How To Choose the Best Forex and CFD Broker
The Forex market is the world’s largest financial market with a turnover in excess of around $4 trillion a day. Despite its huge size, this market has no central exchange for Forex traders to conduct their transactions. Instead, Forex traders must conduct their trading activities through an intermediary, the Forex broker. This shows the importance of the broker’s role in the trading process. When it comes to choosing a broker, traders have literally thousands of Forex brokers to choose from on the internet. But the real question is how can you be certain that the broker you have chosen is the right fit for your trading needs.
To help you in your broker selection process, we have prepared a guide with a list of key factors that you have to look at when choosing a broker.
- Trading Platform & Software
- Additional features
- Commissions & Spreads
- Broker’s Business Model
- Forex Broker for Beginners
- Forex Broker for Professionals
- Forex Broker for Day Trading
- Forex Broker for Scalping
- Account Types
- Customer Service
- Value Added Services
The first thing that you should look at when selecting a broker is to see if the broker is regulated by a competent regulatory agency(read more about Forex and CFD broker regulations). By dealing with a regulated broker, you can have the assurance that the broker has met the operating standards imposed by the regulatory body. Some of these standard regulatory requirements include having adequate capitalization and maintaining segregated accounts in order to protect the clients’ funds. Additionally regulation offers fund protection should the firm become insolvent and ensures the broker is upholding rigorous standards as a financial service provider.
Countries that have financial regulatory agencies that are backed with strict regulatory enforcement include:
- Australia (ASIC)
- Eurozone (Mifid and local regulators)
- India (SEBI)
- Japan (FSA and JSDA)
- Switzerland (FINMA)
- UK (FCA)
- USA (CFTC and SEC)
Discover the best regulated forex and CFD brokers
Trading Platform & Software
As the trading platform is your gateway to the market, you want to ensure that the trading platform that you are using can be relied upon. Most brokers will offer traders a selection of trading platforms to choose from. Most of the time, the trading platforms are provided by third party trading solutions providers such as MetaQuotes Software. There are also some brokers who have taken to developing their own proprietary trading platforms in an attempt to differentiate themselves from other brokers in the industry. Often times, these proprietary platforms are the best platforms to trade with as they are specifically designed by the broker’s client base.
Nevertheless, a good broker should be able to provide a good selection of platforms. This is because some traders prefer to trade from the desktop computer and some traders prefer to trade from their smartphones. It should be noted that the most common trading platform that you will find among the different brokers in the industry is the MetaTrader 4 platform. It is estimated that at least 85% of brokers in the industry uses the MetaTrader 4 platform. So this means there is a very strong possibility that this is one of the platforms that you will be using.
Look at the features which the trading platforms have to offer. Do they come with:
- Comprehensive charting package
- Wide range of technical indicators
- One click trading on the trading platform
- Risk management tools such as stop loss order and trailing stops.
While all these may seem trivial initially, they will later play a crucial part in ensuring that you will get to enjoy a seamless and productive trading experience.
But when it comes to platform selection, it is really a matter of personal choice. Most of these platforms will have the same basic features. The best way for you to find out which platform is right for you is to try them out with the demo account provided by the broker. For those brokers that do not provide a demo account, they may not be worth considering.
Commissions & Spreads
This market unlike other traditional financial markets mostly operates on spreads rather than commissions. This is the reason why most brokers advertise their services as being commission free.
So how do brokers make money?
Simply, they earn by charging traders a spread. The spread is the difference between the buying price and selling price. For example if the Bid & Ask price for the EUR/USD currency pair is 1.0875/1.0878, this means the spread is 3 pips.
As a Forex trader, you will come across 3 kinds of trading cost structure charged by a broker:
- Fixed spread – where the spread is not changing and you know the spread amount before you trade.
- Floating spread – this spread is variable and always moving depending on the market volatility.
- Commission fee – this is calculated as a percentage of the brokers spread. You should be aware of the amount payable before you trade.
