What's the Best FOREX Broker; Part 1
Here we have a closer look at FX brokerage and try to find What's the Best FOREX Broker. Well at least get an idea of what to look for in a good forex broker.
And because there is so much to consider when selecting a forex broker, we have had to break this down to 3 separate blogs.
Once we went through all this, here is what we selected: Best Forex Trading Broker
Like banks, car salesmen and cheese, not all brokers are the same…
Here is a list of the 16 most important questions you need to answer about your FX broker:
- How do they make their money
- Segregated accounts
- Lot size options
- Margin & Leverage
- Spread / Commission
- Funding options
- Funding limits
- Demo account
- Available trading platforms
- Pairs available to trade
- Customer service
- Base account currency
- Islamic accounts
- Broker structure – DD, STP or ECN
- Peer reviews
How Does Your Broker Make Their Money?
When working with any broker, or any company for that matter, it is important to know where they make their money from.
Are their goals aligned with yours, are they neutral, or are they against you?
- 1. Spread
- 2. Commission
- 3. Trading against you
- 4. Transaction fees
- 5. 3rd party services
1. Forex Spread
Most FX brokers will increase the spread (bid – ask) a little and make money from this every time you place a trade, it does not matter whether you win or lose your trade, they still make money.
Your brokers objective here is for you to trade as frequent and as large as possible. This is why most brokers provide their customers market commentary, training, signals, high leverage…
Ideally they want you to make money, because you will then continue to trade.
2. Forex Commission
They will either do this instead of increasing the spread, or as well as (and if they do, they generally will not tell you…)
Your brokers objective here is again for you to trade as frequent and large as possible.
Again your broker wants you to trade, the more trades you make, the more money they will make
3. Broker Trading Against You
Brokers see this first hand and because of this many brokers will trade against you. You buy, they sell, you sell, they buy. You make money, they lose money, or as what happens 80+% of the time, you lose money and they make money!
Your brokers objective here is to get ALL your money! If you deposit $500, they want that entire $500! They also want you to trade as large and frequent as possible.
4. Broker Transaction Fees
Although this is less common and less significant for both parties, some brokers will take a percentage of all transaction costs.
Funds in, funds out, transfers between multiple accounts and on the Swap Interest amount.
If you have a large enough client base it only takes a small percentage of each transaction here to add up.
5. Broker Third party Services
In pretty much every scenario the broker makes money when you trade, the more frequent and larger you trade, the more money they will make.
So most brokers will provide 3rd party products and services for free (that encourage customers to trade more often), things like trading software, trading signals, training etc.
Sometimes these are paid services that have upgrades and the broker will take a commission from this, not saying this is a bad thing, if it does indeed provide value, then why not.
Forex Segregated Accounts
As a trader you should be concerned with keeping your capital as safe as possible. One way to help with this is to choose a Forex broker that uses segregated accounts.
When a Forex broker states they use segregated accounts it basically means they are using two separate bank accounts.
- One account for the brokers operating funds
- And another separate account that is used for all of the clients funds combined.
Most brokers offer segregated accounts these days, but in the past that was not so common and when the brokers ran into financial trouble it was very easy for them to start using their clients funds to help manage their business. Not a good look!
Customers with larger trading accounts can also sometimes get their own segregated account, this would be an account just for their own funds, not shared with the broker or with other traders.
Another thing to look at is where the broker holds your money, where is the segregated account held.
Your broker might be holding your funds in some dodgy offshore bank account that is offering high interest… Yes this is unlikely, but it pays to ask where your funds are held and to look at how stable that bank is.
At the end of the day banks do go under and many take their clients funds with them…
Using a broker with segregated accounts does not mean your funds will be 100% safe, but it will certainly help!
Forex Lot Size
Some brokers do not offer trading on Micro lots or even Mini lots. If you are trading with a smaller account size, being able to trade these smaller lots sizes and use proper risk management will be vital to your success!
Here is the basic 3 different lot sizes available.
- Standard Lot: 1.00 – All FX brokers off these.
- Mini Lot: 0.10 – Pretty much all FX brokers offer these also.
- Micro Lot: 0.01 – Most FX brokers offer these.
And you can of course trade in any multiple of them.
For example if your broker offered Micro lots you could trade 1 micro lot = 0.01. Or as another example you could trade 2 Std lots, 6 Mini lots and 3 Micro lots = 2.63, and you would just say 2.63 lots.
If you were just trading 2 Micro lots, you could just say .02 lots, but 2 Micro lots is a lot clearer : )
Some other brokers do offer slight variants to this, but the basic concept is always followed.
