How to choose and trust in forex broker

Posted on March 3, 2018 at 01:00 PM CET Forex News

The first step you need to do to trade on the forex market is opening a trading account with a forex broker. Some brokers offer better trading conditions than others, and you need to know what to look for when choosing your first forex broker.

This article will guide you through the main points you need to know before choosing a broker.

What is a Forex Broker?

Unlike brokers in the stock market, forex brokers have significantly lower transaction costs. They usually don’t charge commissions and don’t require to trade fixed lot sizes. So how do forex brokers make money? Simply on the difference between the bid and ask price of a currency pair, also called the spread.

What Type of Broker do I Need:

Forex brokers can be grouped into two main categories:

  • Dealing Desk brokers (DD)
  • No Dealing Desk brokers (NDD)

Dealing Desk brokers, also called “market makers”, are acting as a middleman between their clients who want to buy or sell a particular currency. These brokers create the liquidity and market for their client. When placing an order with a dealing desk broker, they will first try to match it with an existing opposite order from their other clients. In case there are no opposite orders, the broker itself has to take the opposite side of your trade, or pass it to other liquidity providers for risk-reducing purposes.

Since they set both the bid and ask price, their spread is usually fixed and doesn’t have to necessarily reflect the real interbank rate (although it’s close enough). The majority of forex brokers out there are market makers.

The other type of NDD brokers, ECN brokers operate on special electronic communication networks, to link both liquidity providers and network participants together in order to offer best possible trading conditions for their clients. They will usually charge variable spreads or commission fees and can require relatively higher deposit requirements compared to the other types of brokers.

Broker Checklist

Now that you know what a broker is and how they operate let’s look at the 6 most important things that should influence your decision when choosing a broker. We will go into greater detail about each one below:

  • Account Security
  • Leverage Range
  • Demo Accounts
  • Charting Platform Integration
  • Customer Service

 

 

Is the Broker Secure?

The most important point when choosing a forex broker is its security. At the end of the day, you want your money to be safely deposited with a broker that is regulated by a relevant financial authority. Some of the most often regulators in forex market include: CySEC (Cyprus), NFA and CFTC (USA), FCA and PRA (UK), and ASIC (Australia). Make sure you find the broker’s regulating body on its website before moving on with our checklist. A regulated broker will also process your withdrawal and deposit requests fast and without any problems.

What are the Transaction Costs?

Although traders can’t avoid transaction costs, they can choose a broker with tight and competitive spreads. However, like anything in life, cheapest is not always the best. In fact, many unregulated brokers will try to attract customers by offering extremely low transaction costs, so don’t fall into this pitfall. Competitive spreads are anything from 1-2 pips on major pairs, such as EUR/USD, GBP/USD and USD/JPY, and a few pips at most for minor and exotic pairs.

Which Charting Platforms Can I Use

The trading platform is your window to the forex market. It should be user-friendly, visually attractive and offer all the features that you may need. Today, most brokers offer desktop trading platforms such as Smart Trader, MetaTrader4 or even our own platform the Ultimate Charting Software (shameless plug, I know) in addition to some in-house solutions, mobile apps or web-based platforms. Make sure your broker of choice offers the platform that best suits your needs. For example, in times when you don’t have access to a computer, being able to manage your trades on your smartphone is very important.

What Customer Service Does the Broker Provide?

Last but not least, a great forex broker should also have a great customer service. Unexpected situations happen along the way, and you need to be sure that your broker will resolve all your problems in a timely manner. It’s equally important that you can contact your broker in a number of ways, such as via chat, telephone, or e-mail, and you can give your broker a quick call before you open an account to check what the waiting lines are and how reliable and accurate the customer service is in answering your questions.