Generally for traders looking for certainty with their trading costs, fixed spreads will be the preferred choice. Traders who are looking to pay a smaller spread would prefer floating spreads. Ultimately as to which is better will depend on your specific trading needs.
The kind of spreads that you will receive depend to a large extent on the kind of business model the broker is operating on.
Broker’s Business Model
In the course of your search for a broker, you will come across terms like “STP”, “ECN”, “NDD” and “Market Maker”. All these terms are in fact used to describe the business model which the broker is operating by. So what do they all mean?
There are two major types of broker – Dealing Desk and Non Dealing Desk.
Forex dealer or Market Maker processes their clients trading instructions through a dealing desk within their company. A dealing desk broker takes the other side of the trade to you, meaning when you open a position like the EUR/USD the trade will be executed by the broker and they are then exposed to that trade.
A Non-Dealing Desk (NDD) broker passes the trade straight through to a third party. There are two kinds of NDD broker (ECN and STP). They are both essentially the conduit between you the trader and the market maker or dealer.
With the first type (ECN) when you press “Buy” on your trading platform, your trade orders will be processed on the broker’s computer trading system automatically and transmitted through the Electronic Communications Network (ECN) without a dealing desk (This is where the term “Non Dealing Desk” (NDD) comes from).
With the second type of NDD broker, upon receiving your trade orders they will pass the trade orders directly to another party to be executed by the market maker’s dealing desk. In this instance, the broker is known as a Straight Through Processing (STP) broker.
Both the Forex ECN and STP brokers are intermediaries to several dealing desks or market makers in the global Forex market. Market makers or dealers will transmit their pricing to the ECN or third party liquidity provider together with the volume which the quote is valid for. The ECN/STP will in turn distribute the pricing to traders/market makers linked to the system. It should be noted that the ECN/STP does not execute trades but rather acts as the conduit for transmitting the trade orders from the trader to the dealing desk where the trader took the price from.
Why is this important?
The business model of the broker is important as this will affect the kind of spreads that you will receive and whether the spread will be fixed or variable.
Forex Broker for Beginners
For beginner traders, look for brokers with the following qualities:
- Comprehensive trading education resources – many brokers supply a suite of education materials to help push traders into mastering their skills. These usually include webinars, videos, courses, guides and articles.
- Unlimited access to the demo account for practice trades – most if not all Forex brokers supply demo-trading accounts to their clients. This is particularly useful if you are new to the world of Forex trading or if you’d like to test-drive a broker’s platform before you trade for real.
- User friendly trading platform – there are a whole host of trading platforms on the market, some more complicated than others. As a beginner trader you will not need a complicated platform with features like EA’s and complex trading strategies. That comes later, but now you should be looking for a platform that is fast and simple to grasp.
Here you can find the best forex brokers for beginners
Forex Broker for Professionals
For professional traders, their trading needs differ significantly from those of a beginner trader. Generally, professional traders prefer brokers which can provide them with:
- Comprehensive trading tools – as a professional trader you will now need a variety of tools including commission calculator, economic calendar and of course complex live charts in order to implement trading strategies.
- High leverage – not for the faint hearted, professionals will seek to use leverage in order to multiply their capital. Leverage increases the risk and equally increases the reward.
- Low spreads – if you trade a lot you want to ensure that your spreads aren’t eating away at your capital. It’s important to check the spreads payable before you select a broker, usually the greater the account type you take the lower are your spreads.
Forex Broker for Day Trading
Generally for a day trader, most brokers will be able to meet their trading needs. However given the shorter time period with day traders are trading with, it is best that the broker is able to provide a diverse range of instruments for the day trader to scout for trading opportunities. These can include a signal service, tools like an economic calendar, updating market news and also earnings reports. As you will probably be placing more short term trades make sure that you are aware of the spreads before you trade.
