Since all traders have different trading needs, it is essential to know if the broker you choose has the requirement to fulfill your trading needs. It is equally important to do your due diligence before trusting a broker with your money.
This comprehensive guide covers all components of a forex broker and would guide you on how to
choose a forex broker that fulfills your trading needs.
Below is a checklist that can guide you in choosing a standard forex broker that best meets your trading requirements.
- Broker Type
- Trading fees
- Non-trading fees
- Trading platforms
- Account types
- Account currencies
- Markets offered
- Execution speed and slippage
- Leverage and Margin
- Payments Methods
- Customer service
Table Of Contents
If you’re going to entrust your money and personal details to a broker, then ensuring it is regulated should be one of the first factors to consider.
A regulatory agency’s primary role is to protect consumers’ interests by establishing standards for the qualifications and activities of financial institutions. Therefore, when a broker is regulated, it meets the standard to qualify as a regulated broker, and its activities are supervised by its regulator(s).
On the other hand, unregulated brokers are not supervised by any regulatory agency and might not meet the standards to qualify as legitimate brokers. Therefore, if you choose to trade with such brokers, you leave yourself vulnerable to scams and fraudulent activities such as price manipulation, order manipulation, and other fraudulent practices.
Other responsibilities of a regulatory body include, but are not limited to, keeping the industry stable, promoting healthy competition between financial service providers, ensuring financial services are provided efficiently, and having dispute resolution systems in place in case consumers are unsatisfied with a company’s services.
Therefore, to enjoy all these benefits, ensure that the broker you choose to trade with is regulated and has a good reputation in the industry.
Below is a list of strict regulatory agencies and their respective jurisdiction.
|United States||Commodity Futures Trading Commission (CFTC)|
National Futures Association (NFA)
|United Kingdom||Financial Conduct Authority (FCA)|
|Europe||Cyprus Securities and Exchange Commission (CySEC)|
|Europe||Malta Financial Services Authority (MFSA)|
|Canada||Investment Industry Regulatory Organization of Canada (IIROC)|
|Japan||Financial Services Agency (FSA)|
|Singapore||Monetary Authority of Singapore (MAS)|
|Hong Kong||Securities and Futures Commission (SFC)|
|Australia||Australian Securities and Investments Commission (ASIC)|
|New Zealand||Financial Markets Authority (FMA)|
How To Verify A Brokers Regulatory Status
A broker can lie about its regulatory status by claiming another company’s license number or making up a fake license number. Therefore it is essential to do your due diligence if you have doubts about a broker’s regulatory status.
While a broker can falsify its regulatory status, the good thing is that you can verify if it’s telling a lie or being authentic.
When a broker is licensed and authorized to operate by a regulatory agency, it receives a unique ID number called a license number. This license number is usually located at the bottom of every page on the broker’s official website, as most regulatory agencies require.
To help financial consumers, most regulators keep an online register or database that clients can access to verify the regulatory status of a broker.
With access to the regulatory agency’s database, you can verify the broker’s regulatory status by doing a quick search using the broker’s license number.
If you’re having a hard time finding a regulator’s register, an easy way to go about it is by doing a quick search on google. Enter the phrase ‘verify (regulatory agency name) license,’ and you should get the link to the page as the first result on google.
Suppose the broker in question is available on the database; the regulatory agency will provide information about the broker, its owners and executives, the history of its operation, how customers are protected, and other relevant information about the broker.
For instance, if a broker claims to be licensed to operate by the Financial Conduct Authority (FCA) in the United Kingdom. A quick way to verify if this is true is by doing a quick search on the FCA website, using the company’s name or the FCA license number provided by the broker on their website.
Before choosing a forex broker, knowing the broker’s business model and how the broker executes your order is crucial because how a broker executes your orders within the foreign exchange market can directly impact the quality of service you receive, your dealing spreads, and transaction fees.
There are two major types of brokers, and they include;
- Dealing Desk Brokers
- Non-Dealing Desk Brokers
Dealing Desk Broker
Dealing Desk brokers (also known as Market Makers) do not hedge their client’s positions with liquidity providers. Instead, the broker takes the risk upon themselves. Thus, the client’s loss would be the broker’s profit and vice versa.
While it might sound like a bad idea to work with market makers because they take the other side of your trade, there are also upsides to working with them, such as access to fixed spread pricing and nano lot trade size.
Such benefits make brokers who operate the market maker model an excellent choice for beginner traders.
Non-Dealing Desk Broker
A Non-Dealing Desk (NDD) broker does not interfere with its client’s position. Instead, it passes it to a third-party liquidity provider, allowing clients direct access to the interbank market rates.
