Forex 101Lesson 4

How to choose a Forex Broker

Forex Broker is the intermediary that facilitates your trading. Although traders prefer to

remove the middle-man, a broker forms an important part of trading. In this article we will

help you choose forex broker. While most traders tend to take the idea of choosing a forex

broker very lightly, its consequences can be very harsh at a later point in time. As the saying

goes, better be safe than sorry; it is worth paying attention to while choosing a forex broker. After all, it is only with a forex broker that traders (retail traders such as you and me) can

trade with. In this article you will learn about some important points to remember while

selecting a forex broker and towards the end you should have enough knowledge and confidence

to help you pick the right forex broker for you.

We cover the following topics in this article

Forex broker basics

How to compare brokers

How to start trading

Forex Broker Basics

A broker, as mentioned is a middle-man who accepts

your order and matches it against other buyers and

sellers. In retail forex trading, a forex broker is

essential as they match thousands of orders thus

adding to the overall transaction value. If you were

you avoid a forex broker, you would need to have

capital in amounts of millions to be able to trade

directly with the buyers and sellers.

Forex Broker Types

Forex brokers can be made up of two primary categories

Market makers

STP or NDD (DMA) brokers

Market Makers

These types of brokers are known as counter-party

brokers. In other words, they trade against their

customers (traders). So when you buy, the broker takes

an opposite sell position against you and vice versa. Sometimes, the market maker can also match your order

against another of their clients. The bottom-line being

that with a market maker type of broker, most of the

trades are done in-house or with the broker’s dealing

desk.

STP or NDD Brokers

The second kind of brokers acts as a true intermediary. They do not take any counter- party positions

but merely pass your orders (or trades) to either their liquidity providers or to other traders. They

do not interfere in your trades as they charge a commission or fee for the service they provide.

While there can be a lot of debate as to which of the two is better, remember that most market maker

type of brokers have low account opening requirements; whereas an NDD type of forex broker

usually requires a minimum deposit of $500 or in most cases above $1000.

Commissions and Spreads

Besides the above classification, brokers can also be classified further based on other criteria such

as commissions and spreads. They fall into the following three categories:

Fixed Spreads

Variable Spreads

Commissions only

Fixed Spread Brokers

do not charge any commission but instead markup a couple of pips on the actual price. For example, if

EURUSD is currently trading at 1.31423, your fixed

spreads broker will show you a quote of 1.31429; thus

adding a markup of 6pips. The problem with such type of

brokers is that in order for you to profit, your trade

must move 6 pips in profit to cover the broker’s

spreads. For scalpers, this can be a problem.

Variable Spread Brokers

are similar to a fixed spread broker (they do not charge any

commissions) but charge a spread that changes (variable) with

market conditions such as market liquidity and volatility. During

periods of high liquidity, variable spread broker’s spreads can

narrow down to even 0 pips (ex: EURUSD during the London and US

market overlap time). While variable spread brokers might seem

ideal, note that spreads can vary during off market hours. For

example, the

same EURUSD could see as much as 6 pips or even more during early Australian (Pacific) trading session.

Commissions

only broker on the other hand do not markup the spreads. However, the spreads can vary. If the

broker has a large liquidity network (i.e: banks

and other market participants who can offer better bid/ask prices) the spreads can narrow

down to 0.5 pips for example.

How to Compare Brokers

When selecting a forex broker, it is always

advisable to compare a couple of brokers to get a better view of things. In this section you will learn

about the important criteria to look into while selecting or comparing forex brokers.

Is the forex broker regulated and licensed by a recognized financial capital markets authority?

And more important, is the broker recognized by a

financial regulator in your jurisdiction. The reason this

is important, especially the second part is that a

financial regulator ensures that the broker complies with the law and can intervene to protect the

customers (traders) interests.

What type of accounts does the broker offer?

Most forex brokers offer different account types catering to the different trader profiles. Typically brokers offer a micro

account (deposits up to $100), a standard account (deposits up

to $3000 – $5000) and VIP accounts for higher depositing

customers.

While this might seem trivial to check on, some brokers also

offer different trading conditions for each of the account types. Leverage is an important aspect that changes based on

the account types. It is therefore best to check on the account

types to see the value you are getting for your business

What are the trading conditions offered by the broker?

Does the broker offer spreads only or commission only? What are the typical spreads for major currency pairs, what are the swaps, does the broker allow scalping or

news trading? What are the minimum contract sizes offered

by the broker, how many currency pairs, CFD’s does the

broker offer to trade?

These are just some of the questions to ask and check with the broker. Most often traders skip this part only to

realize it later on that their profits were withheld because of scalping or news trading.

What are the banking methods offered by the broker?

What kind of banking methods (deposits and

withdrawals) does the broker offer and do any of the

methods meet your criteria. Also be sure to check on the

minimum deposit requirements and any fees that are

charged for deposit and withdrawals.

What bonus structure does the broker offer?

If you are interested in claiming a bonus, be sure to read

before hand on the bonus terms and conditions. Most

forex bonuses require a minimum trading volume to be

met. Some brokers might even withhold your

withdrawals unless the volume is met. Therefore if you

will be claiming a bonus, be very sure to read all the

fine print.

What do others say about the broker?

Broker reviews play an important part while selecting a forex broker. Most traders are sure to voice their opinion

about a broker, especially if the broker tries to scam their

customers. Reviews can be found on forex websites as well

on forums and could provide a bigger perspective when taking the above factors into consideration.

However, do read the reviews with a pinch of salt. Most

traders do not read or research into the broker before hand and thus tend to complain. Try not to be one of them

and do your homework accordingly.

How good is the broker’s customer support?

Last but not the least, check up on the different ways

you can contact your broker. Phone support

(preferably toll- free), email and live chat as well as

the support operating times. In fact you can check on

this before hand by asking questions to support to test them on their knowledge, both about the financial

instruments offered as well on other matters such as

account verification, banking and so on.

How to start trading

Considering that you have done your due diligence on the forex brokers and you have decided to open a trading account with them, always test the

waters by making a small deposit (perhaps $100 – $500) and trade

normally. During the course of the month, you will obviously be interacting

with the broker and thus be able to gauge if the broker is indeed true to what they mention on their website. After a couple of months, you can slowly

fund your account with larger deposits as you grow to trust your broker.

A forex broker is unavoidable and there are many brokers out there who

bring the rest of the business a bad name. By spending time doing due diligence

about a broker and starting slow (with small deposits) you will be able to

not only discover more things about the broker but also build a mutual

business relationship.