Trading forex is risky in general. Picking the wrong forex broker makes it even riskier. Education is key. You need to know what to look for in a broker so you can look past the marketing bling and choose one that’s right for your trading goals.
The way retail trading has advanced with state-of-the-art trading platforms and stricter regulations, it’s not risky per se to use a forex broker. In fact, you can only trade forex online through a retail broker.
The risky part is choosing a broker who’s not the best fit for your trading strategy. You want to trade forex through a broker that is regulated and offers security, reasonable transaction costs, a topnotch trading platform and everything else that one looks for in a quality broker.
Top 12 tips for choosing a quality forex broker
1. Regulated broker
It’s a priority to choose a forex broker that is regulated by an esteemed authority. This is your guarantee that the broker is regulatory-compliant, trustworthy and safe to use.
If a retail forex broker is not regulated by a recognized authority, don’t even think of putting your hard-earned funds into an account with them. You have no recourse if something goes wrong.
The world’s top financial regulatory bodies are:
|Australia||ASIC||Australian Securities and Investment Commission|
|Canada||IIROC||Investment Information Regulatory Organization of Canada|
|Cyprus||CySEC||Cyprus Securities and Exchange Commission|
|France||AMF||Autorité des Marchés Financiers|
|Germany||BaFIN||Bundesanstalt für Finanzdienstleistungsaufsicht|
|South Africa||FSCA||Financial Sector Conduct Authority|
|Switzerland||SFBC||Swiss Federal Banking Commission|
|United Arab Emirates||DFSA||Dubai Financial Services Authority|
Financial Conduct Authority
Prudential Regulation Authority
National Futures Association
Commodity Futures Trading Commission
2. Trustworthy broker
It’s important you check forex brokers’ credentials before signing up to use their platform. Even if they are members of a regulatory authority, you need to find out how the market rates them. There are a number of good broker review websites you can research when choosing a broker that cover their history, pricing and security issues.
Other sites invite traders to comment on their experience with forex brokers. Don’t take these sites too seriously because many of the comments on these peer review sites are fake. If a complaint is genuine, you also won’t know if the problem has been resolved.
The number of bogus brokers appearing online is increasing by the day as forex trading becomes more and more popular. Get feedback from people you know who are having success trading forex on who’s the best broker to use before parting with any money.
Another good tip is to sign up for a demo account or micro account with a new forex broker and experience trading using fake or smaller amounts of money. A few weeks of trading on a demo or micro account should give you a good indication of what the broker has to offer, what spreads they offer, commission fees and the quality of their trading platform.
3. Competitive transaction costs
There are transaction costs for buying and selling currency pairs online through a retail broker. The broker fees come in the form of spreads, commission and rollover fees.
Quality, well-established brokers generally charge higher fees than startups but this is offset against the security they offer retail traders. Be wary of any broker that promises unusually low transaction costs. It could be a scam.
The main way forex brokers make money is by taking the spread between the bid/ask prices or charging a commission per round turn. Some brokers charge both, although it’s less common because forex trading today demands lower pricing.
A forex broker that offers commission-free trades is most likely charging more in the spread to make up the difference. Brokers don’t work for free so expect a catch if something sounds too good to be true.
Fixed spreads vs variable spreads
The spread is the difference between the price you can buy and sell an asset. You pay the higher price when you buy and the lower price when you sell. Your broker pockets the difference. Basically, the spread is the cut a broker takes for giving you access to the forex market.
The spread offered is either fixed or variable. The type of spread you choose depends on your trading strategy and your appetite for risk.
Fixed spreads stay constant even in volatile trading conditions. If your trading strategy depends on consistency, fixed spreads is the better option for you.
Variable spreads pass along the best bid and offer prices available at a certain time. The amount of variability depends on the asset you are trading and the broker you are using. Variable spreads are attractive because they’re usually cheaper than fixed spreads. However, variable spreads can rise quickly in volatile trading conditions and increase the risk of losing money.
Find out beforehand what spreads the different broker’s offer. Brokers either offer fixed or variable spreads and you can’t switch between the two options. Fixed spreads are better for beginner traders because they offer greater protection in volatile times and peace of mind.
4. Best trading platform
Often forex brokers choose the trading platform they want to use and then find a quality broker that offers it. Beginner traders should stick to the tried-and-trusted trading platforms and leave proprietary platforms to the experts.
The most popular electronic trading platform is MetaTrader 4 and the majority of forex brokers offer it as their primary platform. MetaTrader 4 is sophisticated software that offers everything you need to trade forex fast and efficiently, from charts and indicators to news feeds and market analysis.
MetaTrader 4 is easy to use and hassle-free. Narrow down your search for a quality broker by choosing from those that are MetaTrader 4 brokers.
5. Leverage and margin
Leverage and margin is the most important concept to understand about forex trading as it’s what drives this instrument.
Margin is the amount of money in a trader’s account that is required as a deposit in order to open and maintain a leveraged trading position.
Leverage allows traders to control larger positions with a smaller amount of actual trading funds.
If a broker offers 50:1 leverage (or 2% margin required):
- $1 in a trading account (margin) can control a position worth $50
- $1 000 can control a position worth $50 000
- $10 000 can control a position worth $500 000
Leverage is a double-edged sword and you need to be careful, particularly those brokers who lure you with 400:1 leverage or more. Leverage offers traders the opportunity to make profits but it also magnifies losses.
The amount of margin depends on the margin rate requirements of a broker. This differs between each trading instrument, depending on market volatility and liquidity in the underlying market.
