How to choose a forex broker

Why is broker selection in the forex market such a big deal? Read this article to find out more about the very essence of what it means to do business with forex brokers, and why care must be taken in broker selection.

Introduction

Traders cannot trade forex directly on the trading floors. In order to get access to the market, they have to do so using platforms. Trading platforms are provided by forex brokers. In addition, forex brokers serve other functions in the market which the trader will not be able to do on their own. Some of these functions include:

  • Providing tools for technical and fundamental analysis.
  • Shoring up market liquidity.
  • Getting price quotes for currency pairs.
  • Placing a central repository of trading funds in a secure banking environment.

Trading forex can be a complex business, but brokers serve to make it very simple. This is why it is very important to choose your forex broker carefully.

Forex Brokers: What Types Are There in the Market?
There are basically two types of forex brokers.

  1. Electronic Communication Network (ECN) brokers
  2. Market makers

Each type can be used to do forex business under certain conditions. Moreover, the model of brokerage business dished out by these brokers is structured to suit certain categories of traders. All traders are not created equal, therefore it is essential for forex traders at all levels to know which brokerage model will suit them so they get the best out of the market.

1.ECN Brokers
Electronic Communication Network brokers are sometimes referred to as direct market access brokers or non-dealing desk brokers. ECN Brokers provide traders with Level II, institutional-type pricing in the market. What this means is that the prices that are provided by the liquidity providers in the market (usually banks), are passed on straight to the trader. The trader then has an option of choosing from the several prices that are displayed on his platform, and places his order, which is then sent back directly to the liquidity providers for processing and execution. This is the most transparent model of pricing available in the market. Spreads are usually variable and the trader is required to start trading with a large capital base, with capital requirements starting from $10,000 on some forex broker platforms to as high as $50,000 on others.

ECN brokerage model.(c) Aboutcurrency.com

ECN brokerage models are increasingly getting involved in the business of presenting faster and more efficient market execution tools. It is not uncommon to see an ECN brokerage getting quotes from liquidity providers and also enabling their traders to capitalize on the best quotes by giving them tools for better market execution. These tools require some level of expertise to use properly. So for a forex trader, merely having a stash of cash that puts you in the ECN trading range is not enough; some degree of professional training is required.

2.Market Makers
Most forex traders today will use market makers. This is because those who have so much money to trade forex with ECN brokers are not the majority. Trading with market makers, also referred to as dealing desk brokers, has its ups and downs. The “downs” can impact a trader quite negatively if care is not taken. The pricing provided by liquidity providers is usually routed to a dealing desk operated by the market maker, and there prices are marked up slightly and sent to the trader as a single price quote. When the trader executes the order on his platform, this again goes to the dealing desk of the broker and is executed at that level. So the trader is not actually buying from the liquidity providers but from the market maker. Spreads are fixed and capital requirements are small. However, the trader is essentially holding a contrary position to that of the broker and for that reason, this is not the most transparent pricing model there is out there.

However, the market makers play a very important role in the forex market: without them, retail traders would essentially be locked out of the forex market. It behoves the trader to simply know how to get around the rough patches that are encountered when dealing with dealing desk brokers.

(c)Paxforex.com: Execution styles in forex

Choosing a Forex Broker

Here are the key points to consider when choosing a forex broker.

1) Is the broker regulated?
Regulation is all about consumer protection. If your broker is not regulated, you are basically on your own with no one to turn to for redress if problems arise from the broker’s end. Many issues can be resolved amicably with your broker, but there will be times when third party intervention from a supervisory body will be needed. Regulation means that the broker has submitted itself to scrutiny and supervision from a higher body which has a legal mandate to also enforce sanctions if need be.

2) Does the broker have tools to enable you trade forex?
Without certain basic tools, you simply cannot trade forex effectively. Every retail forex brokerage worth its salt should be able to provide its clients with the following basics:

  • Charts
  • Technical tools for analysis such as trend line tools, Fibonacci tools and technical indicators.
  • Support for forex robot use.
  • Forex VPS integration
  • News feeds
  • Assets from different asset classes for correlated trading.

There was a time when these were considered luxurious add-ons; not any more. These are now considered as the most basic of provisions by brokers for their clients.

3) Payment Systems
Payment systems for depositing and withdrawing funds from the forex account are now a big issue. Transition is gradually being made from the bank wire system (which used to be the gold standard), to more advanced, cheaper, faster and more efficient payment methods. For instance, Ripple is a cryptocurrency which has been developed as a means of cross-border payments between banks, and close to 750 banks worldwide have signed up for it. So in addition to the credit/debit cards and the ever-expanding digital currency space, your preferred forex brokers should also be progressive and move with the times in offering payment methods that can enable you make fast deposits and withdrawals.

Conclusion

This website will present the best forex brokers and forex systems that meet the criteria spelt out above and enable you have the best forex trading experience you could every wish for. Feel free to browse through the broker review pages here.