What Makes a Good Forex Broker?
The brokerage industry is characterized as one of extreme competitiveness due to the multitude of solutions to start such a business. Not only that there are companies that specialize in turn-key solutions for the industry, but even among those companies the competition is high. Choosing the right type of a brokerage house is a difficult choice for the new entrepreneur as various factors need to be considered. Such factors relate to the way the brokerage is going to be organized (ECN – Electronic Communication Network, STP – Straight Through Processing, dealing desk or non-dealing desk, etc.). However, these are the struggles at the broker’s end, but how about the things retail traders need to know before deciding the broker to use? What are the conditions that make a good broker and what would be a perfect Forex broker?
Things to Consider
From a retail trader’s point of view, choosing a Forex broker should be a straightforward process. Because of the multitude of brokerage houses that are to be found on a simple online search, traders will end up spending a lot of time looking for the right broker. This time can be shortened if decision factors are split in a different category. To make life easier, the following two categories of factors should be considered, in this order. The aim is that the first category will screen through all the forex brokerage houses, and only the ones that passed that category will be filtered next. This way, the due diligence process of choosing the right broker is not time-consuming and in the end, the trader will end up with the right brokers to choose from.
To start with, the following are mandatory conditions for a good broker. If these conditions are met, then the trader can move on the next category to further filter the different Forex brokers.
Regulation is mandatory. If the Forex broker is not regulated by at least one financial authority, it should be considered a risky broker and one to be avoided. Regulation comes with a price for the broker, but from a trader’s point of view, this is a price the broker must pay. Being a regulated broker means that the broker needs to fulfill some specific conditions for that license and most of these conditions are in the trader’s benefit.
- Funds Safety
This is crucial for any trader as if the funds are not safe, the broker is not to be trusted. Of course, that all Forex brokers will claim that the funds are safe and so on, but one needs to look for clues that this is real. The thing to do is to ask if the funds are segregated or if the broker offers segregated accounts. If yes, it means that brokers cannot touch the funds the trader deposits, and use the for financing the business. This way, the brokerage house is gaining simply from the way it is organized, from commissions and spreads, and, if a market maker, from taking the other side of the trades. In any case, if funds safety is not guaranteed, the broker should be avoided.
Other Conditions to Filter Brokers
If regulation and funds safety are a given, traders may start to look at other things that will make a broker to fit the trading style. Speaking of trading style, this is one of the factors that might prove to be a decisive one in choosing the broker that fit a trader’s needs.
- Trading Style
There are three main trading styles for the Forex market, and they all relate to the time horizon for the trades that are being taken: scalping, swinging and investing. Traders must look for the right broker that offers the best conditions based on the trader’s trading style. Scalping means traders are opening positions and close them extremely fast, going for only a few pips distance, and these calls for accurate executions. Brokers that offer small slippage are desired for these traders. Swinging is a trading style that refers to trades being opened for a longer period, from a day to a few weeks, and this brings new challenges for the broker. Swaps and spreads play an important role, ideally swap free accounts to be offered. Investing considers the longest period possible for a trade. These traders are looking at a bigger time horizon and broker’s reliability is mandatory. Traders that fit in this last category are depositing bigger amounts of money and an ECN broker is most likely the right fit. Even an ECN-STP hybrid broker will have the right trading account for these traders.
Spotless reputation is mandatory. There is no way to have one hundred percent satisfied customers, but still, before opening a trading account with any one broker, traders should check the Forex broker’s reputation. This can be simply done by an Internet search, looking for forum postings, and searching for the overall tone of the postings. Ideally, the broker will not have any issues related to withdrawal of funds, opening a trading account, and similar things.
- Types of Accounts Being Offered
Trading accounts offered are important as they tell much about the type of the broker, the execution quality, as well as other details related to the overall brokerage activity. Ideally, the broker will offer incentives for all traders, small and big players alike, with different approaches. For example, for small retail clients, it is important to see if the trading account offers the quotes in four or five digits. This refers to the digits that follow the big figure, in the case of the EURUSD pair, a five-digit quotation being 1.05509. Brokers that offer only four-digit quotations are to be avoided at all costs! For those trading accounts, what you’ll get is a lot of re-quotes (when opening a position at the market the broker will re-quote you multiple times and by the time the trade is executed the market already made its move).
- Ease of Account Opening
Opening a trading account should not take more than two business days, documents verification included. This should not influence much the choice of a broker, but there are traders who are keen to start trading right away. However, keep in mind that if the process takes a longer period, it doesn’t mean the broker is a bad one. It only means that it wants to make sure all things are done properly.
- Customer Service
Finally, customer service is crucial for a broker. Look for 24/7 live chat to be available, and no more than one business day a response for any inquiry. These are to be tested, and ideally, before depositing a larger amount of money with a broker, traders should test and see how a withdrawal is being made, the hurdles, if any, etc. This is the only way of knowing for yourself how the broker deals with its clients.
Recommended Further Readings
- Forex Trading – Explaining the Concept
– What is forex trading, generalities about trading the currency market.
- Why Trading Forex?
– Advantages and disadvantages of trading the currency market, what are trader’s expectations and what is a realistic approach to follow
- What is a Forex Broker and Types of Brokerage houses
– Explaining what a Forex broker is and does, how the business should be organized, and how many types of Forex brokers exist.
- Financial Products to Trade
– Different categories of financial products that a Forex Broker is offering for the retail clients, starting with the classical currency pairs, and continuing with commodities, CFD’s, indexes, etc.
- Benefits of Mobile Forex Trading
– Mobile trading – why and how?
- Forex Brokers Types – ECN or STP?
– What is ECN, STP, how d- brokers deal with client’s orders, advantages, and disadvantages of the tw- types.
- “Reputation mechanism design in online trading environments with pure moral hazard.” Dellarocas, Chrysanthos. Information Systems Research 16.2 (2005): 209-230.
- The importance of perceived trust, security and privacy in online trading systems. Carlos Roca, J., José García, J., & José de la Vega, J. (2009). Information Management & Computer Security, 17(2), 96-113.