their clients become better traders. Some of the training resources offered include eBooks on multiple trading topics, video lessons on how to use the broker’s platform and training guides on how to be a better trader. Other brokers provide signal services that alert you to when there is a trading opportunity in the markets. For beginner traders, the more the educational resources the better equipped you are likely to be when you start trading a live account. However, more experienced traders may not need all the training resources offered by a broker, except for resources geared at helping them make better use of the trading platform.
To finalise, all the topics covered above are important when choosing a broker for your forex trading activities. Remember that the best broker is the one who is regulated and meets the rest of your requirements depending on which ones apply to your specific situation. Always do your own research on a potential broker before deciding to open an account with them, be it a demo, or a live account. The issues highlighted in this article should guide you in making your decision, but you should make your decision based on your own unique circumstances.