There are hundreds, if not thousands of forex brokers available online and it’s not easy to tell them apart. The majority of brokers offer the same trading platforms, they are regulated in the same country, provide the same trading instruments, offer identical leverage, and almost everything else about them is virtually indistinguishable; even the primary claims on their websites are in uniform.
If all forex brokers claim to have the tightest spreads, the fastest execution, the best customer support and so on, how are you supposed to choose a forex broker if on the surface they all look the same?
It used to be somewhat more straight forward. Just search the internet, find a broker with an excellent online reputation. Make sure they are regulated in a reliable jurisdiction, such as the UK or Australia, make sure the trading conditions suit your strategy and have a call with a sales representative and see if you get a good feeling or a bad feeling from that interaction.
As forex regulation has changed drastically in recent years and months, the situation has become drastically more complex.
In this comprehensive guide on how to choose a forex broker, we don’t just present you with a handy checklist to help find your next broker, but we put it all into context with the current circumstances in the market.
Regulation is absolutely an essential attribute of any investment firm. It used to be the case that traders could narrow their search down to a few reliable jurisdictions, such as the UK, Australia, Malta or Cyprus. Unfortunately, due to sweeping regulatory changes throughout Europe and new changes coming into force in Australia, those jurisdictions are no longer seen as effective regulatory environments, but arguably they have become overregulated environments.
Brokers in Europe and other mature financial services destinations like Japan, Singapore, and the United States all severely limit how much leverage retail traders can access. While it’s undeniable that leverage is a double-edged sword and can be catastrophic for inexperienced traders, it’s also an essential feature for many experienced full-time traders.
Although you can undoubtedly rely on authorities like the Financial Conduct Authority (FCA) in the United Kingdom, the Australian Securities and Investment Commission (ASIC), Malta Financial Services Authority (MFSA) or the Cyprus Securities and Exchange Commission (CySEC) to effectively govern regulated investment firms, the brokers regulated by them are unfortunately no longer able to offer compelling trading conditions.
There was a time when a broker operating from an offshore island was seen as sketchy and potentially problematic. These days, some of the largest brokers in the world, even those are incorporated and regulated offshore—even those listed on the London Stock Exchange, as Plus500 is. Therefore forex regulation has become a moot point when determining if a broker is credible and reliable if all brokers are set up offshore.
The significant changes in the regulations concerning retail forex and CFD products have ignited a trend of brokers migrating to offshore destinations such as Seychelles, Mauritius, Belize, Labuan, Cayman Islands, St. Vincent, Marshall Islands and others.
The major downside of this trend towards offshore regulation is many of these jurisdictions lack stringent oversight. Traders lose some legal protections against abusive trading practices, such as stop-loss hunting, intentional slippage, rejections, requoting as well as other types of fraud. Traders also lose consumer protection schemes such as investor compensation funds to protect their investments in cases of bankruptcy or internal fraud. Also, your funds are safeguarded and will remain separate from the broker’s operating funds.
However, some regulators have stepped up to professional govern investment firms operating under their regulation. The International Financial Services Commission (IFSC) in Belize and the Cayman Islands Monetary Authority (CIMA) are well known for their active roles in overseeing how brokers operate. We recommend reading our guide to offshore forex regulation to get up to speed on the advantages and disadvantages of each regulator.
2. Pricing (Spreads, Commissions, Swaps)
When you choose a forex broker, you should pay close attention to the types of spreads they give. Don’t just look at the headline which reads spreads starting from 0.0 pips. It doesn’t really matter where they start from, what matters is the price you get, when you trade.
Brokers have to make money, and that is not unreasonable. But you also have to make money, which is the point of the relationship between you and the broker. Brokers offer different account types, where fees are applied in a slightly different way. Generally, trading accounts come in two varieties; Standard and ECN.
The main characteristics of an ECN Account is very low spreads and a commission charged to each trade, depending on the size of the order. Based on this model, the broker undertakes the role of sourcing the best possible quotes for you and charges a fee for doing it.
The main features of a Standard Account is no commission, but there is a wider spread, as the broker marks-up on the quotes received from the market.
In addition to those two primary account types, some brokers also offer a Cent Account for trading with cents (instead of dollars) where everything is multiplied by 100, so by depositing ten dollars, you feel like you are trading with a grand. In contrast, you will find some brokers offering VIP accounts to clients who do deposit several thousands of dollars.
Most brokers offer Swap-Free forex trading accounts, designed to suit traders of a Muslim faith who according to Shariah Law on finance, may not pay interest. Swaps are a fee charged when holding a position overnight. The fee is derived from interest rates.
Even if you are not eligible for a Swap-Free trading account, Swap fees are something to pay attention to, especially if you intend to carry trades over multiple days as the costs can add up over time. Many traders don’t pay attention to Swap fees or just don’t understand them, and some brokers exploit the situation.
3. Deposit and Withdrawal Methods
Getting money in and out of your trading account is an essential part of trading. Suppose you need to increase the margin in your account to prevent a position from being stopped out, or you find an unmissable opportunity. In that case, you want to ensure funds can reach your account without delays that cost you money or opportunities. On the other side, you should make sure you can access your money on demand.
Some brokers charge fees on deposits and withdrawals and set minimum withdrawal thresholds which may be restrictive to you. Before choosing a broker, make sure they are offering the most popular forex funding methods.
Making a decision
Once you have completed your research and are almost ready to choose a forex broker, it’s time to do a trial run. You should set up a demo trading account with any of the shortlisted candidates. Take the time to test the platforms and features of each broker and ask the customer support agents various inquiries to see how they respond. Don’t just test the platform, but try everything possible.