How Do I Choose A Forex Broker?
Retail forex has seen rapid growth in the number of forex broker-dealers offering services in the global market over the past decade. Forex trading was once a more exotic activity left to banks, importers and exporters, and multinational companies. However, 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.
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. However, 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.
Also, 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.1)Retrieved 15 February 2017 http://www.finra.org/sites/default/files/NoticeDocument/p117362.pdf
Brokers may vary widely in the types and style of customer services they offer.
Some may present themselves as “full-service” brokerages that offer access to a variety of markets, trading platforms and services; while others are discount brokerages offering a more basic array of services. Still others may be so-called “boutique” brokerages offering 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.2)Retrieved 15 February 2017 http://www.marketwatch.com/story/the-best-brokers-for-forex-traders-1304970934690
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 counter-party for trades. But it may also restrict opportunities for gains, because orders can be filled by the broker on a discretionary basis.3)Retrieved 15 February 2017 https://www.ifw-kiel.de/konfer/staff-seminar/paper/2014/Bjonnes.pdf
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.4)Retrieved 15 February 2017 https://www.ifw-kiel.de/konfer/staff-seminar/paper/2014/Bjonnes.pdf
Regardless of their size or specialisation, most brokerages offer some type of trading platform for account and trading access. The features available on these 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.5)Retrieved 15 February 2017 http://info.scivantage.com/rs/scivantage/images/State/of/Online/Brokerage/Platforms-Scivantage.pdf
Traders may also want to consider the amount of margin that competing brokerages offer.
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.
The amount of margin offered may depend not only on the brokerage used, 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.6)Retrieved 15 February 2017 https://www.ecb.europa.eu/paym/groups/pdf/fxcg/2301/Retail_FX.pdf?8b9766f1bbf56797757c4c2cb391f305
Retail forex trading is generally a lightly regulated activity in an over-the-counter market. However, 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. 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 contains general information and does not represent trading advice.
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|1.||↑||Retrieved 15 February 2017 http://www.finra.org/sites/default/files/NoticeDocument/p117362.pdf|
|2.||↑||Retrieved 15 February 2017 http://www.marketwatch.com/story/the-best-brokers-for-forex-traders-1304970934690|
|3, 4.||↑||Retrieved 15 February 2017 https://www.ifw-kiel.de/konfer/staff-seminar/paper/2014/Bjonnes.pdf|
|5.||↑||Retrieved 15 February 2017 http://info.scivantage.com/rs/scivantage/images/State/of/Online/Brokerage/Platforms-Scivantage.pdf|
|6.||↑||Retrieved 15 February 2017 https://www.ecb.europa.eu/paym/groups/pdf/fxcg/2301/Retail_FX.pdf?8b9766f1bbf56797757c4c2cb391f305|