Ever since I started this blog I have received numerous questions regarding forex brokers from my readers.
As a result, I thought it would be good to put up a post detailing some information about forex brokers to help you choose one that will work best for you.
A forex broker acts as an intermediary between you and the interbank system. The interbank is a term used to refer to bank networks that trade with each other.
A Forex broker will basically offer you a price from the banks where they have lines of credit and access to forex liquidity.
Many forex brokers use various banks for pricing, and end up offering you the best price available.
Opening of a Forex Trading Account
Opening a forex trading account with a forex broker, is slightly similar to opening a bank account.
It needs some paperwork and going through stages like identity verification. The entire process may take a few days depending on the forex broker involved, and your location.
If your intention however is to just do a trial, forex brokers offer demo accounts that only require you to give minimal information before you can open an account.
A demo account allows you to set up and acquire some trading abilities until you’re well prepared to officially start trading with actual money. This is where now you move to a live account.
I always encourage my readers to start trading with a demo account before going to a live account so that they are conversant with how to navigate a trading platform.
Here, you will learn how to place trades, know how to set your stop loss and take profit, know how to calculate your position sizing among other things.
A demo account will also give you a platform to test your trading strategy and see if it works.
Through demo trading, you are subjected to the same market environment as someone who is trading in a live account. The only difference is that you are trading with virtual money.
However, I would advise you not to trade on a demo account for a long time.
You can easily develop poor habits in your forex trading since you are not risking any money. These are habits that you will end up carrying forward to your live trading.
That is why I encourage you to deposit some amount with your forex broker (it does not have to be a lot) after trading with the demo account for some time.
The moment you lose even a dollar of your money, you will feel something and this will encourage you to adhere to forex trading best practices.
The Three Main Types of Forex Brokers
In regard to the main factors to consider on the type of forex broker to use, which is based on their forex quotations, there are three main choices that exist.
These are market-making, no-dealing desk, and ECN forex brokers.
- Market Maker
- No Dealing Desk
- Electronic Communications Network (ECN)
Each of these 3 types of forex brokers tend to manage transactions and execute orders in different ways.
No Dealing Desk Forex Brokers
The No Dealing Desk (NDD) forex broker has no dealing desk, as implied in the name.
The broker however offers the best composite quotes attained from the multiple forex quote providers who offer the NDD broker its liquidity in the forex market.
Each of these providers will basically post their best markets with the No Dealing Desk forex broker.
The broker then performs transactions, watches, and fills orders for their clients as expected.
The No Dealing Desk forex broker may charge a commission or widen the spread so as to make some profit on every executed trade.
There are times when they will even do both. It depends on the broker that you are using.
Market Makers Forex Brokers
Forex market makers basically offer their clients a two-sided market from a professional forex trader working as part of the broker’s own in-house dealing desk.
When the price is handled, the broker ends up taking the other side of any given transaction from their customer by selling on their offer side or buying on their bid side of the quoted price.
The market maker aims at capturing a part of the spread and doing sufficient volume on both sides of the market in order to avoid having to lay off an accumulated risk with another professional counterparty.
Also, if the trade executed is large enough, the market maker might decide to offset the trade immediately. This is done mainly if the broker suspects that the market might move against them.
A market maker forex broker may also decide to add it to their trading book, depending on their transaction size or market outlook.
Given how the market maker operates, this is why you will hear on different platforms that there are forex brokers who trade against their clients.
Electronic Communications Network (ECN) Brokers
An ECN forex broker lacks its own dealing desk too.
The broker instead offers an electronic trading platform where professional market-makers at banks, traders, and other participants in the forex market are able to enter offers and bids through their system.
An advantage offered by some ECN forex brokers is that the trader posting the price can be given some degree of anonymity.
This can suit forex traders who do not wish to disclose the fact that they are on the offer or bid of a given trade.
Does a “Perfect” Forex Broker Exist?
From my years of trading and interaction with other professional forex brokers, I can safely say that there is no such thing as a “perfect forex broker.”
There’s always something that does not settle well with a certain forex broker.
For instance, a broker could be offering you cheap services, but the same broker could be having a bad reputation among different forex traders.
Maybe it might not be regulated, or doesn’t have adequate fund protection policies. It might even go to the extent of being a scam.