Forex Broker for Scalping
Scalpers are traders who hold their market positions for an extremely short period. While they only hold a market position a short period of time, the frequency of their trades is higher than the average trader. Their objective is only to make a small profit on all the trades that they make spread across a large number of trades. Note that not all brokers allow scalping. As such if you intend to trade as a scalper, you should always check with the broker that you intend to sign up if they allow scalping.
The majority of the forex brokers in the industry offer traders a selection of trading accounts to cater for different categories of traders.
- Micro Account – The smallest type of trading account is the Micro trading account where one trading lot is equivalent to 1000 units of the instrument traded.
- Mini Account – The next type of trading account higher up the hierarchy is the Mini account where one lot represents 10,000 units.
- Standard Account – The standard account is where one lot is equivalent to 100,000 units.
With the Micro and Mini account, only a low minimum initial investment is required to let you start trading. With the standard account, although the minimum investment may vary from broker to broker, generally you will need a higher amount of trading capital. Given the varying minimum investment for each type of trading account, you should select the trading account that is commensurate with your investment capital.
Most beginner traders tend to forget to factor in customer service when making their choice of the broker to sign up with. They may not realize the importance customer service plays in their overall trading experience. With customer service, it is not whether you will ever need their assistance but rather a question of when you will need their assistance. Because regardless of how experienced or knowledgeable a trader might be, there will always come a time when assistance from customer service is required. When that time comes, you want to be able to get in touch with the support team without any difficulties. So it is important to check if the broker that you intend to sign up with is able to provide you with reliable customer support.
Check to see if there are multiple ways of contacting customer support. Most brokers will provide their clients with several ways such as email, live chat and telephone for their clients to get in touch with customer support. In short, you don’t want to be in a position where you have to spend countless nights worrying about what your broker is going to do with your problem.
In an industry as competitive as the online forex trading industry, some brokers will try to distinguish themselves from other brokers, by offering additional value added services such as free market analysis, real time news feeds and trading signals. Most of these value added services are provided free of charge but there are some brokers which may require you to deposit a minimum amount before you can have access to these services.
Questions to Ask the Broker
If you have any general questions regarding brokers we can usually advise and recommend, however for more specific information you can read our broker reviews for deep insight. Our video reviews cover many aspects of the trading cycle. Please note, it is important that if you have any doubts about a broker’s product offerings or service, by asking the right questions you can clear up any ambiguity that you might have before they develop into an issue later after you sign up.
The kind of questions that you should ask include:
- How the broker maintains the safety of your funds
- The broker’s regulatory status
- The range of instruments that is available for trading
- Their business model
- Their customer service hours
- Their deposit and withdrawal process and whether there any fees involved
- Whether there are any conditions attached to the value added services provided
Check our broker filter tool >>> FX Empire is perfectly placed to help our readers choose reliable CFD brokers to work with. We have compiled this resource, which looks at all the key factors a trader should consider before selecting a broker to work with. We hope you find it useful.
How Can I Choose A Broker?
We are here to help with that! Check out our list above and choose the most suitable broker for you.
Should I Pick a Regulated Broker?
Yes, you should try to pick a regulated broker to work with. This ensures recourse in the event of a dispute or should your broker face insolvency. Remember by using a regulated broker you will also have access to an investor compensation fund, which insure your deposit up to a certain amount.
What Else Should I Look at When Selecting a Broker?
You should look at the range of platforms on offer and even ideally test-drive the platform you may wish to use. Take a look at the additional resources being offered by that broker eg. Signal service, educational tools, copy trading. Finally remember to find out about spreads, and account types before you place a deposit.
As noted above, there are many factors that you have to consider when selecting your broker. Nevertheless with the help of this guide that we have provided, you should be able to see which broker is better suited to your needs. To further facilitate your search, we have also conducted in-depth reviews and vetted each of the brokers in our recommended list to ensure they meet up the right standards. Once you have found the right broker to work with, you can focus more on your trading activities and trade more confidently thereby increasing your chances of success trading the market.