Forex brokers are a dime-a-dozen these days and while this competitive environment is generally great for us retail traders (i.e. tighter spreads, bonuses etc) it’s vitally important that you choose your forex broker wisely. This is because ‘shady’ operators do exist in the industry (i.e. ‘bucket shops’) who are more interested in feathering their own financial nests than looking out for the best interests of their clients.
In this section we will show you those characteristics that tend to make for good forex brokers as well as the warning signs that tend to be the calling cards of forex brokers you’d probably best steer clear of.
Choosing the best forex broker for your needs is essential to your success as a currency trader so it’s best to get it right the first time (if possible) by applying some due diligence and good old common sense.
Unfortunately this may not be an easy task. Simply because there are thousands of online forex brokers (and more coming online all the time) that are all competing for your business. The forex market is still rather loosely regulated and in many countries (tax havens in particular) forex brokers have no regulatory body to answer to at all. This makes for a fertile breeding ground for shady operators and so you need to be cautious about who you place your hard-earned capital with, especially those forex brokers that are based in a foreign country.
Forex Brokers: Regulated Ones Are Less Risky
First and foremost it is highly recommended that you deal with a broker that is listed with a regulatory body in their country of operation. If they’re not regulated (meaning they have no official body to answer to) then you should probably ‘pass’ on their services, regardless of how enticing their offers may be.
Below is a list of countries where the largest FX margin providers are based, along with their corresponding regulatory bodies.
- United States: National Futures Association (NFA) and Commodity Futures Trading Commission (CFTC)
- United Kingdom: Financial Services Authority (FSA)
- Australia: Australian Securities and Investment Commission (ASIC)
- Switzerland: Swiss Federal Banking Commission (SFBC)
- Germany: Bundesanstalt für Finanzdienstleistungsaufsicht (BaFIN)
- France: Autorité des Marchés Financiers (AMF)
Although being listed with one of the above regulatory bodies will help you to sort out the trustworthy forex brokers from the fraudulent or dishonest ones, it is only the starting point for your due diligence. There are a number of other factors to consider that are critical to both the security of your capital and also your ability to trade successfully / profitably.
The Method, Speed & Cost Of Moving Your Money
An important thing to consider when choosing a forex broker is how quickly you can deposit and withdraw funds to your account. A good broker will offer multiple methods for both depositing and withdrawing funds from your account (e.g. Wire / Direct Deposit, Credit Card, PayPal, Moneybookers etc). They should also facilitate this process speedily. For example, if you decide to fund your trading account via credit card or PayPal then those funds should become available for you to trade with within 12 hours at the most. Unless of course it is the weekend in which case 48 hours should be the maximum acceptable time frame, in our opinion.
In terms of withdrawing your funds, this should take no longer than 1-2 days for a bank wire and only a matter of hours if the broker allows you to withdraw back to your PayPal account. You’ll want to check what fees will be involved (if any), as some brokers apply additional charges depending on your method of deposit / withdrawal.
One of the first things that I will do after opening and funding an account (small deposit at first) with a new broker is to do a test withdrawal to see how quickly I can get my funds back. If the process is quick and without fuss then I will go ahead and deposit the remainder of my allocated capital.
If there are hassles (i.e. I have to jump through unnecessary hoops or there are unreasonable fees involved) or it takes more than a few days to get my money back then I will seriously consider looking for a new broker. It’s your money after all and you should be able to move it quickly, without fuss and without undue expense.
Where Is Your Money Held & Is It Safe?
Here’s the cold, hard truth for the majority of traders. Unless your trading funds are insured and / or kept in your own bank account, in your own name with no connection to your broker whatsoever, your funds are not likely to be 100% safe.
Yes, I know there are plenty of forex brokers offering ‘segregated client accounts’ but what does this really mean? It usually means that the client’s money is kept in an account that is separate from the company account of the broker and therefore cannot be used in the daily operations of the company.
However in many cases (although there are exceptions) should the broker go bankrupt / become insolvent, the money in the segregated client account (regardless of whether the account is held in your name or the broker’s) will be used to pay back creditors.
Yes, that includes ‘you’ the client, however it would be unlikely that you will get 100% of your funds back. In fact, depending on the situation you may not actually get anything back. This is yet another risk that we face as forex traders.
NOTE: With increasing regulation of the industry, things are always changing so make sure you do your own research / due diligence. Carefully read the terms and conditions (and other documents of disclosure) of every forex broker you’re interested in working with and make sure you understand what will happen to your funds in the event of the forex broker going bankrupt, as these laws can differ from country to country.
3 Things To Help Minimize The Risk:
- Don’t keep large amounts of money in your trading account. Instead, deposit additional funds when needed.
- Withdraw your profits regularly.
