Forex Brokers Guide

What makes the ideal Forex Broker?

Choosing the right Forex broker is very important when trading Forex. As the Foreign Exchange market has grown enormously during the past two decades, hundreds of new brokerage firms have appeared. Some of these companies are decent and good for trading, some others not. This article is about how to evaluate a Forex brokerage company.

Different trading styles create different brokerage needs, and therefore, before opening a new account it is wise to define your trading style according to your capabilities, your available time for trading, and most importantly your risk appetite.

 

(1) SAFETY OF MONEY

• FOREX STYLES: ALL TRADING STYLES
• IMPORTANCE: 10/10

1.1 Regulation

The safety of money when trading online is the top issue for any wise trader. An honest Forex broker should apply rules and policies to ensure the integrity of its operations. It’s highly recommended to choose only among Forex brokers who are regulated by trusted regulatory bodies. Regulators monitor and control all their listed Forex brokers and can impose penalties in case these brokers are misbehaving. Furthermore, traders who are scammed can make an official complaint to the regulator, and if they are proven right, they can take their money back. » More about regulators

1.2 Years of Operation

Many years in the industry can guarantee to a certain extent that a Forex broker runs a successful business model. Opening an account with a Forex broker that is already in the market for at least 3 years can add extra levels of credibility to your selection. Avoid always Forex companies in their first year of foundation.

1.3 Bank Account Segregation

Client bank account segregation means that the client’s funds are segregated from the company’s funds and it is also an important issue for the integrity and clarity of any Forex Broker’s operations.

1.4 In the Case of a Broker's Insolvency

Some Forex brokers are insured in the case of insolvency:

• In Switzerland, FINMA covers up to CHF 100,000 per client » Dukascopy Bank
• In the UK, the Financial Services Compensation Scheme (FSCS) pays up to GBP 50,000 per client
• In Cyprus, the CIF covers up to EUR 20,000 per client

 

(2) TRADING CONDITIONS

• FOREX STYLES: INTRADAY TRADERS / DAY-TRADERS / SCALPERS / SWING TRADERS
• IMPORTANCE: 9/10

2.1 Execution Model

The execution model of each Forex broker is very important, especially for intraday traders and Forex scalpers. ECN / STP Forex brokers are offering better trading terms in general than Market Makers. Market Makers via their Dealing Desk usually apply extended delays, requotes, and high slippage. Imagine what it means to trade the news while waiting 1.5 seconds until your order is finally executed. Be aware that not all ECN/STP Forex brokers offer good terms for trading Forex but as a rule, ECN/STP brokers offer better conditions than Dealing-Desk brokers.

2.2 Capital Leverage

The maximum capital leverage you can trade depends on the Forex broker policy and the particular asset class you wish to trade. Forex trading is usually offered at 100:1 to 200:1 leverage. Some Forex brokers may offer a higher rate of leverage, even up to 1,000:1. That means nothing at all, as the higher the leverage the higher the trading risk and the trading cost of each position you open. Think of Leverage as an extended loan and try not to trade using capital leverage of more than 100:1.

2.3 EUR/USD, USD/JPY, and BGPUSD Spreads

Forex brokers make money either on the spread they charge between ask and bid or by charging trading commissions. The more active a Forex pair the narrower gets the spread you pay to trade it. Forex majors (EUR/USD, USD/JPY, USD/CHF, GBP/USD, USD/CAD, NZD/USD, and AUD/USD) enjoy greater liquidity and therefore are offered in tighter spreads by ECN/STP Forex brokers. A typical spread on the EUR/USD without trading commissions is offered between 1.2-1.8 pips. A typical spread on the GBP/USD or USD/JPY, without trading commissions, is offered between 1.4-2.4 pips. All the rest of the Forex pairs (except EUR/GBP, EUR/CHF, and EURJPY) are offered in wider spreads than any of the Forex majors.

Market Makers (DD) charge considerably more expensive spreads than ECN/STP Forex brokers. Usually, Market Makers offer EUR/USD at a minimum of 2.0 pips and GBP/USD, USD/JPY at a minimum of 3.0 pips.

 

(3) TRADING TECHNOLOGY

• FOREX STYLES: INTRADAY TRADERS / DAY-TRADERS / SCALPERS
• IMPORTANCE: 8/10

Trading technology is important for short-term traders and especially for intraday traders and scalpers. The longer-term you trade the less the technical aspects matter to you.

3.1 Trading Platforms

A trading platform is a gateway that connects a trader with the global financial markets. Traders must ensure that their desired platform (if any) is available by a Forex broker before opening a new account. Usually, Forex traders are familiar with MetaTrader-4 (MT4) which is the Forex Industry’s standard platform. Beginners should better seek the availability of a web-based platform which is usually much easier to handle. During the past few years, some Forex traders have shifted to NinjaTrader, JForex, or cTrader platforms which offer extended charting capabilities.

3.2 Trading Orders

The availability of a full set of trading orders is important for all trading styles. Except for the classic Market Order, there are quite a few other types of trading orders:

• Limit Entry Order / Stop-Entry Order
• Trailing Stop / Trailing Profit
• Good ‘Till Cancelled (GTC)
• Good for the Day (GFD)
• One-Cancels-the-Other (OCO)
• One-Triggers-the-Other (OTO)

3.3 Mobile Trading

We are living in the decade of the mobile revolution. Nowadays almost all Forex brokers offer a specialized mobile app for iOs and Android. Other offers also apps for Windows Mobile and Blackberry. Usually, these apps are based on MT4 but sometimes can be based on a WebTrader trading platform.

