To choose the right Forex broker is one of the main to-dos when you start trading because it determines a lot of nuances of your futures trading experience. That's why the importance of this topic is hard to overestimate. We have put together a quite full overview about how to choose the best Forex broker in 2020. Keep reading!
Forex broker is a company that provides FX traders with access to a trading platform that allows them to buy and sell foreign currency. Currency traders use the service of these brokers to gain access to the Fore market. A currency broker, often called a retail Forex broker, processes only a small fraction of the total foreign exchange market.
Your priority is to do research. A reliable Forex broker is a broker with an exceptional reputation and that can meet your needs. The vast majority of Forex brokers will allow potential customers to check their services, practicing on a demo account, so that they can get an idea of how the system actually works. The purpose of this article is to show you how to choose a Forex currency market broker.
What is important when choosing a Forex broker?
Forex broker regulation. It is important to open an account with a regulated broker.
Trading platform. Select a broker that offers Forex and CFD trading on a platform that is most convenient for you to work with, and that meets your needs.
Low spreads. There is nothing wrong with finding a broker with the lowest spreads, but do not chase beautiful promotional offers. The lower spread that is advertised on the website does not necessarily mean that you will constantly use such low spreads. Besides, there are ECN and STP accounts from which you pay a commission to brokers. Searching for the cheapest Forex broker is a combination of spread, quality of execution, commission, and swap.
Finding a competitive Forex broker that offers only low spreads is not always the best idea since the displayed average spread does not guarantee this spread when placing an order.
1. Order execution quality and slippage. Low spreads are good, and orders executed at the asking price are even better.
2. The possibility of scalping. If you are looking for the best Forex broker in the EU, keep in mind that a good broker does not set limits on trading styles.
3. Forex broker with no dealing desk or a dealing center. Depending on your strategy, you can choose an ECN, STP, or No Dealing Desk broker.
4. Security of funds. Choose a Forex broker with bank accounts in Europe, in particular with separate bank accounts.
5. Various types of trading accounts. A good broker should offer you several types of accounts: ECN, STP, or accounts with spreads for larger deposits.
6. To effectively manage your trading position, it is important to be able to use leverage.
7. Diversification of trading instruments - it is always interesting to be able to invest in several markets at the same time. A good choice is to work with a Forex broker who offers a wide range of trading tools, such as CFDs on indices, stocks, commodity assets, bonds, cryptocurrencies, or ETFs.
8. Customer service. It is important that the broker pays attention to customer support and respond quickly in case of problems.
9. A Forex broker cannot give investment advice but can offer training and educational programs. For beginners on Forex, it is important to understand the basics of trading, so he needs a broker with the proper tools. Admiral Markets offers several courses: Zero to hero course, free webinars, and a whole library of trading articles.
Types of Forex brokers and more
Which broker to choose for a newbie is an important question for every trader. We can distinguish several types of Forex brokers according to several criteria. Depending on their client base, Forex brokers can be divided into groups for:
- professionals and suitable counterparties
Depending on the execution of orders, there are:
- Forex brokers with a dealing center
- Forex brokers without a dealing center (STP or ECN)
Depending on the trading platforms, we can distinguish:
- Forex Brokers MT4
- MT5 Forex Brokers
- Brokers with their own platform
- Brokers MT4 / MT5
There are DD (Dealing Desk) and NDD (No Dealing Desk) brokers. NDD brokers include:
- STP (straightforward processing)
- ECN (electronic communications network)
- Hybrid (ECN + STP).
A little bit about Dealing Desk brokers
Usually, we turn to DD brokers as market makers. Which Forex broker to choose in this case? The infamous term market makers are used because these brokers usually occupy the opposite side of traders’ transactions.
They make money through spreads and provide liquidity. They also try to find a suitable long or short order from their other clients before accepting counter-trading or transferring it to a liquidity provider.
They are known to offer artificial quotes, and orders are filled on a discretionary basis. But Traders are interested in reliable Forex brokers.
STP Forex brokers
What Forex broker to choose and what rules to follow when choosing? STP technology or straightforward processing does not require a dealing center. All orders are sent to the broker's liquidity providers, and prices are executed at the bid/ask rate provided by liquidity providers.
In this case, liquidity providers are hedge funds, large banks, and investors, which effectively act as counterparties for each transaction.
Typically, the STP broker has an internal liquidity pool, which is represented by various liquidity providers who compete for the best bid / ask spreads for orders of STP brokers.