You may also find a forex broker that is trusted, regulated, and very popular among the traders. The broker could be having a great platform and the trading instruments available are excellent.
Customer service is also very friendly and accommodating. All you require is there, but the prices are too high.
This means that the transaction costs might be high and the trading instruments cannot be regarded as being cheap too.
When choosing a forex broker, therefore, be sure to maintain a balance between excellent services and reasonable prices.
Considerations When Choosing a Forex Broker
Deposits and Withdrawals
Good forex brokers make it possible for you to deposit money and withdraw your earnings with ease. Here you will have access to a variety of options for depositing and withdrawing your funds.
There is no particular reason at all for forex brokers to make it a hassle for you to withdraw your profits because they only hold your funds so as to facilitate trading.
Your broker should ensure that you are able to speedily and smoothly get your earned profits.
For you to find out how your broker is in this regard, you should first deposit a small amount before you even think of depositing the whole amount you wish to trade with.
Just observe how the deposit process takes place. Even before you start trading, you can try to withdraw the same amount.
This will give you an idea of whether the broker can be trusted with your money. It would be hurtful for you to make money over some period, but find it problematic to withdraw your earnings.
Having a high level of security is an utmost characteristic of a good forex broker.
In any case, you wouldn’t want to give thousands of dollars to a broker who only claims to be legit, right?
The good thing is that checking a forex broker’s credibility is not so hard.
There are regulatory agencies worldwide that separate the trustworthy brokers from the fraudulent ones.
Even before you think of investing your money with any broker, be certain that the broker is a member of the regulatory bodies that I am going to outline at the end of the post.
Always ensure that you are using a regulated forex broker.
Regardless of the type of currency trader you are and whether you like it or not, transaction costs are not something you can escape. They are inevitable
Each time you take a position in a trade, you must pay either for a commission or the spread, and it is very natural to go for the cheapest rates.
In some cases, you may have to sacrifice low transactions in order to get a more reliable broker.
Ensure you know whether you require tight spreads for your type of trading, and then check the options that are available for you. For a trader who trades with a tight stop loss, it would make a lot of sense to indulge with a forex broker that charges a commission instead of spread.
Finding the right balance between low transaction costs and security can be critical when you are looking for a reliable forex broker.
They don’t seem like aspects that one would compromise given the consequence that is likely accrue if they are not in order.
Your forex broker is obligated to fill you at the best possible price for your orders.
In normal market conditions, where there are no surprise events or significant news releases and there is normal liquidity, your broker has no reason not to fill you at a price that is very close to the market price or at the market price the moment you enter a position. This is for both the buy and sell positions.
A good example is when you click “sell” on EURUSD when it is at 1.4723, your forex broker is supposed to fill you at that price.
In case there will be a deviation, let it be some micro-pips and nothing beyond that. However, you should also ensure that the internet connection on your side is very stable.
The speed at which your orders are filled is vital, more so if you are trading forex as a scalper.
Slow internet is something that can work to your disadvantage if you are a scalper or even a day trader to some extent.
Also Read: Best Day Trading Books
Most trading activities in online forex trading take place via the brokers’ trading platform.
Going with this, your broker’s trading platform ought to be stable and user-friendly.
As you search for a forex broker, make a habit of reviewing their platform to see what they are offering.
Does the platform offer technical and charting tools that are easy to use?
Does it offer free news feed?
Does it provide you with all the relevant information that you might need for your trading success?
This is just but a few. There are other things that you might need from a trading platform to attain forex trading success.
I have mentioned above that there is no forex broker who is perfect.
As a result, you must, therefore, go for a broker that you can easily reach in case you need to.
Good forex brokers ought to be competent when dealing with technical and account support issues.
Their performance should not be rated on their ability to execute orders only.
I have seen forex traders complain about how their brokers were helpful and kind when they were opening their accounts, but they have now become terrible with regards to after-sales services.
Top Forex Regulators
- Prudential Regulation Authority (PRA)
- Financial Conduct Authority (FCA)
- Commodity Futures Trading Commission
- National Futures Association (NFA)
- Australian Securities and Investment Commission (ASIC)
- Investment Information Regulatory Organization of Canada (IIROC)
- Bundesanstalt für Finanzdienstleistungsaufsicht (BaFIN)
- Autorité des Marchés Financiers (AMF)
- Swiss Federal Banking Commission (SFBC)