Fees, account minimums, platforms, commissions, and regulations are just a few of the things one should consider when choosing the best online Forex broker. To help you make the right decision in broker selection, we’ve prepared this guide with a handpicked list of key factors you should take a closer look at when choosing the right online broker.
The Forex market is without a doubt the world’s biggest financial market with a turnover that’s more than $4 trillion per day. Despite the huge size, the market doesn’t have any central exchange for the Forex traders to conduct various transactions. Rather, Forex traders should carry out their trades via an intermediary, a Forex broker. This definitely shows the importance of the role of a broker in this trading process. With regards to choosing the right broker, traders have thousands of brokers to choose from. However, the real question is how do you find the right fit for all your trading needs.
One of the first things you should consider when choosing a Forex broker is to find out whether the broker is regulated by a reputed regulatory agency. If you choose to deal with a regulated broker, you’ll have a full assurance that the broker meets all the operating standards that have been put in place by the regulatory agency. Some of the common regulatory requirements include maintaining segregated accounts and sufficient capitalization to protect the client’s money. Furthermore, the regulation provides fund protection in case the company becomes insolvent and makes sure the online broker upholds stipulated standards as the financial service provider.
Countries with financial regulatory bodies that are supported by strict regulatory enforcement include:
- USA (SEC and CFTC)
- UK (FCA)
- Switzerland (FINMA)
- Japan (JSDA and FSA)
- India (SEBI)
- Eurozone (Mifid)
- Australia (ASIC)
Trading Platform and Software
You need to ensure the trading platform you’ll be using is reliable mainly because it’s your gateway to the Forex market. The best brokers will offer FX traders a wide range of platforms to choose from. In most cases, these platforms are provided by 3rd party trading solution providers like MetaQuotes Software. Also, some Forex brokers have developed their trading platforms as a way of differentiating themselves from the rest. In most cases, proprietary trading platforms are the best because they are specifically tailored for the broker’s clientele base.
Overall, a good Forex broker must be capable of providing an exclusive selection of trading platforms. This is due to the fact that some FX trader prefers trading from a Desktop and others prefer trading from their smartphones. MetaTrader 4 is the most common platform you’ll find among different online brokers in the Forex market. It’s estimated that about 85% of online brokers in the industry use the MT4 platform.
Commissions and Spreads
Currently, unlike the traditional financial markets, the Forex market operates on spreads instead of commissions. It’s for this reason that many FX brokers promote their services as commission-free.
The spread can be defined as the difference between the selling price and buying price. For instance, if EUR/USD’s Bid & Ask price is 1.0875/1.0878, the spread is 3.00 pips.
Fixed spreads are a great option for any trader looking for certainty with trading costs. However, floating spreads are much better for any trader who wants to pay a smaller spread.
Brokers Business Model
As you continue looking for the best Forex broker, you’ll also come across terms such as “NDD”, “ECN”, “STP” and “Market Maker”. All these terms are often used to describe a business model that a broker is following. So, what exactly does it all mean? There are two major kinds of brokers (a dealing desk and a non-dealing desk).
A Forex dealer is also known as a Market Maker and processes the trader’s trading instructions via a dealing desk within the organization. The dealing desk online broker takes the opposite side of the trade, which means you open the position such as EUR/USD, the trade would be executed by the online broker and they’re exposed to that particular trade.
A non-dealing online broker passes a particular trade straight to the third party. Essentially, there are two types of a non-dealing desk (STP and ECN). Both are a channel between the trader and the dealer or market maker.