In a broader sense, STP means that the brokerage company plays the role of a connection between the market and the trader, rather than a dealing center that processes transactions.
Another advantage of the STP broker is the so-called DMA. DMA means direct market access. It transfers client orders directly to their liquidity pool, so orders are executed at the highest possible price with only a small mark-up broker spread.
You should always aim for a broker with variable spreads. The reason is that a broker with a variable spread can choose the best rate from one of the liquidity providers from his own pool, and the best ask from another liquidity provider. This effectively offers the best possible spread for its clients.
STP execution just goes without any requotes and because of its lightning-fast speed, it is very suitable for traders who like scalping and news trading.
ECN Forex brokers
A few years ago, the MT4 ECN seemed redundant. In fact, the initial reaction to this concept was that it seemed impossible. If a Forex trader wanted to use a standard platform, they had to trade exclusively with one broker. However, the requirements of the Forex retail trader were eventually heard, and MT4 ECN was developed.
There are many similarities between STP and DMA, but the main difference is routing. As mentioned above, STP may decide to deal with various liquidity providers from its liquidity pool, while ECN acts as a form of the hub.
The concentrator acts effectively as the main source of liquidity, as it is represented by banks, hedge funds, and all major market players. They are all interconnected to find counterparties for orders that they cannot process domestically.
Another difference between STP and ECN is that ECN trading is generally limited to 0.1 of the minimum size. This is because there are very few providers of liquidity services, which is less than 0.1 lots, which turned out to be difficult for inexperienced traders who need to trade with lower amounts of money (1-2 thousand),
Therefore, a hybrid model was developed, and this largely influenced the choice of a Forex broker for many.
Forex broker, Hybrid Model
This is a combination of ECN and STP. Typically, with this type of service, brokers can focus on providing excellent customer service, education, and, most importantly, on diverse market analytics.
Mixing ECN or DMA and STP models allow you to use a fully electronic Forex dealing center. This popular mix allows Forex brokers to fully automate the entry of orders, dealing with issues of spread pricing and aspects of the implementation of the transaction for their execution.
Using STP and ECN models, brokers avoid market-making. This is a win-win situation for traders and brokers. Brokers do not want us to lose, because they could earn more from a spread or commission, the longer we trade with them.
NDD Forex Brokers
Unlike DD brokers, No Dealing Desk brokers do not transfer their orders to a market maker or liquidity provider. They use both STP and ECN technologies without a dealing center and send trading orders directly to liquidity providers. This allows customers to access real-world markets with faster execution.
This is a bridge between customers and liquidity providers, and there are no requotes when an order needs to be executed. We distinguish between two types of NDD brokers: STP and ECN.
Which broker is better in terms of regulation?
The first thing you need to check when looking for a reliable Forex broker is compliance with regulatory requirements. For example, in the United States, a reputable FX broker will be a member of the National Futures Association (or NFA) and will be officially registered with the US Commodity Futures Trading Commission (CFTC) as a trading agent for futures contracts.
Also, the NFA is an industry-wide, fully self-regulatory organization for the US futures industry. Its main functions are the development of rules, programs, and services to ensure the protection of the market and its participants. Besides, it must ensure that members comply with regulatory obligations and certain obligations.
CFTC is a fully independent government agency whose function is to regulate the US commodity futures and options markets. The main mission of CFTC is to protect market users and the public from any manipulation, scam, and abuse associated with the sale of goods and financial futures and options.
If you are looking for Forex brokers online, remember that a professionally executed website does not guarantee that the broker is a member of the NFA or is subject to CFTC regulation, and the same applies to the relevant institutions in your country of residence.
If the broker is a member of the National Futures Association and under specific CFTC rules, they report this, and his NFA member number will be displayed on the website, most often in the "about us" section, as well as on each web page. As mentioned earlier, each country outside the United States has its regulatory authority.
Broker Regulation: How to Choose a Forex Broker Regulated by FCA
The first thing you need to check if you are considering how to choose a Forex currency broker is whether your FCA broker is regulated. There are many scam sites, and very often there are rules on these sites that are not very strict or not regulated at all.
With a European passport, any financial company registered in one of the countries of the European Union has the right to offer brokerage services in other countries without the need for additional agreements.
One of the strongest European authorities in terms of oversight is the FCA. If you are looking for the best Forex brokers online, a professional website does not guarantee that the broker is reliable.
The advantage of the British broker is the Financial Services Compensation System (FSCS), a system that guarantees the compensation of clients' funds in the amount of GBP 50,000 if the broker goes bankrupt.
