Best Forex Broker - 10 Factors To Watch When Picking The Best One
Selecting the best forex broker is one of the key steps on the way to successful currency trading. We provide you a list of topics to consider before selecting your broker.
Selecting best forex broker is one of the key steps on the way to successful currency trading. There are a wide variety of forex brokers available online and you need to compare them so that you can select the best one that suits your needs. The following is a list of topics you may like to consider before selecting your broker and opening a real trading account.
1. Customer Protection Of Best Forex Broker
Customer protection is my number one filter when selecting the best forex broker. In today's electronic world, you have to be aware of many frauds in this area. It is really not so difficult to make a professional looking web site offering forex trading with extreme good conditions; but you can end losing all your money very quickly, if you fell in another pyramid game or anything similar.
Only regulated brokers should pass your filter! Don't trust the brokerage if it claims to be regulated, check them out yourself on the regulator's website to be sure. Also be careful about some brokers claiming to be "self-regulated", which is actually the same as unregulated. Also, remember that some countries have more strict regulations than others. Carefully read about the legal protection you have against broker in case of fraud or bankruptcy.
2. Execution Of Best Forex Broker
In terms of execution, Forex brokers operate different business models. They can play a role of market maker, ECN and non-dealing desk broker.
Market Maker
A market maker provides pricing and liquidity for a particular currency pair and stands ready to buy or sell that currency at the quoted price. A market maker takes the opposite side of your trade. A market maker earns their commission from the spread between the bid and offer price.
ECN
ECN is an acronym for Electronic Communications Network. A Forex ECN broker does not have a dealing desk but instead provides a marketplace where multiple market makers, banks and traders can enter in competing bids and offers into the platform and have their trades filled by multiple liquidity providers in an anonymous trading environment. The trades are done in the name of your ECN broker, thereby providing you with complete anonymity.
No-Dealing Desk
A no-dealing desk broker does not have a dealing desk but instead uses external liquidity providers to provide pricing and liquidity for its clients. A greater number of liquidity providers providing pricing to the no-dealing desk broker leads to tighter spreads. A no-dealing desk broker may increase the spread to earn its commission.
Besides the type of execution it is important for you that your broker executes your orders fast and automatically.
3. Currency Pairs Of Best Forex Broker
There are some small brokers who only have a few currency pairs for you to trade. Therefore it is very important for you to find those forex broker that have the currency pairs you are interested in.
4. Spread, Slippage And Commissions Of Best Forex Broker
Forex trading is connected with costs; some are seen (commissions) while others are hidden (spread and slippage).
Commissions
Many of forex brokers today do not explicitly charge any commissions on your trades. Don't be fooled with this kind of marketing, there is no free lunch. Every broker is earning money with every trade you make; if their fees are not expressed as commissions, than commissions are built into the spread (most common with market makers).
Spread
Spread is the difference between the sell and the buy quote or the bid and offer price. There are 2 types of spread: fixed and various. Fixed spreads remain the same throughout the day, while various spreads change according to market conditions. Spread also alters from account types. A mini account typically charges a higher spread than a standard account.
The tighter the spread, the more profit you can get. For example, if EUR/USD quotes read 1.1900/03, the spread is the difference between 1.1900 and 1.1903, or 3 pips. In order to break even on a trade, a position must move in the direction of the trade by an amount equal to the spread.
Slippage
Slippage is the difference between the order price and the executed price, measured in pips. Slippage often occurs in fast moving and volatile markets, or where there is manual execution of trades.
5. Margin & Leverage Of Best Forex Broker
Leverage
Leverage basically means you can use credit in order to maximize your returns. In simpler terms, what you do is you "borrow" your broker's funds temporarily to make larger trades and if all goes well, will produce larger profits. For example, you can control a $400,000 transaction for as little as a $1,000 actual investment; in this example, the leverage level is x400.
Margin
Opposite to leverage is margin; margin = 1 / leverage. Margin is the deposit required to open or maintain a position. With a $1,000 margin balance in your account and a 0.25% margin requirement to open a position, you can buy or sell a position worth up to a notional $400,000.
Few of possible margin and leverage combinations:
- 0.25% margin = max 400:1 leverage
- 0.5% margin = max 200:1 leverage
- 1% margin = max 100:1 leverage
- 2% margin = max 50:1 leverage
An investor should be aware though that if the market turns sour, there is a risk of losing a substantial sum of money, depending on the amount of leverage taken. If a trader's account falls below the minimum amount required to maintain an open position, he will receive a "margin call" requiring him to either add more money into his or her account or to close the open position. Most brokers will automatically close a trade when the margin balance falls below the amount required to keep it open.
6. Rollover Policy Of Best Forex Broker
A spot transaction is generally due for settlement within two business days (the value date). The cost of rolling over a transaction is based on the interest rate differential between the two currencies in a transaction. If you are long (bought) the currency with a higher rate of interest you will earn interest. If you are short (sold) the currency with a higher rate of interest you will pay interest. Most brokers will automatically roll over your open positions allowing you to hold your position indefinitely.
It's normal to charge a little more on negative swap than what a trader gets paid for positive swap, but some brokers use this as another way to squeeze even more money from traders. Some brokers charge negative swap both ways on some or even all pairs. If you rarely leave trades open for very long and can avoid the time that swap is charged, this won't affect you. For others, this could be important factor in picking a broker.
7. Trading Platform Of Best Forex Broker
Trading platform is basically the program that you will use to get such information like live quotes, graphs and charts, your exposure, your profit and loss, the margin required, every your open positions with their current profit and loss status and further useful data.
Trading platform plays an important role in selecting best forex broker. Today most of the forex brokers offer you free web-based trading platform, stand-alone desktop trading platform and even mobile trading platform. It is very important that you can open or close a position regardless of where you are located, home, office or on your vacations.
Other things to consider about trading platform are about its simplicity (it should be intuitive to use), functionality (does it offer you one click dealing or chart trading for example), how stable it is regarding possible disconnections (you don't want to see your application to drop-down in the middle of important scalp-trade), how reliable is it during fast moving markets and news announcements (your orders should be executed fast enough and you should also receive the confirmation fast enough). For more sophisticated forex traders it could be also important, that trading platform offers an Application Programming Interface (API) to allow you to automate your trading system.
8. Trading Account Of Best Forex Broker
Brokerages differ among each other on minimum balance required to open an account and on minimum trade sizes. While some brokerages allow you to open an account for $1, there are very well-rated brokerages which require $50,000 to open an account.
The standard unit size of a transaction, one standard lot is equal to 100,000 units of the base currency. Some brokerages offer so called mini accounts, where one lot is equal to 10,000 units; some go even further, offering micro accounts (one lot = 1,000 units) or even lower. Some brokers even offer you to manually adjust the standard lot size traded.
After demo trading you should start with mini/micro account and then move forward toward standard account, and test your trading strategies well on this path.
9. Customer Support Of Best Forex Broker
Obviously, support should be considered when the software becomes faulty or when questions arise regarding certain transactions. Quick acting support reflects positively on a broker and you can even try this by contacting them with pre-sale questions.
10. What Other Traders Have To Say About Best Forex Broker?
In today's world it is easy to find out, what other trades think about any of forex brokers. You can find and read many traders reviews on forex brokers. Check few of them and bear in mind, that also some of this reviews are not truly independent, they can be ordered and paid by forex brokers themselves. One important advice for you is, to exclude any brokerage with complaints about significant problems getting money out of accounts.
Written by: Goran Dolenc
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