With hundreds of Forex brokers competing for each new client, picking the right broker is not as easy as it seems. Your broker is your window to the Forex market and has to offer a range of qualities to make your trading as seamless as possible. In this article, we’ll cover the 9 most important features that a Forex broker should have, so you can focus on what really matters – trading.
Tip #1: Choose the right type of broker
Let’s first discuss the main types of Forex brokers in the market. Generally, all brokers can be grouped into two groups:
- Dealing Desk (DD) brokers
- No Dealing Desk (NDD) brokers
Dealing desk brokers are also called market makers, since they create the market for their clients. They are the main liquidity provider for the trades opened with them, which means they sell you the currency if you want to buy it, and they buy the currency if you want to sell it. Naturally, this creates a certain conflict of interest, as DD brokers make money when you lose, and vice-versa.
No Dealing Desk brokers, on the other hand, don’t create the market for their clients. They simply act as a middleman and forward their clients’ trades to external liquidity providers, such as investment and commercial banks. To do so, NDD brokers use a technology called Straight-Through Processing (STP), which automatically matches your order with the best possible price from a pool of liquidity providers.
Some NDD brokers are also called ECNs, which stands for Electronic Communication Network. ECNs combine various liquidity providers on their platform, which can be either external providers or internal market participants, and match your order with the best bid/ask price.
The following table shows some key differences between Dealing Desk, STP and ECN brokers.
Why is the type of broker important to consider when picking the best Forex broker? Because you should always look for No Dealing Desk brokers (STPs or ECNs), to enjoy a long-term cooperation and avoid any conflicts of interests. This is also our first tip: Look for a Forex broker which is an STP or ECN.
Tip #2: Make sure the broker is secure and regulated
Now that we removed market makers (DD brokers) from our pool of potential Forex brokers, it’s time to move on to a very important topic – security and regulation.
A secure broker needs to be regulated by a country’s respective regulatory body. This ensures that all industry standards are upheld and enforced, and reduces the potential of fraudulent activities to a minimum. That’s why our second tip suggests to check whether a broker is fully regulated.
Regulated brokers usually don’t hide the fact that they’re secure and regulated, and most of the time you can find their regulatory authority and license number on their website.
To make your life easier, here are the most common regulatory bodies of Forex brokers. Please note that the majority of Forex brokers are regulated by CySEC, which allows them to provide their services in any country of the European Union (thanks to the “EU Passport” rule).
||Australian Securities and Investment Commission (ASIC)
||Cyprus Securities and Exchange Commission (CySEC)
||Financial Services Agency of Japan (FSA Japan)
||Monetary Authority of Singapore (MAS)
||-Commodities and Futures Trading Commission (CFTC)
-National Futures Association (NFA)
||Swiss Financial Market Supervisory Authority (FINMA)
||The Financial Conduct Authority (FCA)
Tip #3: Don’t look for the cheapest broker, but for the whole package.
The next major point to consider are costs and commissions. As mentioned in our first tip, STP and ECN brokers charge either fixed or variable spreads, and in some cases a commission per trade. Most of the time, brokers charge variable spreads without any commissions. Unlike DD brokers which are able to offer fixed spreads since they quote you both the bid and ask prices, NDD brokers usually have to go with variable spreads as their liquidity providers may widen their bid/ask prices during certain market conditions.
The key here is not to look for the tightest spreads, but for the overall package and quality that the broker has to offer. Most brokers already have tight spreads, especially on majors such as the EUR/USD or GBP/USD. Unless you’re a scalper and open dozens of trades a day, you probably won’t feel a real difference between a few pipettes of spread (1 pipette = 1/10 pip).
That’s why we suggest not to look for the cheapest broker, but for the whole package.
Tip #4: Check the offered payment options for deposits & withdrawals
Making deposits and withdrawals needs to be simple, fast and straight-forward. There is no reason for a broker to make this process difficult. The broker should offer a few payment options both for deposits and withdrawals. Most of them support a few online payment providers (PayPal, Payoneer…), credit/debit cards and bank wire transfers. The former two options allow for making deposits and withdrawals usually in the same day, while bank wires are costlier and take a few days to be processed.
Also look for hidden fees in the process of making deposits and withdrawals. Brokers are more than happy to process your deposits as soon as possible and without further fees, but they can impose certain fees on withdrawals.
Make sure that your broker of choice offers a payment type that is convenient for you.
Tip #5: More tradable instruments means more opportunities
The number of tradable instruments is another major consideration when choosing your new best Forex broker. Try to widen your Forex portfolio with cross-pairs and even exotic currencies, as they have a significantly larger volatility compared to major pairs which are the most often traded pairs by Forex traders. Volatility in the market is what creates trading opportunities. Forex traders live on volatility, and there’s no way around this.
