Between 54-87% of retail CFD accounts lose money. Based on 69 brokers who display this data.
Between 54-87% of retail CFD accounts lose money. Based on 69 brokers who display this data.
This guide to choosing a suitable forex broker will first explain what forex trading is all about. It will then discuss how to go about selecting a safe and suitable forex broker to trade through and the trading fees one might expect to pay, as well as the various broker business models available for trade execution, so you can choose the one that suits you best.
You can read any particular section by jumping to it using the links below.
Foreign exchange or forex trading involves exchanging one national currency for another. In the forex market, you can trade numerous pairs of currencies that are known as currency pairs. When the U.S. dollar is not involved in a currency pair, it is called a cross currency pair.
Among forex traders, the most actively traded currency pairs are known as the majors and the major crosses. Moderately traded currency pairs are known as minors, while the least actively traded pairs are known as exotics.
In all of the major currency pairs, you can freely go long or short one particular currency against another, although some of the less actively traded national currencies are subject to exchange rate controls. These controls are typically overseen by a central bank that limits the value or fluctuations of their country’s currency relative to one or more other national currencies.
For those sincerely interested in getting started trading forex for their own account, the good news is that the forex market is now wide open to your participation as an online forex trader, even if you only have a few dollars to put at risk.
Before starting to trade forex, you should first make sure you have the forex trading basics under your belt. This means that you have a forex trading platform that can execute transactions and that you know how to enter and exit forex positions. You will also need to know about the different types of orders that your forex broker permits, how to enter them and when to use them appropriately.
Furthermore, all it takes to make money as a forex trader is to buy low and sell high, although determining exactly what levels are low and what levels are high can take a lifetime to master. It also makes sense to develop a sound money management strategy so that you bet appropriate amounts for your trade certainty, risk tolerance and account size.
Exchange rate movements occur in dynamic response to the situations and events either occurring or widely-predicted in either of the countries that issue the currencies involved in a particular currency pair.
As market participants shift their expectations to encompass such new information, and their positions accordingly, the bet result is that the supply/demand balance shifts to a higher or lower rate. To accurately predict future changes in exchange rates, one therefore needs to take into account fundamental information pertaining to both of the currencies in a particular currency pair.
You will also want to have access to a good-quality economic data calendar with consensus expectations and times listed for the numbers due to be released. You can research online what the relevant economic releases mean to the market, and their relative importance in terms of market-moving potential. Keep in mind that even the forex market can often be illiquid, with wider spreads and sharper moves seen during the release of important data.
Furthermore, since you probably will not be privy to information about the large flows that move the market, you will want to develop an understanding of why those flows might occur, how interest rates affect currency trends and what other factors the big institutional players use to shift their portfolios between currencies.
Retail forex traders may find their information flow inferior to that of larger forex market players. One thing you can reasonably be assured of knowing, however, is the current exchange rate and how it has fluctuated in the past.
Armed with that exchange rate data information, you will then need to take the time to become proficient at using the many methods of technical analysis. This can help you utilise this exchange rate information to predict the overall direction and even the level of future exchange rates.
Having a good price charting system, with a reliable historical data stream and the indicators you prefer to use is vital when it comes to performing technical analysis.
One of the classic trading adages passed down by seasoned traders to novices learning the ropes of trading forex is to “plan your trade and trade your plan.” By using reliable technical analysis signals and other important market observables to set up your trading entry and exit points in an objective way, you can much more easily avoid many of the emotionally-based pitfalls that can blow out trading accounts.
Trading forex can become a much more enjoyable experience, and often a considerably more profitable one too, if you can just find the discipline and emotional control needed to stick to your tried and tested trade plan.
Most individual or retail clients trade currency pairs via an online forex broker. These brokers can have several different business models that might affect the dealing spread they offer, and they generally offer one or more ways retail clients can deal a variety of currency pairs electronically, including the majors, major crosses and minors.
To facilitate transactions, online brokers provide forex trading platforms that consist of software you can use to trade currency pairs electronically. They are typically developed either by the broker in-house or by third parties, and while most are free, some do have a fee associated with their use.
Online brokers also let you trade currencies on margin, often using substantial leverage ratios. For example, if the maximum leverage ratio offered by a particular broker for forex trading is 100 to 1, then you can control a position of up to $100,000 with a deposit of just $1,000, or 1% of the traded amount. This margin amount needs to be deposited with the broker to act as security against any losses that might accrue due to your trade.
The maximum leverage ratio a broker allows their clients to use for forex trading can vary significantly among forex brokers. Leverage ratios can also vary depending upon the laws governing retail forex trading in both their and your local jurisdictions.
When choosing an online forex broker, the following four key considerations should be taken into account:
The most important thing to consider when choosing a forex broker is how reputable the firm is. In the past, some questionable forex brokers have refused to return their clients’ deposits or have failed to manage their business in such a way as to keep client funds separate from their own so that they remain safe and can be returned to their owner in case of the broker’s bankruptcy.
