Retail forex has seen rapid growth in the number of broker-dealers offering services in the global forex market over the past decade. Forex trading was once a more exotic activity left to banks, importers and exporters, and multinational companies. Now, the intensification of global interaction has made the activity more familiar, commonplace and attractive for individual traders who are looking for liquid assets and markets to trade within.
In this environment, however, the decision of where to set up a forex trading account has become more significant and relevant. With many brokers and currency pairs available from many locations, traders will want to consider a series of variables that can help minimise trading costs and maximise profits, while also ensuring secure trading conditions.
1. Trading Costs
Due to differences in bid-ask spreads and commission structures, the costs of trading may vary from broker to broker.
Most brokerages charge a fee for their services through the bid-ask spread, which is a small difference between amounts at which a currency can be bought and at which it can be sold. The bid-ask spread at brokers will vary in size depending on market conditions. Below are two factors that impact the relative size of the bid-ask spread:
- Volatility: During volatile periods, price action can quickly become directional and erratic. Accordingly, both risk and reward are amplified for market makers and forex traders. Generally, the bid-ask spread widens during volatile periods as the process of price discovery unfolds.
- Liquidity: Amid periods of limited order flow and market depth, bid-ask spreads grow. Due to a reduced number of buyers and sellers, market makers offset the risk of swift movements in price by increasing the bid-ask spread. This raises the cost of doing business for long-term investors, intraday traders and day traders.
Whichever trading strategy you use, it may be beneficial to engage forex pairs or CFDs with minimal bid-ask spreads. Accordingly, these are deeper markets that exhibit consistent participation and order flow. For instance, major pairs such as the EUR/USD and GBP/USD normally feature tighter bid-ask spreads than exotic or cross pairs. Also, traders may want to seek out brokers whose spreads are generally narrower on average in order to lower the cumulative costs of trading over a series of trades.
In addition to the bid-ask spread, some brokers may charge commissions for trading. The commissions may be calculated on a fixed basis per trade, or may be charged according to volume traded. Brokerages may apply other fees for account inactivity, non-compliance with account minimums, usage of margin, or use of any special brokerage services offered.
2. Customer Service
The best forex broker is one that excels in customer service. However, brokers vary widely in the types and style of customer services they offer.
In the forex marketplace, as well as in the broader financial markets, there are three basic types of brokerage service suites:
- Full Service: Full-service brokerages offer access to a variety of markets, trading platforms and services. For those new to the markets, full service brokers are valuable resources for education and proper trade execution. Additionally, the added customer support is worth the extra cost for novice traders.
- Discount: Discount brokerages offer a more basic array of services. With discount brokers, traders are left to their own devices and operate in an independent capacity. Veteran traders and market professionals find the reduced pricing of discount brokerages attractive.
- Boutique: Boutique brokerages offer more personalised services where it is easier to make direct contact with a customer service representative to ask questions or resolve any problems that may arise.
From a cost perspective, full-service and boutique brokers are more expensive, but are ideal for market newbies or hands-off traders. Discount brokerages offer reduced pricing that can boost profitability for experienced, savvy forex traders.
3. Dealing Desk, Or No Dealing Desk
Another important distinction among broker services is whether they offer dealing desk or no dealing desk trading. Some brokers may offer both.
When the brokerage operates as a dealing desk, it will take the other side of a trader's position to assure that the trader always has access to a liquid trading environment where a trade can be executed regardless of conditions in the interdealer market. This type of trading offers more predictable, fixed spreads in addition to a guaranteed counterparty for trades. But it may also restrict opportunities for gains, because orders can be filled by the broker on a discretionary basis.
In no dealing desk trading, the trader will be given direct access to pricing conditions in the interdealer market. This may be through an electronic communications network, or straight through processing. No dealing desk trading offers traders access to actual market prices, but can expose them to variable spreads and thin liquidity for executing trades.
