What Makes a Good Forex Broker?

The brokerage industry is characterised as one of extreme competitiveness due to the multitude of ways of starting such a business. Not only are there are companies that specialise 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 numerous factors need to be considered. Such factors relate to the way the brokerage is going to be organised (Electronic Communication Network (ECN); Straight Through Processing (STP); dealing desk or non-dealing-desk, etc.). These are the struggles at the broker’s end, but how about the things retail traders need to know before deciding which broker to use? What are the attributes that make a good broker, and what would a perfect Forex broker be like?

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 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 into different categories. 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 pass that category will be filtered to the next pass. In this way, the due diligence process of choosing the right broker is not too time-consuming, and in the end the trader will end up with the right group of brokers to choose from.

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Mandatory Conditions

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 at 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 fulfil some specific conditions for that licence, and most of these conditions are for the trader’s benefit.

good forex brokersThis is crucial for any trader, as if their funds are not safe, the broker is not to be trusted. Of course, all Forex brokers will claim that the funds are safe and so on, but one needs to look for clues that this is true. The thing to do is to ask whether the funds are segregated, or whether the broker offers segregated accounts. If yes, it means that brokers cannot touch the funds the trader deposits, and cannot use them for financing the business. In this way, the brokerage house gains simply from the way it is organised, from commissions and spreads, and, if it is a market maker, from taking the other side of the trades. In any case, if safety  of client funds is not guaranteed, the broker should be avoided.

Other Conditions for Filtering Brokers

If regulation and funds safety are a given, traders may start to look at other things that will make a broker fit their preferred 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.

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 describes traders who frequently open positions and close them extremely quickly, going for only a few pips distance, and these call for accurate executions. Brokers that offer small slippage are desirable 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, and ideally swap-free accounts should be offered. Investing considers the longest period possible for a trade. These traders  look at a longer time horizon, and the broker’s reliability is mandatory here. Traders that fit in this last category deposit bigger amounts of money, and an ECN broker is most probably the right fit. Even an ECN–STP hybrid broker should have the right trading account for these traders.

A spotless reputation is mandatory. There is no way to have 100% of 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 relating to withdrawal of funds, opening a trading account, and similar things.

Types of Trading accounts offered are important, as they tell much about the type of the broker, their execution quality, and as other details related to their overall brokerage activity. Ideally, the broker will offer incentives for all traders, small and big players alike, with different approaches for each. For example, for small retail clients, it is important to see whether the trading account offers the quotes in four or five digits. This refers to the digits that follow the big figure (e.g., in the case of the EUR/USD 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 will have already made its move).

Opening a trading account should not take more than 2 business days, document verification included. This should not influence  the choice of a broker too much, 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.

Finally, customer service is crucial for a broker. Look for 24/7 live chat availability, and no more than 1 business day for a response to any inquiry. These should be tested, and ideally, before depositing a larger amount of money with a broker, traders should test and see how a withdrawal is made, the hurdles, if any, etc. This is the only way of knowing for yourself how the broker deals with its clients.

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