Step by Step Guide to Choose the Best Forex and CFD Broker

Regulations, commissions, platforms, account minimums, and fees are only a portion of the variables you ought to consider while picking an online Forex and CFD broker. To help you in your broker selection process, we have set up a brief guide with a rundown of key factors that you need to think about while picking a broker.

Regulations.

The primary thing that you should think about while choosing a broker is to check whether the broker is regulated by a competent regulatory agency. By using a regulated broker, you can have the affirmation that the broker has fulfilled the working guidelines forced by the regulatory body. A portion of these standard regulatory requirements includes having sufficient capitalization and maintaining segregated accounts so as to secure the customers’ assets. Moreover, the regulation offers fund protection should the firm become bankrupt and guarantees the broker is maintaining thorough standards as a financial service provider.

Countries that have financial regulatory agencies that are backed with strict regulatory enforcement include:

  • Australia (ASIC)
  • Eurozone (Mifid and local regulators)
  • India (SEBI)
  • Japan (FSA and JSDA)
  • Switzerland (FINMA)
  • UK (FCA)
  • USA (CFTC and SEC)

Trading Platform & Software

As the trading platform is your portal to the market, you want to ensure that the trading platform that you are utilizing can be depended upon. Most brokers will offer traders a choice of trading platforms to choose from. More often than not, the trading platforms are provided by third party trading solutions suppliers such as MetaQuotes Software.

In any case, a great broker should be able to provide a good selection of platforms. This is due to the fact some traders prefer to trade from their personal computers/laptops and some traders prefer to trade from their smartphones. It should be noted that the most widely recognized trading platform that you will find among the various brokers in the industry is the MetaTrader 4 platform. It is estimated that at least 85% of brokers in the industry use the MetaTrader 4 platform. So there is a very likely chance that this is one of the platforms that you will be using at some point in your trading journey.

Additional Features.

Look at the features which the trading platforms have to offer. Do they come with:

  • Comprehensive charting package
  • Wide range of technical indicators
  • One click trading on the trading platform
  • Risk management tools such as stop loss order and trailing stops.

While all these may appear to be unimportant at first, they will later play an essential part in guaranteeing that you will get to enjoy a consistent and productive trading experience.

But when it comes to platform selection, it is really a matter of personal choice. The majority of the platforms will have similar basic features. The best way for you to discover which platform is right for you is to give them a go with a demo account provided by the broker.

Commissions & Spreads.

This market unlike other traditional financial markets for the most part works on spreads instead of commissions. This is why most brokers will promote their services as being commission-free.

So how do brokers make money?

In simple terms they earn by charging traders a spread. The spread is the margin between the buying price and selling price. For example if the Bid & Ask price for the EUR/USD currency pair is 1.0875/1.0878, this means the spread is 3 pips.

As a Forex trader, you will come across 3 kinds of trading cost structure charged by a broker:

  • Fixed spread — Where the spread is not changing and you know the spread amount before you trade.
  • Floating spread — This spread is variable and always moving depending on the market volatility.
  • Commission fee — This is calculated as a percentage of the brokers spread. You should be aware of the amount payable before you trade.

Generally for traders searching for the assurance with their trading costs, fixed spreads will be the favored choice. Traders who are wanting to pay a smaller spread would incline toward floating spreads. Ultimately as to which is better will rely upon your particular trading needs.

The type of spreads that you will get depends to a greater degree on the kind of business model the broker is using.

Broker’s Business Model.

In the course of your search for a broker, you will come across terms like “STP”, “ECN”, “NDD” and “Market Maker”. All these terms are in fact used to describe the business model which the broker is operating by. So what do they all mean?

Throughout your search for a broker, you will run into terms like “STP”, “ECN”, “NDD” and “Market Maker”. Every one of these terms is in fact used to describe the business model which the broker is working by. So what do they all mean?

There are two main types of broker — Dealing Desk and Non-Dealing Desk.

Dealing Desk.

Forex dealers or Market Makers process their customer’s trading requests through a dealing desk inside their company. A dealing desk broker takes the opposite side of the trade to you, which means when you open a position like the EUR/USD the trade will be executed by the broker and they are then exposed to that trade.

Non-Dealing Desk.

A Non-Dealing Desk (NDD) broker passes the trade straight to a third party. There are two sorts of NDD brokers (ECN and STP). They are both essentially the middleman between you the trader and the market maker or dealer.

ECN.

With the first type (ECN), when you press “Buy” on your trading platform, your trade request will be processed on the broker’s computer trading system automatically and transmitted through the Electronic Communications Network (ECN) without a dealing desk (This is where the term “Non-Dealing Desk” (NDD) comes from).

STP.

With the second type of NDD broker, upon receiving your trade request they will pass the trade request directly to a third party to be executed by the market maker’s dealing desk. In this instance, the broker is known as a Straight Through Processing (STP) broker.