Your broker should therefore offer a number of exotic currencies, such as the Turkish lira, Mexican peso or Chinese yuan, to name a few.
Today’s financial markets are interrelated, and your broker should also offer other asset classes such as commodities, stocks and stock indices. Trading a variety of asset classes can reduce risk and improve your profitability.
Tip #6: Make sure the broker’s trading platforms suit your needs
You’ll spend most of your time in front of the broker’s trading platform, which makes it important to be user-friendly, reliable and to offer all necessary features. Many brokers offer proprietary trading software, web-based platforms and mobile apps, which helps if you’re on the go and need to open or manage your positions from your smartphone or a public computer. In essence, it’s important that the trading platform offers all tools you need in your daily trading. Pay attention to the types of market orders (stops and limits), availability of trailing stops, charting tools and overall speed of the platform.
The world’s most popular trading platform – MetaTrader 4 – is being replaced by the newer MetaTrader 5 by a lot of brokers. The new version has some significant upgrades, such as support for more trading instruments, advanced charting tools, upgraded trading policies and a new strategy tester, so you might consider switching to MT5 when picking your new Forex broker.
Tip #7: Open a demo account and assess the broker’s quality
All of the mentioned tips so far don’t replace the real-feel of trading with a broker. That’s why you should open a demo account first and check whether the broker suits all your needs. Demo accounts are a great way to assess the broker’s price-feed (look for slippage, spikes…), get familiar with the trading platforms, and get an overall feeling of what the broker has to offer. While on a demo account, try to contact the broker’s customer support a few times to check the quality of live chats and the time needed to respond on a simple e-mail question.
Always open a demo account first before going with a real account.
Tip #8: Bonuses? You probably don’t need them
The retail trading industry is very competitive, and Forex brokers try to attract new traders using all possible tools. Some of them offer bonuses and trading incentives if you open a real account with them. The bonus can be as high as 50% of your initial deposit, meaning if you deposit $10,000 into a real account, you get a $5,000 bonus. Sounds cool, right?
Well, before you hurry to open a real account with such a broker, let me tell you that the bonus can’t be withdrawn from your account. The broker usually imposes certain limitations, such as trading 100 standard lots before being able to withdraw the bonus. One hundred standard lots equal to a market position worth $10 million, and a pip-value of around $1,000. In other words, they’re betting you’ll lose both your initial deposit and bonus before you reach the withdrawal-limit.
In fact, CySEC sent out a circular note #194 in March 2017, prohibiting CySEC-regulated Forex brokers to offer bonuses and trading incentives to their clients.
CySEC states that “[Forex brokers] must avoid the practice of offering bonuses that are designed to incentivize retail clients to trade in complex speculative products such as CFDs, binary options and rolling spot forex as it is unlikely that a firm offering such bonuses could demonstrate that it is acting honestly, fairly and professionally and in the best interests of its retail clients…”
Brokers that offer such bonuses bet against the success of their own clients. They push you to chase the withdrawal-limit by opening enormous market positions, only to lose both your deposit and bonus. This practice is unfair, unprofessional and unethical, and even the slightest suggestion of a trading bonus would cross that broker from my list for all times.
Tip #9: Check for educational material and reliability of customer support
The final tip for picking your new Forex broker is the availability of educational material, market commentary, forex signals and customer support. A reliable broker employs market analysts who provide regular market commentary for their clients. Even if you don’t need market updates from your broker, be aware that the quality of their market views is usually highly correlated with the quality of the broker.
Educational material, such as a comprehensive library of video lessons, PDFs, e-books or webinars can help you sharpen your trading skills and grow your bottom line. An emphasis on education also shows that the broker wants its clients to succeed, as only successful traders are able to generate long-term profits for the broker based on spreads.
Finally, a top-notch customer support truly separates good Forex brokers from the best in the business. Make sure that the broker offers at least a fast and reliable live chat and e-mail support. While you’re still demo-trading (recall tip #7), try to contact the broker a few times with general inquiries about trading accounts, deposits/withdrawals or trading platforms, which should help you determine the quality of the broker’s customer support.
Your new Forex broker has to offer some notable advantages compared to your existing broker. In this article, we provided 9 tips that will guide you in finding your new best Forex broker among hundreds of brokers in the industry.
Whether it’s the type of broker, regulation, deposit and withdrawal options or simply the availability of demo accounts, these tips will help you in narrowing your list of potential brokers and picking the best one for your trading needs.
We have compiled a guide on the Best Forex Brokers in South Africa!