3.4 Free VPS Server

Traders who wish to apply automated Forex trading strategies via Expert Advisors (EAs) need a Forex VPS server to avoid having their computer turned on 24/5. Some Forex brokers offer a free VPS server to their clients and that feature can prove very useful and cost-effective for automated Forex traders.

 

(4) TRADING OPTIONS

• FOREX STYLES: ALL STYLES
• IMPORTANCE: 8/10

4.1 Number of Available Forex Pairs

Most Forex traders and especially short-term traders prefer to trade solely the Forex majors and especially the four (4) most liquid Forex majors {EUR/USD, GBP/USD, USD/JPY, and USD/CHF). The reason for this limited selection is the tight spreads that these four major pairs are offered by brokers. Swing traders and long-term traders usually trade a wider selection of pairs including Forex minors or even exotic currencies. This is happening as longer-term traders tend to trade the differences in the level of interest rates between two currencies (carry trading) and therefore demand a wider Forex asset index.

4.2 Availability of Other Instruments

Forex currencies can be the underlying asset of many different financial instruments. For example, most brokers nowadays offer Forex trading via CFDs (Contracts for Difference). Some other brokers offer Forex trading via Futures and Options. What is the advantage for you? Simply Futures and Options do not charge overnight rates, therefore if you wish to trade a Forex pair and avoid swap rates then seek a Forex broker providing Forex Futures / Forex Options contracts. Note that Forex Options can be used as well for hedging purposes.

4.3 Demo / Practice Account

All Forex brokers nowadays offer a free demo/practice account. A demo account is very useful to test the trading platform and the trading conditions of any Forex broker before opening a Real Account. This is important as you save a lot of time but also you may save some money too. Even if you have opened and funded a Real Account you may use the Demo Account as a pilot of your trades. For example, if you open 1 lot on USD/TRY which is offered usually in very expensive spreads, a Demo can help you calculate your trading cost before opening this position on your real account.

4.4 Hedging Allowance

Hedging means reducing the risk of a position by opening the same position in the opposite direction. Direct hedging means opening opposing trades simultaneously. Most Forex brokers allow hedging but not all of them. Note that Forex brokers welcoming US traders are not allowed to provide them with hedging, as hedging is illegal in the US.

4.5 Scalping Allowance

Scalping means opening and closing positions in less than 1 minute by targeting tiny profits of 5-10 pips. Usually, all ECN/STP Forex brokers allow scalping but this is not the case for Market Makers (DD). Market Makers usually forbid scalping or allow it under certain policies. Forex scalpers trade solely with ECN/STP brokers.

 

 

(5) ACCOUNT PREFERENCES

• FOREX STYLES: ALL STYLES
• IMPORTANCE: 8/10

5.1 Minimum Account Deposit

The minimum account deposit is important for all traders. Forex beginners don’t want to risk much money before understanding what is going on in the Forex market. Furthermore, advanced Forex traders may wish to deposit only a few hundred bucks in a Forex Broker to test its real trading conditions. If they are happy they usually deposit more funds. Therefore the minimum account requirements are important for all traders.

5.2 Micro Account Type

A micro account is an account type for beginners who wish to trade Forex in much smaller increments than advanced and professional Forex traders. A micro lot is equal to 1,000 units of a base currency compared with the 100,000 units of a standard account. That means less risk and less trading cost for Forex beginners and it is an important feature for them.

5.3 Funding Methods

All Forex brokers offer Bank Wire and Credit / Debit Cards as available payment methods. If you wish to deposit funds via electronic wallets such as PayPal or MoneyBookers Skrill you are advised to use the website of each Forex broker to find out your payment options. Make sure that the withdrawal of your funds can also be done via the same payment method. Some brokers such as FXCC allow depositing funds via e-wallets but if you want to withdraw your profits you are limited to using Cards or Bank Wire.

5.4 Trading Commissions and Fees

Forex Brokers may impose fees on withdrawals or non-active accounts. Use the live chat support to get this information.

5.5 Forex Trading Promotions

Most Forex brokers offer promotions for their new clients. The most common promotion is a welcome bonus which is usually 30-100% of your first deposit. This welcome bonus can be a Cash or a Credit Bonus. The Cash Bonus is a bonus that you may withdraw after trading it several times. On the other hand, a Credit Bonus can be used only as a Margin and you may only withdraw the profits generated by this extra margin but not the bonus amount itself. Other promotions may include Demo/Real Account Competitions. These competitions offer free participation and can help you get familiar with Forex Trading, and who knows, maybe winning some extra bucks risk-free.

 

(6) CUSTOMER SUPPORT

• FOREX STYLES: ALL STYLES
• IMPORTANCE: 6/10

6.1 Customer Support

Customer support is always an important issue when you are trading online. You may need specialized instructions or you may have a serious technical problem. In any case, a Forex broker must offer 24/5 customer support that responds immediately to your requests. The customer support of Forex brokers usually operates via email, telephone, live chat, and sometimes via Skype. Some Forex brokers may offer you also a dedicated account manager, which is very helpful.

6.2 Live Chat Support

The Foreign Exchange market is open 24/5 from Monday to Friday and therefore the existence of 24/5 support via live chat is very helpful. A quick visit and testing of a live chat or call support can give you a good idea of what to expect shortly from a particular Forex broker.

6.3 Available Languages

All Forex brokers offer English as their main website and customer-support language. Some Forex brokers have additional multilingual support and that can be important for worldwide traders who do not speak or write English.

 

Table: Compare Forex brokers and find information regarding their Forex trading terms and live accounts.