How to Pick a Forex Broker
According to the Bank for International Settlements, the current foreign exchange trading volume is $4 trillion per day – a volume that the stock market takes six months to achieve. There are many forex brokers to suit your forex trading needs. To help prepare you, we offer articles about forex brokers. We also have reviews of recommended best forex trading brokers: Alpari, MB Trading and Dukascopy. We compare forex market trading systems. And we aim to provide the best forex broker comparisons and reviews.
Forex brokers fall into several categories that you should understand if you don’t want to be a sucker. There are honest market makers who make money on the spread between the buying and selling price, and there are greedy market makers who manipulate and increase the spread artificially so that it hits your stop loss, which turns it into a buy order to make them money. We would avoid most market makers because their business model, by definition, pits them against you, even if they don’t break any laws.
Straight Through Processing (STP) brokers are a step in the right direction because their quote systems are more highly correlated to the actual inter-banking quotes. Nevertheless, straight-through-processing brokers are a type of market maker. Sometimes they choose to route a transaction to independent traders. However, if the nature of the transaction is such that they would make more money if they handled it as a market maker instead, they will often keep it in house and manipulate the transaction to their advantage.
A third category consists of Electronic Communications Network (ECN) brokers, who do not make money on bid-ask spreads and therefore have no reason to manipulate these transactions. Usually, for a commission of less than $1 for every $10,000 traded, an ECN broker simply allows an individual retail trader to buy and sell on the inter-bank network with no markup, as if the retail trader were a bank or a financial institution.
We recommend that you use an ECN broker, even though it sometimes means significant minimum deposits and the requirement to trade in fairly large, rounded lot sizes. All of the best-rated forex brokers in our review are ECN brokers.
Forex Brokers: What to Look For
Internet access to forex brokers is, in part, the reason for the exponential growth of the retail foreign exchange market. Another attraction for retail forex traders is that forex brokers lend money to allow leverage from 50:1 in the United States and up to 700:1 outside of the United States. Forex leverage ratios are far greater than the 10:1 leverage of traditional trading markets. One pragmatic approach to choosing among forex brokers is to evaluate them in three areas: Trades, brokerage and payment details, and trading platforms.
Most forex brokers provide a demo account preloaded with play money from $10,000 to $500,000 so that you can practice in a pseudo-live environment until you feel confident enough to go live with legal tender. Once you go live, you can choose from different account levels. Some forex brokers provide a universal account, but most offer mini accounts and standard accounts with various minimum amounts that control how large of a transaction is allowed. Some mini accounts have no minimum required deposit and some have a $2,000 minimum deposit. Some standard accounts have no required minimum and some of them have a $5,000 minimum.
Brokerage and Payment Details
Understand the acceptable methods for you to pay the broker and for the broker to pay you. Not every broker accepts credit cards. Are you okay with paying a $25 wire-transfer fee if that is the only way the broker sends money? Be aware enough to spare yourself from unpleasant surprises.
Many traders are day traders and square their accounts by the end of each trading day. However, if you hold a position on consecutive days, the broker charges interest. How much interest is something you should know before you select a broker. For Muslims, who are forbidden to charge or pay interest, there are Islamic (or swap-free) accounts available from some forex brokers to allow clients to hold positions on consecutive days by paying daily fees instead of interest.
Know which entity regulates the broker. Some Americans restrict themselves to brokers within the United States so that they can conveniently march into the brokers’ headquarters in the event of trouble.
Consider the software platform that you will use to chart currency pairs and execute trades. Some forex brokers offer a web-based system, which is useful if you flit from computer to computer or if you want to trade from work. Some offer proprietary software that you download to your computer. Some support third-party trading-platform software applications. Some provide smartphone applications.
We hope that our review of forex brokers whets your appetite for forex trading. But keep your wits about you and educate yourself carefully. Do not dabble in forex with money that you actually need. Do not borrow money to trade foreign exchange currencies.
Foreign exchange trading is a game for the big kids on the playground, and they play for keeps. Be careful and use your practice account daily until you gain confidence in your ability to consistently make profitable trades for months. Unless you are prepared, the big kids will eat your lunch and take all your marbles home in their pockets.