How to Choose a Forex Broker
When you look at a website all brokers seem to look alike. It is easy to create a professional looking website and make an enticing case for opening an account. However, when you look further, there may be major differences and how a broker actually performs may not become evident until you trade a live account. For what a trader may be entitled to, see Traders Bill of Rights.
So the question is how should you go about selecting a broker that meets your needs?
- List your priorities: Make a list of your priorities for choosing a broker, such as, location of broker, regulated or not and if so, under what jurisdiction (in some cases, like the U.S., there is no choice as you have to trade with a domestic broker), safety of funds, spreads, platform, free value added services (e.g. news, charts, trading signals), customer service, etc.
- Due Diligence- It is important to do your own due diligence to find a broker that suits your individual needs and meets your requirements, such as whether the broker is regulated, in what domain it operates, its capitalization, etc. You need to be careful looking at reviews as the tendency is to post negatives rather than positives in this regard. Nevertheless, you can do some research to make comparisons.
- Commissions/Spreads- Most forex brokers do not charge explicit commissions on their trades. They are baked into the bid/ask spread. Check into the "pip spread" on trades. In this regard, the executed or real spread (i.e. where a trade is actually executed vs. the quoted price) is what is important and may differ from what you experience in demo trading. You may not be able to determine this until you open and trade a live account.
- Dealing Desk-Non-Dealing Desk - ECN- All brokers collect or aggregate prices from outside sources. The term dealing desk implies the broker acts as a market maker and takes trades from its clients into its book, and manages its positions based on its internal risk parameters. The term non-dealing desk implies the broker passes trades through directly to outside sources. An ECN is more of a marketplace with outside sources making the prices and trades executed directly with these counterparties. In this case, the broker will typically charge a commission for each trade. There are advantages and disadvantages to each type in terms of spreads and liquidity. There are also some brokers who give the Impression of being an ECN when in fact they are aggregating prices from outside sources and claiming to act like an ECN.
- Types of Accounts- Brokers can offer a variety of accounts with minimum capital and trade size for each type. These accounts are often known as standard, mini and micro. The standard account often has a minimum 100,000 (also known as a standard lot) size trade, mini a minimum 10,000 size trade and micro a minimum 1 size trade. Some brokers offer one size fits all account. Check with your broker for capital requirements for each type of account.
- Platforms- Platform is just a fancy name for the trading program. Some are web-based and some are downloaded directly to your desktop. Some platforms, such as Metatrader allow automated programs to run on them. Each platform has different features, such as order executions, etc. and it comes down to a personal preference as to the functionality. Take some demos to see which platform works best for you.
- Free value added services: - Different platforms provide different features. Almost all brokers provide charting of some kind. Others include news, trading signals, etc. Some can include some very sophisticated trading analysis software and analysis tools.
To sum up, there is no perfect broker but there are differences and it comes down to which meets your individual needs and priorities.
Do you have questions or need help? We have decades of experience and as part of our advocacy effort, are can help you make a suitable choice.
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