Both the Forex ECN and STP brokers are intermediaries to Nemours dealing desks or market makers in the global Forex market. Market makers or dealers will transmit their pricing to the ECN or third party liquidity company together with the number of which the request is valid. The ECN/STP will in turn issue the pricing to traders/market makers linked to the system. It should be noted that the ECN/STP does not execute trades but rather acts as the middleman for transmitting the trade requests from the trader to the dealing desk where the trader took the price from.

Why is this important?

The business model of the broker is significant as this will influence the sort of spreads that you will get and whether the spread will be fixed or variable.

Forex Broker for Beginners.

For beginner traders, look for brokers with the following qualities:

  • Comprehensive trading education resources — numerous brokers will supply instructional material to help traders master their abilities. These normally incorporate webinars, videos, courses, guides and articles.
  • Unlimited access to the demo account for practice trades — most Forex brokers supply demo-trading accounts to their customers. This is particularly useful if you are new to the world of Forex trading or if you’d like to test-drive a broker’s platform before you trade with your own money.
  • User-friendly trading platform — there are a large number of trading platforms out there and as a beginner you will not want a complicated platform with features like EA’s and complex trading strategies. That will come later with experience, but for now you should be looking for a platform that is fast and simple to use.

Forex Broker for Professionals.

For professional traders, their trading needs greatly differ from those of a beginner trader. Normally, professional traders prefer brokers which can provide them with:

  • Comprehensive trading tools — As a professional trader you will now need a number of tools including commission calculator, economic calendar, and of course complex live charts in order to implement your strategies.
  • High leverage — Not for the weak-hearted, professionals will look to use leverage in order to increase their capital. Leverage increases the risk and in turn increases the reward.
  • Low spreads — If you trade often you want to ensure that your spreads aren’t depleting your capital. It’s important to look at the spreads payable prior to selecting a broker, normally the larger your account type is the lower your spreads are.

Account Types.

The majority of the forex brokers in the industry offer traders a selection of trading accounts to cater for different types of traders.

  • Micro Account — The smallest type of trading account is the Micro trading account where one trading lot is equivalent to 1000 units of the instrument traded.
  • Mini Account — The next type of trading account is the Mini account where one lot represents 10,000 units.
  • Standard Account — You then get the standard account where one lot is equivalent to 100,000 units.

With the Micro and Mini account, only a low initial investment is required to start trading. However, with the standard account generally you will need a higher amount of trading capital, although the minimum investment may vary from broker to broker.

Customer Service.

Most beginner traders will in general neglect to consider customer service when making a decision on which broker to sign with. They may not understand the significance customer service plays in their overall trading experience. With customer service, it isn’t whether you will ever require their help yet rather an issue of when you will require their help. Because regardless of how experienced or knowledgeable a trader might be, there will always come a time when assistance from customer service is required. When that time comes, you want to be able to get in touch with the support team without any difficulties. So it is important to check if the broker that you intend to sign up with is able to provide you with reliable customer support.

  • Check to see if there are multiple ways of contacting customer support — Such as email, live chat, and telephone, etc.

Value-Added Services.

As competitive as the online forex trading market is, some brokers will try to distinguish themselves from other brokers, by offering additional value-added services such as free market analysis, real-time news feeds, and trading signals. A large portion of these value-added services are provided free of charge but there are a few brokers that may require you to deposit a minimum amount before you can have access to these services.

Questions to Ask the Broker.

It is important that if you have any concerns about a broker’s products, offerings or service, that you ask the right questions to clear up any concerns before they develop into an issue later on.

The kind of questions that you should think about are:

  • How the broker maintains the safety of your funds.
  • The broker’s regulatory status.
  • The range of instruments that is available for trading.
  • Their business model.
  • Their customer service hours.
  • Their deposit and withdrawal process and whether there are any fees involved.
  • Whether there are any conditions attached to the value-added services provided.

Q&A

Should I Pick a Regulated Broker?

  • Yes, you should try to pick a regulated broker to work with. This ensures recourse in the event of a dispute or should your broker face insolvency. Remember by using a regulated broker you will also have access to an investor compensation fund, which insures your deposit up to a certain amount.

What Else Should I Look at When Selecting a Broker?

  • You should look at the range of platforms on offer and even ideally test-drive the platform you may wish to use. Take a look at the additional resources being offered by that broker eg. Signal service, educational tools, copy trading. Finally remember to find out about spreads, and account types before you place a deposit.

James Stewart

Fundamental Analyst for Global Markets

James has over 20 years of experience trading FX, cryptocurrencies and investments products for a range of investment banks and brokers

He spent the last 10 years analyzing and writing about foreign exchange, crypto-currencies and the global financial markets

He has also spoken at a range of conferences around the globe on various financial topics.

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