Margin & Leverage
Brokers offer different amounts of Margin and Leverage to their customers. This can range from 0:1 to anywhere over 2000:1, which is a little crazy…
Too little leverage can make it hard to earn a decent return, but too much will also significantly increase your risk and potential to destroy your trading account…
If you see a broker offering 1000:1 or more, you need to look closely at these brokers. Do they really want you to make money, or just blow up your account ASAP
So they can move onto the next unsuspecting novice…
Most reputable brokers will offer around 200-500:1 leverage. We call this the sweet spot. Remember even if your broker offers you 500:1, this does not mean you have to use it, you can still trade only using 100:1, this just gives you the option to use more if you choose to at any time.
Note: US regulated brokers can only offer their US citizens a maximum of 50:1 leverage by law
Forex Brokers Spread and Commission
But some charge more than others…
some brokers are just plain greedy!
So to keep more of your money it pays to look around!
Because some brokers charge commission and some don’t, some mark up the spread and some don’t, there is really only 1 way to compare them and it needs to be done in a 2 step process.
Look at their advertised Spread and Commission together (apples to apples).
Here is an example of 2 different brokers on the EURUSD pair:
- Average advertised spread 0.6 pips ($6.00 USD/Std Lot)
- Commission $3.50 USD / Std Lot
Total cost per RT (Round Turn) = (6+(3.5*2)) = $13.00 USD
- Average advertised spread 1.6 pips ($16.00 USD/Std Lot)
- No Commission
Total cost per RT (Round Turn) = (16+0) = $16.00 USD
Broker A charges a commission as well as the spread, but is still considerably cheaper!
The Broker Commission fee is pretty transparent, but the Spread, which is variable can be a quite the opposite.
If you are trading 2 different accounts side by side, you will soon see if one of them is trying to pull the wool over your eyes (unless they both are…). And sure the spread maybe showing as really small, but as soon as the first Nano lot is traded it widens significantly…
Its not that some brokers lie, most just don’t know…
And as discussed earlier, the spread will change based on the liquidity of the individual currency pair, not all pairs are created equally…
So you need to compare the pairs you are going to be trading. Some brokers focus mainly on the majors and offer very poor pricing on the exotics, others are more evenly focused.
But depending on your trading style and trading frequency, getting a lower per trade fee can have a…
Massive impact on your bottom line!
Forex Funding Options
How can you fund your trading account? Brokers offer different funding methods because of unique regulations for different locations and the different costs and complexities associated with each type.
Here is an example of a few of the main ones offered.
- Wire Transfer (TT)
- Local Bank Transfer (ACH)
- CC / DC
- Union Pay
Also are there any restrictions on funding minimums or maximums?
You also need to look at the Withdrawal options, even though you deposited money via your CC, you may not be able to withdraw money via CC… So you need to check this first! This area is where a large percentage of broker / client conflict comes from.
Most of the issues are related to AML (Anti Money Laundering) regulations. Unfortunately this is a big issue for all banking related businesses.
Forex demo Accounts
Does the broker offer Demonstration accounts? And do you need them?
Demo accounts should look and feel pretty much identical to a live account. Their data feeds should be pretty similar (they will not be exactly the same though, hence to test the spread and slippage you do need to test on a live account).
But over all this makes them a great place to get familiar with the platform and any trading ideas you may have.
If you make a few mistakes and blow up a 50k demo account, no problem, just get another… and then another and so on.
Don’t Practice with your hard earned money!
If you cannot make money on a demo account, then why do you think you will on a real account?
Even most experienced traders still use demos for testing out new ideas, they are an invaluable tool for all traders to use!
Forex Trading Platforms
Some of the bigger FX brokers offer their own proprietary trading platforms for you to use. These are either web-based platforms that you access via your Internet browser (in the cloud) or client-side platforms that you download, install and run on your local personal computer.
And of course most offer mobile trading apps now also.
You need to think about what type of trading you are going to be doing and then find the right software that will work best for you.
- Manual Trading
- Automated Trading
- Technical Analysis
- Fundamental Analysis
- Being away from your office / computer…
Meta Trader 4 (MT4)
Also, most brokers support independent third party trading platforms like the very popular MetaTrader 4 (MT4) platform that can be obtained free of charge and has all the basic (and also many advanced) features like charting and the ability to automate your trading.
All of our FX Spot trading is done with MT4, it is offered for free, most brokers have access to it, we can use it for auto-trading and it is good for doing charting / technical analysis.
No it is not the best out there, but overall it is pretty good at doing everything we require at GLS Equity.
Continue to part 2 here: What's the Best FOREX Broker
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