Furthermore, most reputable forex brokers will be overseen by a major financial regulator, such as the Financial Conduct Authority (FCA) in the UK. This type of agency generally aims to keep the broker honest and protect the broker’s clients by making sure the firm complies with the financial laws of their jurisdiction designed to protect retail currency traders. The regulators may also review the broker’s internal procedures, handle customer complaints against the broker and insist that the broker keep client funds segregated from their own money.
Depending on their jurisdiction, clients of some brokers may also have their funds protected by compensation programs. In the UK, for example, forex brokers must insure client deposits against their insolvency by up to £85,000 as part of the Financial Services Compensation Scheme.
All forex brokers listed on this website are duly regulated by a financial regulatory agency. You can also look over a forex broker’s website for the name of their regulatory authority. Their regulation registration number should also be listed so that you can check the status of their approval to operate with their regulator.
Each forex broker will offer a different set of currency pairs, and some might also offer currency-related commodities like crude oil and gold you can trade on their supported platforms. If you prefer to operate your trading plan in a specific set of currency pairs, then it makes sense to ensure any broker you might consider using offers a competitive execution service in these pairs.
In general, almost all brokers will let you trade in the U.S. dollar and euro against each other and against the UK’s pound sterling, the Japanese yen, the Swiss franc, the Australian dollar and the New Zealand dollar.
To see a comprehensive overview of the currency pairs offered by any particular forex broker, you can start by reading their review on this website and can also visit the broker’s website for further details.
This topic will be discussed in greater detail in the next section, so it will only be briefly touched upon here. Basically, when trading currencies, you will have to think about three different types of fees that brokers can charge you, which are dealing spreads, commissions and swaps to hold overnight positions.
Keep in mind that wide dealing spreads and/or swaps, and high trading commissions can add considerably to your transaction costs when trading forex, so you will want to minimise them, especially if you intend to trade forex actively.
Most brokers do not charge all of these fees, and Islamic accounts do not generally have swap rates associated with them at all. Still, it makes sense when selecting among forex brokers to check what their trading charges are and ensure they will suit your trading style.
Although forex trading platforms all provide a broker’s clients with the ability to execute forex transactions and enter orders, they can range widely in their functionality, display style and target user audience.
On one end of the spectrum are the highly intuitive trading platforms intended for novices, like those in-house platforms provided by eToro or Plus500. More sophisticated forex trading platforms that might appeal to experienced traders, such as the exceptionally popular MetaTrader 4 and MetaTrader 5 platforms developed by MetaQuotes, can include advanced features like automated trading and trade strategy back testing over a range of historical data.
Many forex platforms also offer a strong set of charting tools, as well as the ability to add technical indicators to charts. Some platforms even allow you to create your own custom indicators if you know how to program or can find someone else to do it for you.
Selecting the right forex trading platform for your needs will largely depend on your level of experience as a trader, the type of trading plan you have developed and what assets you want to trade.
For example, technical forex traders might want a platform with exceptional charting capabilities and real time exchange rate data, while fundamental or news traders might prefer a platform with a top-quality financial news feed. Furthermore, some traders who are managing several forex accounts for themselves or others might want a platform that lets them do that most effectively.
In general, a good way to compare trading platforms among the various forex brokers is to open several forex demo accounts funded with virtual money. You can then test them out to determine which platform seems preferable for your individual trading and market analysis style.
Forex brokers can charge three basic types of fee, although not all brokers charge in the same way or degree. If you are or intend to be an active forex trader, it can therefore really pay to shop around for the best fee structure that will suit your particular trading style.
The most common type of fee charged by almost all forex brokers is known as the dealing spread. This is the difference between the bid or buy price for a currency pair and the offer or sale price as provided by a broker or market-maker quoting two-way prices.
Although less common, some forex brokers might charge a commission on transactions. This can be a flat fee charged on a per-trade basis, or the commission might be expressed as a percentage of the notional amount traded. A combination of the two commission structures is also sometimes seen. Brokers that charge such commissions might also offer volume discounts for especially active traders.
Forex brokers also usually charge or pay a fee for traders who wish to hold a position overnight. This is due to the fact that such positions need to be rolled out an additional day to remain value spot.
The amount of this so-called swap or rollover fee is typically determined for a particular currency pair by the difference between their respective Interbank market deposit rates. Swaps are generally expressed in pips, so you can multiply them by the base currency notional amount to get the amount of the swap fee you will pay or receive in counter currency terms.
If you are long the higher interest rate currency and short the lower interest rate currency, then you might actually be paid to roll the position out for another day. Such positions are said to have positive carry since you get money to carry them due to the favourable interest rate differential.
Those who qualify to open an Islamic account that conforms to Sharia law can usually trade swap-free. Keep in mind, though, that the broker might need to charge additional fees in other ways to compensate for not charging swaps on overnight positions for traders using an Islamic account.
