5 Factors To Consider When Choosing A Forex Broker
Factor 1) Regulation
Factor 2) Execution
Factor 3) Pricing
Factor 4) Education / Trading Tools
Factor 5) Customer Service
With over 5 trillion dollars’ worth of currencies traded globally every day, the foreign exchange market is the most traded in the world, making it a highly liquid and dynamic market. Since there is no central marketplace for the Forex market, traders must select a Forex broker to help them conduct their trading activity. There are a large and growing number of Forex brokers, and choosing the right one requires cautiously sifting through an overwhelming number of magazine and internet advertisements. In this article, we’ll look at five considerations when choosing a Forex broker in today’s competitive Forex marketplace.
Factor 1: Regulation
There are many regulators in the world all with different reputations for their level of regulatory enforcement. We cover three of the most notable ones in our eBook “Top 3 Regulations”. All regulations aren’t born equal – some have much stricter rules and regulations by which they abide. Others are more loose and offer less consumer protection. Knowing and understanding regulations is key when shopping for a credible brokerage.
When talking about reputation of regulators for European customers, the one that has the reputation for the highest level of consumer protection is the Financial Conduct Authority or FCA. The UK regulator requires the most detailed reporting, is the strictest on client fund segregation, as well as trade execution, all of which are in the best interest the client.
Another thing you will find with FCA firms is that investment is covered up to £50,000 pounds covered by the FSCS – the Financial Services Compensation Scheme. This is covered in the case of the broker going bankrupt etc. This brings you a peace of mind when depositing large sums of money to trading accounts in the unfortunate event that anything happens with the broker.
There are many other major regulators within the European forex market space such as CySEC in Cyprus and BaFin in Germany. There are advantages and disadvantages to each regulator and much depends on the history of previous brokers under the regulatory eye of brokers in these regions. For example there have been a number of Cypriot firms that have gone bankrupt or stopped trading – a high profile example being IronFX.
Something the FCA is taking a real interest in lately is best execution of trades, which is vital for a trader – which leads us onto the next factor.
Factor 2: Execution
STP, DD, NDD, Slippage, News, Speed, Restrictions etc. are all things to consider when shopping for brokers. You have no idea what most of these mean? Good thing you’re reading this, since we’re going to tell you.
A major thing that will help you with finding a good broker, is the fact that the broker is an STP broker, STP stands for Straight Through Processing. STP is when a broker automatically and instantaneously pass your order through to its liquidity provider. In practice this means that your broker is not touching your trade in any way, and is not taking risk on your trade, essentially this means that an STP broker has an interest in you making money, since when you make money you are more likely to trade more volume, volume being the sole revenue stream of most STP brokers, and even if an STP broker has figured out a way to capitalize on your losses, it will not be able to tamper with your trade in any way.
DD or Dealing Desk is essentially the opposite of STP, the Dealing Desk is a so called market maker, which means they make the price, and it doesn’t always strictly correspond with the actual market price. The problems with dealing desk brokers is the fact that they can see your take profits and stop losses, pair this with the fact that the dealing desk makes money when you lose it, this doesn’t make a good recipe. Something that may happen with DD brokers is that hey see the market is getting close to your stop loss but not quite there, they may provide liquidity at your stop loss which makes your stop activate and you get closed out, where the market didn’t necessarily actually go to your stop loss.
Slippage is when a broker doesn’t execute your order at exactly the price they advertise, but may “slip” the price by a little bit, especially in a fast moving market, say, the price is 1.10000, you make an order, this is the price the broker is offering, which they already make spread and commission on, then they execute you at 1.10012 instead, making an extra 1.2 pips in spread. This may happen in extremely fast moving markets without manipulation, since there may not be liquidity left at the price you see, but some brokers may slip you by purpose, earning what seems like little in one trade but cumulates in the long run.
Liquidity is scarce around news, some banks don’t offer liquidity around newstime since they don’t want to get on the wrong side of a trend. If liquidity is offered during news in the first place, it is with a very high spread. There is difference in brokers here, since bigger brokerages likely have more banks to rely on their liquidity, and are thus more likely to be able to provide a price even during news. The spreads will still be wider as a rule of thumb, but atleast you are more likely to have liquidity.
These days in investing, speed is very important. And the speed at which your orders are executed means money in the bank and pips in the bag. An STP broker will always be faster than a DD broker, simply because of the higher level of automation associated with an STP broker.
We have been talking about DD brokers, and we have also mentioned the term NDD, which is No Dealing Desk, so basically the opposite of the Dealing Desk model, these guys are after your volume, not your losses.
There are some things some brokers/platforms will restrict, mainly the use of expert advisors and a scalping strategy, if you want to use either, make sure there are no restrictions with your broker.
Factor 3: Pricing
Pricing is a key part in making you a profitable trader, and once you are a profitable trader, making you a more profitable trader. Sounds good right? More money in your pocket! Thought so too.
There are two major factors in pricing, the commision and the spread.
Commision is the price you pay for the broker for brokering your trade, it is a constant, in that it changes according to the size of your lot, and does not change according to time of day, currency pair or any other variable.
Spread is a much trickier thing. Since it changes according to time of day, currency pair etc. Basically it changes solely due to liquidity, the higher the liquidity, the lower the spread, the lower the liquidity, the higher the spread. So, if you are trying to trade the currencies of two small countries, the liquidity is likely to be low, and thus the spread will be high. Don’t expect to trade the Turkmenistan Manat against the Tongan Pa’anga at a 0.5 spread, in fact, don’t expect to find such a pair at any broker anywhere, but I think you get my drift, stick to EUR/USD/JPY/GBP etc. pairs for low spreads!
Also a good thing to note, is the fact that if a broker is saying they have no spread, they are looking to make money off of you losing it, since it is virtually impossible for an STP broker to be profitable without making money off of the spread.
Factor 4: Education/Trading Tools
Some brokers give more tools for their clients in order to give them maximum capability for being profitable in the market, be it e-books, webinars, seminars or educational videos. Of course this type of information can be found on other websites online as well, thus it is only number four on our list.
Factor 5: Customer Service
Good case scenario, everything is highly automated, withdrawals etc. work like clockwork and there is no need to contact customer service at any point of your trading experience. If though, you need to contact the customer service, it is nice to have them there ready to help.