One of the main advantages of working with an NDD broker is that you gain access to actual interbank market prices, which means you would get the actual market price, and your spreads would be significantly smaller.
Also, since NDD brokers do not take the other side of a client’s trade, traders can trade more confidently, knowing that their broker has no conflict of interest with their trades.
Other advantages of working with NDD brokers include access to a more reliable network and faster trade execution.
There are three types of Non-Dealing Desk brokers, and they include;
- ECN (Electronic Communication Network): An ECN broker does not interfere with its clients’ positions. Instead, it uses an Electronic Communication Network (ECN) to match its clients’ trade to that of other market participants.
- STP (Straight Through Process) Broker: An STP (Straight Through Process) broker uses electronic transfer to pass its client’s trades directly to an external liquidity provider with access to the interbank market.
- DMA (Direct Market Access) Broker: A DMA broker allows traders to execute trades directly on the electronic order book or with a liquidity provider.
Though these brokers offer slightly different execution models, they still operate similarly because they do not take the other side of their clients’ trades. Instead, they pass it on to liquidity providers or market participants who want to take the other side of the trade.
Trading fees are fees incurred while carrying out trading activities with a broker. Therefore, before choosing a broker, it is crucial to consider its trading costs, as this can significantly impact your overall profitability in the long run.
When trading with a forex broker, here are some trading fees to expect;
- Overnight fees
Spread is the price difference between a currency’s bid (buy) and ask (sell) price. It is a small markup to the currency price, added by the broker as compensation for the liquidity they’re providing to you.
For instance, EUR/USD is priced at 1.1510/1.1511. So if a trader buys the currency pair at 1.1511 and sells it at 1.1510, the difference between the buy and sell price, which is one pip, is what the trader pays as the cost of the transaction.
There are two types of spreads, and they include:
- Variable Spread – The price difference changes based on the current market conditions. It can be wider or thinner, depending on the currency involved, economic event, volatility, and the time of day.
- Fixed Spread – The price difference stays the same at any given time, regardless of the market conditions.
The kind of spreads that you will receive depend to a large extent on the type of business model the broker is operating on.
Variable Spread Account vs. Fixed Spread Account
While some traders might prefer using a fixed spread account over a variable spread account, the reverse may be the case for other traders. The table below contains the significant differences between variable and fixed spreads.
|Variable Spread||Fixed Spread|
|Lower costs only during quiet market conditions.||Consistent and predictable regardless of market condition.|
|Great for large account size traders who trade more frequently, especially during peak market hours (when spreads are tight).||Great for traders with small account sizes and those who trade less often.|
|Well-suited for active and long-term traders.||Best suited for beginners, scalpers, and short-term traders.|
|Traders experience fast trade execution, fewer requotes, and slippage.||Traders may experience slow trade executions, requotes, and slippage in certain market conditions (e.g., increased volatility).|
With commission-based pricing, the broker charges a small flat rate fee (per trade volume or lot), and in exchange, the trader gets access to tighter spreads.
This pricing structure is usually seen on NDD account types, which gives traders access to interbank rates or prices very close to it, along with a small commission fee per trade volume. Some of the best forex brokers that offer excellent pricing with such pricing structures are IC Markets, Pepperstone, and FBS.
An overnight fee (aka rollover fees or swap rates) is a small charge which applies when you hold a leveraged position overnight.
When you open a leveraged position, the broker lends you the remaining capital required to open the trade. If you keep the trade open overnight, you would be charged with an interest to cover the cost of the money borrowed.
Knowing how this fee is charged and calculated with the broker you choose to work with is essential. It would help you avoid unwanted surprises in the long run.
Non-trading fees are fees a broker charges when clients carry out non-trading activities. These activities may include fund withdrawal, deposit, and currency conversion.
Aside from the regular trading fees charged when carrying out trading activities, it is essential to know the fees charged by the broker when you carry out non-trading activities.
Here are some non-trading fees to look out for:
- Account management fee – An account management fee is a fee to keep a managed account open.
- Deposit fee – A deposit fee is a fee charged to cover the cost of a deposit transaction. It can either be a fixed amount or a small percentage of the money deposited.
- Withdrawal fee – A withdrawal fee is a fee charged to cover the cost of a withdrawal transaction. It can either be a fixed amount or a percentage of the money withdrawn.
- Inactivity fee – An inactivity fee is a fee charged to your trading account if there has been no trading activity over a certain period (e.g., 12 months, two years, etc.).
- Currency conversion fee – A conversion fee is a fee for converting foreign currency to your account’s primary currency. This fee applies when transacting with a currency other than your account’s primary currency.