Most online forex brokers will display their fees on their website. If you cannot find them yourself, just contact the broker to ask what their fees are and where they are displayed so you can look them over.
A key consideration when comparing forex brokers is the way in which they execute customer transactions and how transparent that execution is.
For some traders, another important aspect of choosing a broker involves if they take the other side of a trade and hence might have a conflict of interest when you deal with them.
Most forex brokers operate under one of five different broker models, although some brokers use a hybrid structure incorporating aspects of two or more models. It helps to know how these models work so you can choose the best broker with the execution method you prefer to use in your trading business.
The sections below describe and compare the most common forex broker models so you can better choose among them.
The first key distinction between forex brokers involves if they have a dealing desk staffed by people who clients interact with to make transactions. If they do, then they are a dealing desk broker. If they do not, then they are a no dealing desk (NDD) broker.
Dealing desk staff commonly widen dealing prices shown to clients. Both dealing desks and market makers also regularly shade prices by moving them against a client’s interest in order to make more money for their firm.
Selecting an NDD forex broker lets you cut out both the dealing desk and the market maker who can both attempt to make extra profit from transactions. Having a NDD broker can help you get fairer pricing when you want to make a trade, although you will probably need to give up the human element when interacting with the broker.
Brokers using the STP broker model do not have a dealing desk and provide a fully-automated trading system to their clients in which trades are processed electronically without human intervention. They are a type of NDD broker that is also sometimes referred to in the industry as an A-Book brokerage model.
STP brokers generally give client orders anonymously to a group of Interbank participants called liquidity providers for competitive execution when triggered. This means you can typically get fast executions that avoid human errors and involve lower transaction costs. STP brokers also usually provide greater liquidity, tighter spreads and better order fills because more than one market maker is involved.
When forex brokers use an ECN model, they allow customers to have direct access to the Interbank forex market via a trading platform. This type of NDD broker typically offers the best pricing and deal execution, although a flat fee commission per trade or extra pips are often charged that somewhat diminish this benefit.
ECN forex brokers often show order information and real time exchange rate fluctuations that come from the Interbank market. ECN forex brokers also have a lower error rate since trades are processed electronically instead of involving humans.
Another advantage of ECN broker is that re-quotes are rare. This can benefit news traders who take advantage of high volatility levels occurring around major economic data or news releases.
Forex brokers using a DMA model to execute client transactions automatically match client orders with market maker dealing prices. ECN brokers will generally offer clients a DMA service, while not all STP brokers do.
DMA brokers pass all client orders directly to liquidity providers for execution at the prevailing market price. This process tends to be more transparent than when brokers fill client orders themselves. DMA brokers generally provide variable dealing spreads instead of fixed spreads, but they usually add a per trade commission or a fixed markup on trades.
Forex brokers that act as market makers also usually operate a dealing desk and are known as a B-Book forex broker model. They make their money off the bid-offer dealing spread quoted to clients and try to capture as much of that spread as possible.
Market makers typically provide a two-way dealing price with fixed spreads depending on the currency pair quoted, although spreads can widen and prices shift quickly in highly volatile markets. Market making brokers take risk from and effectively trade against their clients, although since most retail traders lose money, doing so tends to be a profitable exercise.
An MTF broker (also known as an Alternative Trading System broker in the U.S.) operates in a similar way to regulated financial exchanges like the Chicago IMM where currencies can also be traded.
They basically match buyers and sellers so they can form a transaction contract subject to the MTF’s internal procedures. Compared to regulated exchanges, MTFs typically offer good transparency, fair pricing, reasonable execution, and lower costs.
Some forex brokers use a transaction model that is a hybrid or combination of two or more other model types. Some brokers also offer different execution models for different accounts, so large traders might have ECN access, while smaller traders might need to go through a dealing desk.
Common hybrid models involve a blend of the ECN or DMA models with an STP model to produce a totally electronic forex broking service. This allows a broker to lower costs substantially once their system has been developed, as well as notably reducing human errors.
Forex.com scored best in our review of the top brokers for forex, which takes into account 120+ factors across eight categories. Here are some areas where Forex.com scored highly in:
Forex.com offers one way to tradeForex. If you wanted to trade EURUSD
The two most important categories in our rating system are the cost of trading and the broker’s trust score. To calculate a broker’s trust score, we take into account a range of factors, including their regulation history, years in business, liquidity provider etc.
Forex.com have a AAA trust score. This is largely down to them being regulated by Financial Conduct Authority, segregating client funds, being segregating client funds, being established for over 19
|Regulated by||Financial Conduct Authority|
|Uses tier 1 banks|
|Segregates client funds|
Want to see how Forex.com? We’ve compared their spreads, features, and key information below.
|USD/JPY Spread||0.90||DAX Spread||250.0|
|FTSE 100 Spread||150.0|
|Platform||MT4, Web Trader, NinjaTrader, Tablet & Mobile apps|
|Base currency options||USD, GBP, EUR|
|Funding options||Bank transfer, Cheque, DebitCard,|