How To Choose a Forex Broker? | Forex For Beginners Nr.2


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This is the second article of the series called “Forex For Beginners,“ where I explain the basic stuff every beginner should know. If you’re completely new to this, I suggest you start with the first article.

 

Due to constantly growing interest in financial markets, new forex brokers are created very often. In order to attract clients, they must be appealing and competitive. Being competitive means better offers to the customers, better trading conditions and so on. That’s great, but as always there are some minor downsides…

 

Of course, when there are so many firms to choose from, all of them simply can’t be equally good. Many of them are not capable of meeting all the needs of a customer. Also, there are some scammers out there, but they can be identified by performing a little bit of research.

 

Others are honest, but still, there is a large selection, sometimes brokers can be quite specific and not suitable for everyone’s needs. If it’s your first broker – don’t worry too much about it, you can create a demo account with almost any broker without risk. You can change broker at any time, or work with several at once.

 

During the time necessary to practice with a demo, you will be able to know your needs, do some research and make the reasonable decision about your first real investment. Here are the most important aspects that you should pay attention to when choosing a forex broker:

 

Regulation

A proof of reliable regulation probably is the most important thing a broker must have. If you’re entrusting your money to an unregulated broker, chances are, you will never be able to get it back.

 

Choosing unregulated broker means that you don’t have any protection from fraud. Unregulated brokers can do whatever they want.

 

Also, simply being regulated can often be not enough. You need to make sure that a broker is supervised by the regulatory body, that is based in the reliable and relatively stable country.

 

A pretty reliable and common regulator is the NFA (National Futures Association), which is based in the U.S.

 

“National Futures Association (NFA) is the industrywide, self-regulatory organization for the U.S. derivatives industry. NFA strives every day to safeguard market integrity, protect investors and help our Members meet their regulatory responsibilities.” – This is stated on their official website.

 

For the regulation details, you should look at “About Us” page, footer section of each page, or you can simply google it. Countries with reliable regulators: U.S., U.K., Eurozone, Switzerland, Japan, Australia. Countries with less reliable regulators: Cyprus, Russia, and pretty much every third world country.

 

ECN Or Market Maker?

Market makers (aka dealers) literally makes the market for you by acting as counterparties to all your trades. They’re taking the other side of your trades – when you sell, they buy from you, and when you buy, they sell to you.

 

They make money from spread (the difference between bid and ask). But your loss is also their profit and vice versa. It means that they always expect you to lose, this can lead to some illegal interventions: slippage, platform “freezing” connection disappearance, stop hunting, etc.

 

They set bid and ask quotes based on their own interests (usually spreads are kept adequate, due to the competition between market makers). Some of them have fixed spreads, others have variable ones.

 

ECN (Electronic Communications Network) brokers match your trades with other market participants. Broker won’t take the other side of the trade. For example, if you’re buying GBP/USD and there’s no seller, your order won’t get filled until the seller appears (It’s rare but theoretically possible).

 

ECNs doesn’t make money from the spread, instead, they charge you with the fixed commission (transaction cost), so spreads are usually tight (It’s even possible at certain times to get no spread at all). That’s why ECNs actually wants you to win and be successful so that you continue trading and paying commission. It makes no sense for them to trade against you.

 

They determine exchange rates based on the data from multiple market participants such as banks and market makers, so rates are usually more accurate. Bid and ask quotes are also based on these prices, not on the needs of the broker.

 

Even though ECN probably looks better, but as a beginner you should choose a market maker (unless you have several thousand to invest), and here’s why:

 

let’s say that you’re buying a mini lot (0.1) with a market maker, and the spread is 2 (it’s fixed for simplicity reasons). With one mini lot, one pip movement is worth $1, in order for you to make a profit, the market should move at least 2.1 pips in your favor. This trade would cost you $2. But if you’re buying one standard lot (1), one pip is worth $10, so this would cost $20!

 

If you’re buying a mini lot with ECN, the spread is 0.5, and a commission is $5 per trade, in total it’s $5.5 – much more than a market maker! But if you’re buying a standard lot, you are paying $5 for the spread and the commission is still only $5, in total $10 – way less than a market maker!

 

As you can see, trading with ECN makes sense only with bigger accounts. Also, market makers have lower initial deposits (can be less than $10) and ECNs requires a higher deposit (sometimes as high as $100 000).

 

Trading Platforms

The most popular platform in the world is MetaTrader 4. Chances are, that no matter which broker you choose, you will be using it (or at least there will be an opportunity to do so).

 

There are many indicators and automated robots for MT4 that you can download and install. After learning to work with MT4, it will be very easy to switch to another platform later. There’s new MetaTrader 5, some traders prefer it.

 

There are hundreds of other platforms out there. You might prefer a desktop application or a web-based (java) application. Some brokers have their own platforms, for example, Oanda has FxTrade, which is pretty reliable web-based platform. Also, some brokers have their mobile apps, this can be very handy.

 

mt4Generally speaking, all platforms have the same basic functions. Their layout, navigation, speed, additional tools, customization abilities, and reliability is what separates them one from another.