It's important to be aware of which type of order execution model that a broker supports. Both Dealing Desk and No Dealing Desk have advantages and disadvantages that can impact any trading strategy.
To illustrate this point, assume that you are scalping energy CFDs. The ultra-short trade durations promote the need for maximum liquidity, thus dealing-desk execution is suitable. Conversely, for those implementing longer-term strategies such as day trading, searching for the best price on the open market via no-dealing desk is worthwhile.
4. Trading Platform
Regardless of their size or specialisation, most brokerages offer some type of trading platform for account and trading access. The features available on these forex trading platforms will vary according to the sophistication and costs of the account type. These features can include news feeds, charts and market analysis, and price alerts. Some brokerages will also offer a demo account to allow traders to test their platforms before beginning trading.
Elite brokerage services support the functionality of multiple forex trading platforms. As an example, FXCM offers a collection of platforms including Trading Station, industry-standard MetaTrader 4 (MT4), and TradingView integration.
Traders may also want to consider the amount of margin that competing brokerages offer. Margin requirements can vary wildly and depend upon an array of factors.
Margin is a type of loan offered by brokers that allows traders to leverage their initial capital to try to multiply the amount of profit they may be able to obtain on any given trade. Two primary elements impact forex margins:
- Currency Pair: As a general rule, the greater a forex pair's liquidity, the lower its required margin. Major pairs including the USD, EUR or GBP will offer lower margins than exotics such as the Russian ruble (RUB). These reduced margins reflect market stability and increase the traders ability to apply leverage.
- Market Conditions: Forex brokers are free to increase or decrease margin requirements as they see fit. For instance, many brokers increase margin requirements during periods of low participation or high volatility.
The amount of margin offered may depend not only on the forex pair or brokerage, but also on the maximum amount permitted in the country where the brokerage is operating. Traders may find brokerages in some countries offering leverage in a ratio of up to 50:1 and others elsewhere offering ratios of up to 400:1 or even 1000:1.
However, traders should be aware that using large amounts of leverage may be risky. Not only can leveraged trades multiply their profits, but they can also multiply their losses and the amounts they will be responsible for covering should they enter losing positions. When applying enhanced leverage to shares, forex, or cryptocurrency markets, it's essential to adhere to prudent risk management principles
Retail forex trading is generally a lightly regulated activity in an over-the-counter market. Subsequently, forex pairs aren't subject to many restrictions placed on equities, ETF, or futures products. Without a universal governing body such as the U.S. Commodity Futures Trading Commission (CFTC), oversight of the forex market falls upon regional authorities.
Depending on the country and jurisdiction in which they operate, forex brokers can and often are subject to some forms of regulation that can help protect traders' interests in the case misunderstandings or disagreements arise with their brokers. For instance, forex activity in Australia is managed by the Australia Securities and Investments Commission (ASIC). In the U.K., for example, forex trading is regulated by the Financial Conduct Authority (FCA).
Before jumping on board with the broker offering the least expensive services, traders would do well to investigate how the broker is regulated and to whom they may be able to appeal in case a dispute arises.
A variety of choices among forex brokerages has arisen that may make the decision of whom to work with seem daunting. However, if traders follow some basic guidelines in regard to cutting costs and maximising the efficiency and security of their activities, they will be more likely to ensure that their trading will be a positive and profitable experience.
This article was last updated on 7th September 2021.
Senior Market Specialist
Russell Shor (MSTA, CFTe, MFTA) is a Senior Market Specialist at FXCM. He joined the firm in October 2017 and has an Honours Degree in Economics from the University of South Africa and holds the coveted Certified Financial Technician and Master of Financial Technical Analysis qualifications from the International Federation of Technical Analysts. He is a full member of the Society of Technical Analysts in the United Kingdom and combined with his over 20 years of financial markets experience provides resources of a high standard and quality. Russell analyses the financial markets from both a fundamental and technical view and emphasises prudent risk management and good reward-to-risk ratios when trading.
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