FSCS is the last resort compensation fund. They also protect banks and building societies, credit unions, insurance, etc.
Choosing a Forex broker and false information/privacy violation
Unfortunately, many people incorrectly associate Forex with the scam. The problem is that a growing number of unscrupulous companies sell false information. Over the past few years, the number of scamming transactions related to Forex has increased significantly, so it is important that you can distinguish a Forex scammer.
When traders register with a specific broker, they expect that their personal data will be protected, that is, they will not be transferred to third parties. Therefore, be careful about privacy issues so that a dishonest broker does not sell your personal data to a third party.
How to choose a Forex broker in terms of offers?
Each Forex online broker has various offers that include the following factors:
First, shoulder and margin. Forex participants have access to leverage depending on the broker, for example, 50: 1 or 200: 1.
Leverage is a loan provided to margin account holders by their brokers. For example, applying the leverage of 50: 1, a Forex trader with an account size of $ 1,000 can take a position that is valued at $ 50,000. Leverage works in favor of a trader with winning positions, as the potential for profit is greatly enhanced.
However, leverage can quickly destroy a trader’s account, as the potential for losses increases. This leads us to the fact that the shoulder should be used only with caution.
The second nuance in the offer of the Forex broker is spreads and commissions. Forex broker makes money through established commissions and spreads. An FX broker who uses commissions may charge the indicated percentage of the difference between the demand and the bid price of the currency pair.
However, many brokers advertise that they do not charge fees and instead receive money from wider spreads. For example, the spread may be fixed at three pips, or the spread may be variable depending on market volatility.
Imagine that the EUR / USD 1.3943 - 1.3946 quote has three spreads. This means that as soon as a market participant buys 1.3946, the position has already lost three points of value since it can be immediately sold for only 1.3943. Therefore, the higher the spread, the more difficult it can be to make a profit.
The third is the initial deposit. Most Forex accounts can be opened with a very small initial deposit. Of course, when using leverage, you can open a position significantly more than the minimum deposit. This is one of the many reasons why Forex trading is so attractive to new traders and investors.
And the last - the simplicity of replenishing the account and withdrawing funds. Brokers can allow account holders to maintain accounts online via PayPal, simply by credit card or by paying ACH, not to mention bank transfer, bank checks, or business or personal checks. Typically, withdrawals can be made by bank transfer.
Those who are considered a reputable and reliable Forex broker can charge a fee for each transaction.
What should I know about the proposed currency pairs?
When choosing a Forex broker, for yourself, pay attention to what tools they offer. Even though there is a wide variety of currencies available for trading, only a few uses increased attention and, thus, are traded with the greatest liquidity.
The most popular pairs are USD / JPY, EUR / USD, USD / CHF, as well as GBP / USD. Those who position themselves as the most reliable Forex brokers can offer a wide selection of Forex pairs.
The value of customer service
Forex trading takes place 24 hours a day, so customer support should be available at any time.
If you were wondering how to choose a Forex broker, a simple call to the support service can give you an idea of what kind of customer service they provide, the waiting time, and the representative's ability to answer questions about spreads, positions, leverage and company information in a brief form. As you know, the most reliable forex brokers basically have access to the best execution and prices.
Trading platform and the Forex broker choice
The trading platform is a portal for an investor to enter the market. Forex traders must make sure that the trading platform and any trading software are easy to use and visually understandable.
The platform should also have several technical and fundamental analysis tools, and it should be easy to enter and exit the transaction.
This last point is crucial when considering how to choose a reliable Forex broker: a high-quality Forex trading platform will have simple buy and sell buttons, and some even have an emergency button that closes all open positions.
A poorly designed user interface can lead to costly errors, such as accidentally adding to a line item. These inconsistencies and errors can cause a loss of funds. Make sure you choose a reliable trading platform such as MetaTrader 5, as it is the most popular choice among the best Forex brokers.
Also, there are other points to consider: the ability to configure, types of order entry, automatic trading options, backtesting, strategy development, as well as trading signals. Most brokers offer free demo accounts so that Forex traders can try out the trading platform without any risk.
As has been repeatedly mentioned in the article, choosing a Forex broker is one of the most important tasks for any trader, because your trade, the safety of your savings and the quality of trade depend on this. If you are confident in your Forex broker, you will be able to devote much more time and precious attention to the analysis and development of various Forex strategies. It may take a long time to find a reliable Forex broker, but the right choice can improve the trader's chances of success in the foreign exchange market.