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Things to Look for in a Forex Broker

Things to Look for in a Forex Broker

Trading in the largest financial market in terms of market cap comes with its own share of gains and risks. The latter becomes more pronounced if the right trading infrastructure and money management tactics are not available. Such challenges become magnified without access to and support from a competent and licensed forex broker. For an aspiring trader, it is important to select a good broker, not only to maximise trading results over the long term, but also to protect their funds from misappropriation.

A number of factors need to be considered before you start trading with a forex broker, such as personal profit goals, flexibility and technological feasibility. Here are some important factors to take into account while choosing a forex broker.

Fund Safety and Regulatory Compliance

There have been plenty of cases where traders have been duped by their broker or have lost money due to a sudden bankruptcy. This makes it vital to check whether the broker is regulated in the region where they operate.

Over the years, the financial regulatory authorities around the world have become very stringent regarding guidelines for brokers, especially keeping the protection of clients in mind. These bodies keep a close watch on brokerages and come down strongly on any firm that fails to comply with the guidelines.

Forex broker regulations, however, differ from country to country, which is why many reputed brokers have multiple licenses from various regulating agencies. This offers traders greater confidence to entrust their funds with the firm.

Some of the most sought after licenses are the UK Financial Conduct Authority (FCA), US Securities and Exchange Commission (SEC), European Securities and Markets Authority (ESMA) and the Cyprus Securities and Exchange Commission (CySEC). They all have separate guidelines and prerogatives to issue broker licenses, as well as laws to protect investor interests. Some basic protection clauses to look out for are:

  • Segregation of client funds in separate accounts from that of the broker, maintained with reputed banks
  • Negative balance protection
  • Standardised risk warnings regarding risky financial assets
  • Leverage limits. For instance, the ESMA prescribes a leverage limit of 30:1 for major currencies and 2:1 for cryptocurrencies. The United States imposes a 50:1 leverage limit on major currency pairs.
  • Easy access and withdrawal of funds
  • Safe transactions
  • Regular P/L and order statements for clients. The company’s financial statements also need to be audited at prescribed intervals.

Trade Execution Model

Broadly, there are two kinds of brokers: Dealing Desks (DD) and Non-Dealing Desks (NDD), which also include hybrids.

1. Dealing Desk Brokers/ Market Makers

These brokers set the bid/ask spread on their own terms and systems, and usually take the opposite side of the client’s trades. They make money through spreads and by offering liquidity.

2. Non-Dealing Desk Brokers

There are again three main sub-categories here:

  • STP (Straight through Processing): All orders are routed to the broker’s liquidity providers, including banks, hedge funds and big investment firms, which occupy the counter positions in each trade. These providers set the bid/ask rate and the broker acts as a silent bridge between the liquidity provider and the trader. Some brokers also provide Direct Market Access (DMA), where orders are filled at the best available price, with a small mark-up spread.
  • ECN (Electronic Communications Network): Real-time order book information, where spreads are based on quotes from a large network of liquidity providers. Mini communication networks allow trades to be executed at lightning speed with minimal slippage. Spreads offered are much tighter.
  • STP+ECN Hybrid: Many brokers offer a blend of the ECN and STP model, to fully automate the process of order entry, spread pricing and trade execution.

Competitive Platforms to Trade

Superior trading platforms allow traders to get comprehensive market views, tools for fundamental analysis and plenty of technical indicators to analyse price action. Robust platforms also play a huge role in enabling low latency trade execution at desired prices. It is important to make sure that the features of the platform are easy to understand and can be accessed on multiple devices.

Traders also look for freedom to execute different order types with ease and apply strong risk management tools, such as stop-loss and take-profit. Some of the most popular and reliable trading platforms are MetaTrader 4 and MetaTrader 5. Getting a demo account to test their features would be a good idea before getting into the live markets.

Cost of Trading: Commissions, Spreads and Other Costs

Trading costs can significantly impact profits in the long-term, especially for traders who get in and out of the markets frequently, like scalpers, swing traders and high-frequency traders. Most brokers do not charge commissions on a per-trade basis. Instead, they charge in terms of the spread. The tighter the spread, the greater is the ease for traders to enter and exit positions.

The spread could be “fixed,” which means that the difference between the buy and sell price is set at a fixed number of pips. “Floating” spreads, on the other hand, mean that the bid/ask rate depends on market conditions, such as lower liquidity, leading spreads to widen. The size of the trading account determines the structure of spreads for most brokers. Of course, there are some that charge fixed or floating spreads, irrespective of the account size.

Slippage can also alter the actual earnings. It is a good idea to determine how much slippage is possible on a broker’s trading platform. Other trading costs include transaction fees for funding accounts, wire transfers, withdrawals and bank transfers. Some brokers might also charge a small amount for providing account statements and for closing accounts. These charges can be understood in detail from the broker’s service agreement.

Other important considerations can include leverage, initial deposit amount, lot sizes and availability of multilingual customer support. Most reputed brokers provide rich educational materials, such as e-Books, videos, webinars, blogs, etc., for traders to hone their trading knowledge and skills. Personal account managers are also becoming common. They offer strategic advice regarding order execution and market movements, while taking care of any technological roadblocks while trading.

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