6. Re-quotes and slippage
It’s very important to note the presence or absence of requotes and slippages when you’re researching the best forex broker to use.
A requote is when you are unable to make a transaction at the current market price. You get an ‘error’ or ‘no price’ message from your broker’s server which means your order has not been accepted or executed.
Slippage is when your broker fails to execute your order at your desired price. The transaction then proceeds according to the nearest following quotation which could either be above or below the price you wanted for a currency pair.
You can only check the prevalence of requotes and slippage for a broker when you start trading in real-time on a live account. You can’t check this issue using a demo account because different servers manage different accounts.
One way of checking for requotes and slippage is to open micro accounts with more than one broker and compare how they each fare with order executions under live trading conditions.
7. Hassle-free and fee-free deposits and withdrawals
This is a big one and not something new traders often think about until they’re well into trading with a broker. How does the forex broker allow you to deposit funds and withdraw your earnings and what does it cost you?
A broker should only hold your money to make trading forex online easy and convenient. There is no reason for a broker to hold onto any profits you’ve earned. Their withdrawal process should be fast and efficient.
Many forex brokers say they don’t charge any fees on deposits or withdrawals but these costs are often hidden in the fine print. When comparing brokers, you need to check exactly how you can deposit and withdraw funds and what are all the possible fees and costs incurred with each method.
Depositing forex funds
Depositing funds for trading is usually easy. You simply log in to your respective forex account that you set up through a retail broker, submit your credit card information and your funds will be posted in about one working day.
You can also transfer funds into your trading account from an existing account by EFT or send the funds through a wire transfer or online cheque.
Withdrawing forex funds
Bear in mind, deposited funds must be returned to the originating source. If you have deposited funds using multiple methods, you must exhaust the total deposit amounts based in the following order:
- bank transfer
- debit card
Excess funds may be withdrawn via bank transfer or wire. In the event you add a new bank account to withdraw excess funds, your broker will require evidence of the account by uploading a bank statement.
8. Speed of execution
The speed at which your orders are filled by the broker is very important, especially if you’re a scalper or day trader.
It’s also mandatory that your broker fills your orders at the best possible price. If trading conditions are normal – normal liquidity and no market surprises – your broker should fill you at or very close to the market price you see when you click the ‘buy’ or ‘sell’ button.
A few pips difference in price can make a world of difference to how much profit or loss you make. If you click ‘buy EUR/USD’ for 1.2000, your broker should fill your order at that price or within micro-pips of it.
9. Good customer service
Retail forex trading is conducted exclusively online so it’s rare that you develop a one-on-one relationship with your broker. However, customer service and support is still important as you need someone you can contact if and when a problem occurs.
Your broker should help you to handle any problems that arise with your account or technical issues with the trading platform. Brokers tend to be enthusiastic about getting you on board and signing you up on their platform but it’s excellent after-sales support that separates quality brokers from dodgy ones.
10. Demo account
It’s rare that a quality broker would not offer a demo account but it’s worth mentioning that this facility is very important, particularly if you’re a new forex trader.
Brokers who offer MetaTrader 4 and MetaTrader 5 automatically offer demo accounts because they’re a built-in feature. Demo accounts allow beginner traders the option of trading with ‘fake’ money to hone their trading strategy before committing their own money.
It’s really important that you learn as much about forex trading while using the demo account and take advantage of the educational material on a broker’s website so you can learn more about different trading strategies, how to minimize risk and make money.
Be wary of a Broker who wants you to deposit money straight away without first learning the ropes on a demo account. Chances are this broker doesn’t have your best interests at heart.
Quality forex brokers offer a wealth of educational material on their websites as well as access to podcasts, webinars and seminars. This shows a true commitment from the broker that they are invested in your forex trading journey and equipping you with the knowledge and skills to trade wisely.
Forex trading is risky and it’s certainly not a ‘get-rich-quick’ opportunity. More people get burnt badly trading forex than make it rich. The more you know about the complexities of forex trading and develop a disciplined trading strategy, the better.
Knowledge is your number one weapon for succeeding at forex trading. Partner with an online retail broker that invests in your education.
The best investment you can make in yourself is completing a reliable and up-to-date forex trading course that teaches you the basic concepts and terminology as well as provides you access to forex experts and coaches who’ll help you develop a disciplined and balanced trading strategy.
12. Bonuses, rebates, recharge, and contests
Many forex brokers offer some form of incentive to persuade you to deposit more funds in your account. It’s not a bad idea to make use of a bonus or special offer but don’t let a broker force you to increase your leverage and trading volume simply to qualify for a bonus.
It could interfere with your trading strategy and put you at risk of losing money by being over-leveraged. Forex trading is risky as it is and you shouldn’t take additional and unnecessary risks by depositing more money than you should.
Trading securities is no longer the domain of institutional traders as a proliferation of sophisticated online brokerages have made the markets accessible to everyday retail traders. The trading world has changed and the advantages that institutional traders enjoyed have fallen away. You can now buy and sell forex in real-time from your phone, sitting in the lounge in your boxer shorts.
Using a quality retail broker is key to the success of forex trading. However, even the most well-known and trusted brokers make mistakes. That’s why it’s so important to choose a forex broker that is regulated by an esteemed authority so you have recourse if you cannot resolve the problem through the broker.
Forex trading is associated with a high level of risk. Forex is a highly leveraged financial instrument and these high-risk stakes can maximize losses and result in you losing a lot of money. Consider your appetite for risk before trading forex using a real live account.