 

After you learn the basic, it really comes down to personal preference.

 

The platform should suit your needs and your trading style. If you like to trade aggressively (big lots and frequent trades), you should make sure, that the platform doesn’t “freeze” a lot, and is fast. If you are more conservative, you can be more flexible with platform selection.

 

Account Types

With different brokers, you can get different types of accounts. The most common ones are standard, mini, micro, cent and demo. Basically, the difference between them is the minimum initial deposit and the minimum (and maximum) available lot size.

 

With a micro account, micro lots (0.01) are the lowest lots available, with mini usually mini lots are the lowest. Standard doesn’t necessarily mean that standard lots are the lowest trade size (it could be, but it depends on the broker).

 

If this is your first time investing, you should probably look for demo and cent accounts. Demo means that you’re not trading with real money (and their opening is free), but you have the ability to experience conditions of the real market and get familiar with all its specifications.

 

Most brokers have unterminated time with the demo, some of them offer only limited time. As a beginner, you should choose the ones with unlimited practice time.

 

With cent accounts, money in your balance appears as cents, instead of full units. For example, if you invested $300 and you have a cent account, your balance will look like this: $30 000 (it means that you have thirty thousand cents in your balance).

 

Other Very Important Criteria

Leverage: Traders have access to different leverage. Leverage is a loan provided by your broker, which increases the potential of your winning (and losing as well).

 

For example, if you’re using the leverage of 100:1, it means that if you have $100 in your account, you can trade with the maximum of $10 000, if the leverage is 500:1, you can trade with the maximum of $50 000 and so on.

 

Leverage should be used with extreme caution – when you open bigger position you can earn more if the market moves in your favor, but the loss can be equally big if you made a mistake.

 

People (especially beginners) often tend to choose higher leverage. This is a huge mistake, as a beginner, you should choose no more than 100:1.

 

Trading costs and fees: As I mentioned earlier, brokers make money from commissions and spreads. Market makers usually have only spread (sometimes can have a commission, especially for larger accounts). Before joining a broker, you need to make sure, that you clearly understand how much they charge for different actions.

 

Also, most brokers have a “swap”. It’s defined as an overnight (rollover) interest. A swap charge is determined based on the interest rates of the countries involved in each currency pair. Most of the time you pay this fee, but sometimes it can be paid to you.

 

It’s more relevant to traders who likes to hold positions for longer time periods (overnight). Some brokers now offer swap free accounts, but you need to be careful, sometimes there can be hidden fees.

 

Additional Services: As the competition between brokers increases, additional services become very common. It could be easy access to economic news and upcoming events, technical and fundamental analysis and so on.

 

Some brokers provide more services for bigger accounts. It could be called silver, gold or platinum packages (or something similar). Some very professional and expensive ECHs can offer even personal financial advisor.

 

Capitalisation: When choosing a broker it’s important to make sure, that it has a sufficient amount of money. In other words, the more money your broker has, the bigger chances are that you will get paid and it won’t try to trick you. You can find out broker capitalization by simply googling or by looking at the regulatory bodies website.

 

Customer Support: Trading occurs 24 hours a day, so it’s important to be able to get support at any time you need. You should pay attention to the time necessary to contact with a live person, rather than a time consuming, ticket based automatic systems.

 

It’s important in which way you can contact the helpdesk: email, live chat, phone or all of them. Do the representatives seem knowledgeable? You can determine whether or not they would be willing to help based on their willingness to answer your questions.

 

Financial instruments offered: There are a lot of currencies available for trading, but only a fiew of them get the most attention. They’re called “majors”: EUR/USD, USD/JPY, GBP/USD, USD/CHF, GBP/USD. They are the most important and probably every broker has them.

 

Also, some brokers can offer other financial instruments, such as gold, silver, oil, sugar, palladium, wheat and many more.  Generally speaking, the wider range of financial instruments increases your chances to find the ones that you really like.

 

Initial deposit: As I mentioned earlier different brokers have different initial deposit requirements. It also depends on the type of account.

 

ECNs typically has significantly higher requirements. Market makers have lower requirements (sometimes no initial deposit at all).

 

If a broker offers trading with real money without your investment, firstly you should figure out about conditions of this offer. No one gives away money for free, there’s more likely, that you will never be able to withdraw those “free” money.

 

Conclusion

It’s important to trust your broker. When there’s no need to worry about the quality of broker’s services, you can be more focused on the market analysis and your strategy development.

 

In the beginning, all this may seem a little bit complicated, but it isn’t. As you start to gain experience in trading, it becomes very clear. Generally speaking, if you’re a beginner just open a demo account with any recognizable broker and learn how to work with MetaTrader 4.

 

After becoming more confident and knowing your needs, you can try the variety of other platforms, brokers, and ultimately make your first real investment.

 

If you have any questions, feel free to ask them in the comments 🙂

Share with friends if it was helpful!

-Julius


If you feel like forex is not for you, or just don’t like to risk your money, you can read

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