To ensure a smooth trading experience, you should find out if the broker you choose to trade with charges these fees and how to calculate them. Doing this would help you avoid ridiculous charges and unwanted surprises in the long run.
Knowing that a trading platform is your gateway to the markets, it is only right to choose a broker that offers a fully functional proprietary trading platform or provides access to industry-standard third-party trading platforms.
When searching for a forex broker, you would notice that your options with trading platforms are limited to; brokers who offer only proprietary trading platforms, the ones who offer just third-party trading platforms, and those who offer both.
While some brokers might offer a proprietary trading platform to differentiate themselves from other brokers, most brokers offer access to standalone trading platforms such as MetaTrader4, MetaTrader 5, and cTrader, among others.
These standalone platforms offer robust trading solutions and full functionality across mobile and desktop devices. They also have a large community where traders and investors can interact, share ideas and even copy each other’s trades.
Whether you use a proprietary or a third-party trading platform, what matters is that the platform you choose to use has all the qualities required to fulfill your trading needs.
Here are some essential qualities to look out for in a trading platform;
- Strong security system.
- Minimal system downtime.
- Fully functional trading platform across mobile and desktop devices.
- Comprehensive charting package
- Customizable trading environment.
- Multiple chart types and time frames.
- Wide range of analytical charting tools.
- Wide range of technical indicators.
- One-click trading and trade from charts.
- Risk management tools such as stop loss order and trailing stops.
- Support for backtesting.
- Support for algorithmic trading.
- Support for trading strategy formulation, optimization, and automation.
- Support for copy trading and social trading.
Different traders have different trading needs and goals. A good broker knows this and would offer different unique account types to meet their client’s diverse trading needs.
Therefore, it is crucial to work with brokers that offer multiple tailored account types and, more importantly, a broker that provides you with an account type that best suits your trading needs.
The most common account types offered by most forex brokers include;
- Demo Account:
- Standard Account: The Standard account is the most popular forex trading account offered by most forex brokers. This account type gives traders access to Standard lot sizes of a currency, where one standard lot is equivalent to $100,000.
- Mini Account: On the Mini account, one Mini lot is equivalent to $10,000, which is 10% of a Standard lot.
- Micro Account: The Micro account is one of the smallest accounts offered by forex brokers. It provides access to Mirco lot sizes, where one Micro lot is equivalent to $1000, which is 1% of a Standard lot.
- Cent Account: The Cent account (aka Nano Account) is the smallest type of account offered by forex brokers. It offers Cent lot sizes, where one Cent lot is equivalent to $100, which is 0.1% of a Standard lot.
- ECN (Electronic Communication Network) Account: An ECN account allows traders to buy and sell directly with other market participants in the interbank market without any intervention from the broker.
With this account, type traders get access to raw market prices without any markup but are charged with a commission which occurs naturally within the order matching process.
ECN accounts are ideal for advanced traders looking for tighter spreads, fewer requotes/ slippage, and fast trade execution time. Such traders include but are not limited to professionals, high volume traders, active traders, scalpers, and algorithmic traders.
- STP (Straight Through Processing) Account: An STP account uses an execution model where the broker passes the client’s order directly to an external liquidity provider without any intervention.
Since the broker does not intervene with the client’s order, clients get access to raw market price (with no added spread) but are charged with a commission per trade which occurs naturally within the order matching process.
- DMA (Direct Market Access) Account: A DMA account uses a trade execution model where the broker offers traders access to the physical market without intermediaries. While this account type gives the trader access to direct liquidity, the trader’s orders are still sent in the broker’s name and not the trader’s.
This type of account is suitable for advanced traders looking for maximum transparency and control over the market.
- PAMM (Percent Allocation Management Module ) Forex Account: A PAMM account is an investment account that offers a form of pooled money forex trading where investors can allocate their funds in desired proportions to qualified money manager(s)of their choice who trades from a master account to generate profits.
This kind of account is ideally suited for traders who want to invest in forex trading but do not have the time or required knowledge to do so.
- MAM (Multi Account Manager) Account: The MAM account is similar to a PAMM account because it allows investors to allocate funds to qualified money managers. However, investors are allowed to intervene in the trading process.
- Copy Trading Account: A copy trading account allows investors to automatically copy the trading positions opened and managed by other investors or traders. This account type is an excellent choice for investors who want to invest in forex trading but do not have the time or required knowledge.
- Managed Account: A managed forex trading account provides clients with a professional money manager who executes trades on a client’s behalf for a fee. This account type is well suited for investors who want to invest in forex trading but do not have the time or required knowledge to do so.
- Swap-Free Account: Just as the name implies, a Swap-free account is an account that charges no interest (swap) on positions held overnight in the forex market. This account type is ideally suited for Islamic traders who are not allowed to be charged or credited with interest payments due to their religious beliefs.
