When looking to trade currencies, a new trader is bombarded with massive amounts of advertisements, offers, and of course noise from online forums. In this article, I will try to break down some of the most important things to consider when choosing a Forex broker. After all, the main function of a Forex brokerage is to simply allow you to place an order with the liquidity provider, and at the end of the day most function in a similar manner. However, that’s not to say there aren’t some things that you should pay close attention to.
Are they regulated?
Probably the most important thing to pay attention to is whether or not the Forex broker you are choosing is regulated. Beyond that, it also matters where they are regulated. Unfortunately, not all regulatory bodies are equal, and therefore some traders get sucked into less than reputable brokerages due to this reason alone.
Regulation allows the trader to feel somewhat protected, as there is a governmental agency that is paying close attention to what the Forex broker is doing. Many years ago, when Forex trading was relatively new for retail traders, there were a lot of nefarious companies out there willing to take your money. Since then, we have seen a tightening and maturation of the industry, so almost all brokerages are regulated at this point. If they are not, that is a huge red flag and they should be avoided at all costs.
Beyond that, regulation in a country like Germany or the United Kingdom is much different than regulation in a country like Belize. Some of the most stringent regulatory regimes can be found in the UK, the United States, the EU, Australia, and Japan. In short, countries with more advanced economies typically have better regulatory protections for the retail Forex trader. Importantly, some countries, such as the U.K., offer deposit protection insurance, meaning that even if your broker goes bankrupt, the government will eventually refund your account balance.
What products do they offer?
Obviously, you need to know whether the broker you’re interested in offers the markets that you wish to trade. For example, if you wish to trade the CAD/JPY pair, the broker needs to offer it. Not all brokers offer all currency pairs. There have been brokerages that I have seen offering as few as 10 pairs, but I have seen other brokerages out there offering several hundred. In general, the larger brokerage firms will offer at least 25 pairs, quite often 40. Some of the more institutional based liquidity providers and brokerages can offer several hundred, giving you the opportunity to trade exotic currencies. Make sure that you can get the product you are looking for before filling out the paperwork.
ECN or dealing desk?
An Electronic Communication Network, or ECN, matches orders directly with each other, creating a fair and transparent marketplace. Dealing desk brokers, on the other hand, will look to either match orders or trade directly against you. A reputable broker will follow the guidelines and rules of the regulator and treat you fairly regardless. It may be considered heresy to say this, but my experience has shown me that it makes no difference which type of brokerage you choose, although spreads can vary greatly between these two different models. Typically, if you get an ECN broker to facilitate your order, they will charge less and spread, but charge a commission. In the end though, it’s pretty much a wash as to the cost of the trade. One area that the ECN works better for is typically scalping, as it allows for quick in and out trades and you don’t have to worry about any lag time at the desk. If you want to scalp, bear in mind that many brokers do not allow scalping-style trading, so be sure to check that out.
Some brokerages offer expert analysis while some don’t. It comes down to whether or not you need a little bit of extra help to form trade ideas, or if you are comfortable trading on your own. Beyond that though, there are plenty of places online, (such as DailyForex or FXAcademy) where you can find plenty of analysis for free.
Some brokerages will go beyond the usual calendar and announcements and offer plenty of extras. Sometimes those are deposit bonuses, sometimes they are webinars or even trading education. Again, all of this can be found for free online, but some brokerages have quite nice educational sections as an example. Think of it as buying a car, you can either get the stripped down version, which is generally cheaper, or you can get a more expensive model that comes with all the bells and whistles. Brokerages are much like this.
Let us not forget the CFD market. Unfortunately, CFDs aren’t available for trading everywhere (such as in the United States). However, most of the world does allow CFD trading, and this is something that you should pay attention to. If you have the ability to trade the currency markets, why not trade indices or crude oil? This gives you the ability to trade the world in one account, which of course has a major advantages if you understand correlation between markets. One of the major advantages that the rest of the world has over the United States is the ability to trade these markets as you don’t need to go in and by an entire futures contract to trade natural gas, you can simply put up a small amount of margin.
Much like any other business, the better you treat your customers the longer you stay alive. That being said, as a general rule you should feel bit more comfortable with a brokerage that has been around for 10 years as opposed the one that just started this year. However, if they are regulated in the proper sense and based in a strong, financially mature country, you should be okay. Make sure to read as many reviews as possible, but keep in mind that some of it has to be taken with a grain of salt as trading is emotional, and some people will negatively review brokers after losing money (which isn’t the broker’s fault). In general though, you can see through these negative posts, as they tend to be a bit over-the-top.
The main take away
The most important way to choose a Forex broker is to use common sense. There are a few things that I would consider about brokerages before depositing. Are they regulated? If so, where? Do they offer demo accounts? Do they have the currencies that I’m looking to trade?
I would say that if the answer to any of these basic questions is “no”, you should keep looking.