Today there are a huge number of Forex brokers offering a variety of different trading platforms online. This article lists the 5 most important points to consider when choosing a Forex broker.
5 Important Points to Consider when Choosing a Forex Broker
The procedure involved in the selection of a Forex broker is one of the most important decisions a Forex trader has to take when setting out to trade the financial markets. The foreign exchange market is the world's largest financial market and, with a huge number of Forex brokers offering a variety of different trading platforms online, traders need to select a suitable Forex broker to help them conduct their trading activities.
Choosing the right one can seem like a colossal task, requiring lengthy internet searches and ploughing through advertisements, but it is a necessary exercise. In this article, we will take a look at 5 of the most important points to consider when choosing a Forex broker in today's fiercely competitive marketplace.
Without a doubt, one of the most important things to look for when choosing a Forex broker is whether they are regulated. Finding a broker which is completely trustworthy is not always straightforward since the Forex market operates across the globe and there is no global regulation. Furthermore, a professional looking website does not guarantee that a broker is regulated. Although some countries have their own regulatory bodies, there are still some brokers who are unregulated. This is why it is important to find out whether the broker’s actions are considered governed by a recognised authority. Regulation allows for a higher level security for traders, especially in terms of their deposits and withdrawals.
These days, checking the credibility of a Forex broker is fairly easy and there are regulatory authorities all over the world who weed out the trustworthy ones from those who are fraudulent. Recognised regulatory agencies include the National Futures Association (NFA) and Commodity Futures Trading Commission (CFTC) in the United States, the Financial Conduct Authority (FCA) in the United Kingdom and CySEC (Cyprus Securities & Exchange Commission), the financial regulatory agency of the Republic of Cyprus.
2. Type Of Forex Broker
Forex trading enables traders to trade with both brokers and dealers. In simple terms, a broker is the middleman between individual traders and market makers. They process a trader’s orders electronically by computer systems and are known as a Non Dealing Desk.
The spreads offered to traders can be fixed or variable and brokers sometimes earn their commission as a percentage of the spread; for example, $10 per trading lot. Both ECN (Electronic Communications Network) and STP (Straight Through Processing) models are popular, giving retail traders access to a pool of offers which are quoted directly by the market makers and result in very low spreads.
Dealers are the market makers, having what is known as a Dealing Desk which processes the orders. Knowing the differences between the different types of brokers and dealers is key to selecting the correct broker to suit a trader’s particular requirements.
3. Transaction Costs
Traders will always be subject to transaction costs irrespective of what kind of currency trader they are. Each time a trader enters a trade, they will have to pay for either the Forex spread or a commission, so inevitably a trader will look for one which is the most affordable with the cheapest rates. It may, however, be occasionally preferable to sacrifice low transaction costs for a more reliable broker. Traders should ensure they know whether they require tight spreads or their specific type of trading and then review all the available options. Typically, traditional brokers do not charge fees or commissions on trades, making their money instead from the difference between the bid and the ask price, known as the spread. Seeking out the right broker is all about finding the right balance between low transaction costs and security.
4. Trading Platform
In online Forex trading, activity occurs via a broker’s trading platform, so one of the first things to look out for when choosing a broker is whether their platform is user-friendly and stable since it is a portal to the markets. Hence, traders should ensure the platform is visually pleasing, easy to use, has a wide selection of technical and fundamental analysis tools and, above all, that trades can be easily entered into and exited.
Well-designed trading platforms always have clear ‘buy' and ‘sell' buttons, and ideally, a ‘panic’ button which closes all open positions. Poorly designed interfaces can lead to costly order entry mistakes, so traders need to beware of trading platforms which do not meet expectations.
Other considerations include checking on whether a broker’s trading platform offers a free news feed and other market knowledge, including daily updates together with customization options, order entry types, automated trading options, strategy builders and trading alerts. Lastly, but by no means least, the best brokers always offer a free demo account so that traders can try out their trading platform prior to opening and funding an account.
5. Customer Service
The competence of a Forex broker when dealing with account or technical support issues is equally as important as their performance on executing trades. Although no broker is perfect, it is still important to choose one that can easily be contacted if problems arise. Some brokers may be professional and helpful during the account opening process, but have poor customer support.
It is therefore a useful exercise for traders to test the availability of a broker’s customer support team by attempting to contact them using the communication channels on their website. Assistance should be readily available, particularly for a live-chat service and, if technical problems occur, it is vital that help is always on hand. A good Forex broker always offers quality, speed and politeness as part of their customer service.
With hundreds of Forex brokers to choose from, it is important to select a reliable broker offering all the features a trader needs. Taking the time to do your research before opening up an account with a broker is an invaluable exercise and will increase your chances of having a successful trading experience.