While forex brokers commonly offer the accounts mentioned above, you may also come across other account types targeted at professional traders with additional features or separate pricing structures. Beyond this are tiered account types or VIP accounts targeted at high-volume traders.
When choosing a forex broker, an excellent way to go is by choosing one that offers multiple account types. With this, you can easily adjust to a suitable forex account type if there are changes to your trading style or requirements.
Also, you should choose an account that suits your current trading styles and meets your trading requirements. If unsure which account type best suits you, speak to your account manager directly.
When choosing a broker to trade with, you’re better off choosing a broker that offers the same currency with which you would be making transactions (deposit and withdrawal). Doing this means you don’t have to pay a conversion fee which is a fee charged for converting foreign currency to your account’s primary currency.
Before opening a forex account, it is essential to check if the broker offers the currency pair(s) you want to trade.
It is also advisable to work with a broker that offers a variety of asset classes, such as cryptocurrencies, stocks, commodities, indices, ETFs, and bonds, among others. This is because more tradable assets give traders the ability to diversify, and that can open doors to more trading opportunities.
Even if you’re the type of trader who focuses primarily on one or a few assets, it is still good to know that you have the option to diversify or take advantage of the opportunities other assets might offer in the future.
Execution Speed and Slippage
In simple terms, execution speed is how fast a broker can process your trade at the price you want. It is essential for all traders, especially those whose trading strategies require fast execution speed, such as scalpers and algorithmic traders.
Slippage, on the other hand, occurs when a market order is executed or closed at a different price from the price initially set in the order. The primary reasons for such occurrences are market volatility and execution speed.
Though brokers cannot eliminate slippage, it can be mitigated and minimized by not trading when the market is highly volatile and, secondly, using a forex broker with a fast execution speed.
Knowing fully well that the forex market is a fast-moving market, ensuring the forex broker you choose has a fast execution speed is highly important. A broker with fast execution would provide you with more accurate pricing when you place your orders.
Leverage and Margin
Leverage is a powerful financial tool that allows traders to control a much larger position size in the market by staking a smaller margin amount.
This means that with leverage, you can control a more significant amount of money by using little of your own money and borrowing the rest from the broker.
On the other hand, Margin is a percentage of the total position size that the broker sets aside from your account balance as collateral to cover the potential loss of a leveraged position.
As commonly stated, leverage is a double-edged sword, as it can equally magnify your profits and losses. That is why it is crucial, especially as a beginner, to understand what leverage trading is, how it works, how you calculate it, and when you should apply it. This would help you avoid unnecessary confusion and losses along your trading journey.
That being said, when choosing a broker, ensure you choose a broker which offers adjustable leverage. That allows you to adjust your leverage according to your trading objectives and risk appetite.
Also, good brokers would put some risk measures in place to protect clients from unnecessary loss. Such risk measures might include risk management tools and features such as negative balance protection, stop loss and take profit orders, deal cancellation, and calculators.
Note: There is an industry-wide leverage limitation of 30:1 for retail traders under certain jurisdictions, including Australia, the United Kingdom, and Europe. However, traders in these jurisdictions who qualify for professional status can access higher leverage of up to 400:1.
If you live outside these jurisdictions, you can access maximum leverage of up to 400:1 or more (as high as 3000:1), depending on the broker.
When you open a forex account, you would be doing a lot of monetary transactions such as deposits, withdrawals, or funds transfers. A good broker understands this and would offer multiple safe and secure payments for you to choose from.
While it may be attractive to choose a broker that offers multiple payment methods, choosing one that offers two or more payment methods that are convenient for you is also highly advisable.
Also, check the broker’s payment policies, fees, and processing time. Doing that would give you a better insight into how the broker processes payments and help avoid unnecessary payment issues in the long run.
Becoming a successful forex trader requires continuous education, knowledge, and practice. Thus when picking a broker, especially as a beginner, you should choose a broker which offers a highly comprehensive and regularly updated educational center.
The significance of education in forex trading is to empower you to make the best possible decisions in the market at all times. Good brokers understand this and would offer access to free quality learning materials, such as videos, articles, eBooks, and webinars.
A quick run-through on a broker’s website should give you an idea of the quality of education the broker offers. It would help if you also compared between brokers to find the best option for yourself.
Regardless of how experienced you are as a trader, there will always be times when the assistance of a customer support service is needed. In times like this, you want to be able to reach the support team and get your problems resolved without any difficulties.
To test the quality of a broker’s customer support, a quick call to the broker or chat with the live chat support team should give you an idea of the nature of their support service and the average time the support team takes to resolve a query.