- Give preference to forex brokers that are well established, as opposed to new operators.
- Avoid forex brokers based in tax havens, politically unstable countries, or countries known for high levels of corruption.
Amount of Leverage Offered: How Much Is Too Much?
One of the great appeals of forex trading is the amount of leverage that is possible. Currently there are brokers that allow up to 500 times leverage for small accounts (up to $10,000 for example). However, this amount of leverage is not only unnecessary it spells almost certain death for the under-capitalized and inexperienced forex trader’s account.
In fact, I’d go as far to say that the misunderstanding and misuse of leverage is the #1 reason why new traders blow up their accounts.
Leverage is a tool that can work for you just as much as it can work against you and therefore it should be used responsibly and realistically. Just because a forex broker offers 200, 300, 400 and 500 times leverage, doesn’t mean you should take it. I know several professional forex traders who although very successful, rarely use more than 50 or 100 times leverage at the most.
When you are first starting out it is a wise idea to limit the amount of leverage available to you by requesting a maximum of 50 times leverage i.e. 1:50 for your trading account (many brokers start you out at 100 times leverage). This means that you will only be able to trade a maximum of 0.5 standard lots (also known as 5 mini lots which lets you control of $50,000 of currency) for every $1000 margin in your account.
However, we would suggest that you only trade an absolute maximum of 0.1 standard lots (also known as 1 mini lot which lets you control of $10,000 of currency) for every $1000 margin in your account, which in effect means you’re using 10 times leverage. This is plenty of leverage, especially when you are first starting out. In fact, many traders would consider this to be rather aggressive and they themselves use significantly less leverage. Some forex traders trade as low as 0.01 standard lots (also known as 1 micro lot, which lets you control $1,000 of currency) for every $1,000 margin in their account. This is a little too conservative for us, however you need to decide what is best for you.
IMPORTANT: Regardless of how much leverage you ultimately decide to use, you should only ever trade forex with risk capital i.e. money you can afford to lose without affecting your current lifestyle. You should also first trade on a demo account and move onto trading with real money only after you’ve proven yourself to be consistently profitable.
Spreads / Commissions: The Cost Of Doing Business
There are two things you need to keep in mind when it comes to forex trading:
1) You’re in the forex trading business to make a profit.
- 2) So is your forex broker.
What is the major cost of doing business as a forex trader? It is the spread and / or commission that needs to be paid on every single trade. Most forex brokers do not charge commissions but rather make their money by taking a piece of the spread. Although the size of spreads can vary greatly between forex brokers, the fierce competition in recent years has made it relatively easy to find brokers offering spreads as low as 1-3 pips on the major currency pairs, with the tightest spreads usually on the EURUSD, the world’s most heavily traded currency pair. This is very good for us retail traders, especially for those of us who like to scalp the market (i.e. take lots of small trades looking for 5-10 pips profit) as it means that there is only a very small hurdle to overcome before we are in profit.
Variable Vs Fixed Spreads
As a general rule of thumb those forex brokers whom offer the lowest spreads are offering a variable spread. Variable spreads fluctuate i.e. they widen and contract depending on market volatility and liquidity. When the market is at extremes for example the early hours of the Asian session (usually quiet with low liquidity) or after the U.S Non-Farm payrolls data has been released (usually extremely volatile), variable spreads will widen, often considerably. These times require additional caution when trading with a variable spread broker. However, during the peak of the Asian, European and North American sessions where liquidity is at it’s highest and markets have settled into a somewhat of a rhythm, variable spreads will be at their tightest and these times can be the most advantageous and safest to trade.
Fixed Spreads on the other hand tend to stay the same width, regardless of what the current market conditions are (with the exception of extreme, unforeseen events such as terror attacks or natural disasters etc ). The primary advantage of trading with a forex broker who deals in fixed spreads is that the majority of the time you will know what your costs per trade will be (in any currency pair) up front.
So which is best? Well they both have their pros and cons, however if you can find a broker that offers consistently low variable spreads with minimal spikes then this is a major plus in this trader’s experience.
I have traded with both fixed and variable spreads over the years and as someone who turns over a lot of volume (several hundred trades per month) the latter has definitely given me a greater advantage. However, if you are more of a position trader than you are a scalper or swing trader then saving a few pips on each leg may be inconsequential. You just have to consider your own trading style.
Dealing Desk or Non-Dealing Desk Forex Brokers?
To get straight to the point, non-dealing desk brokers are always preferable over dealing desk brokers as they give you direct access to their liquidity providers i.e. straight through processing (STP). With true non-dealing desk brokers there are no re-quotes on orders and no order confirmation. Non-dealing desk forex brokers want their clients to win and do well because the better they do, the longer they will remain a client. They provide a transparent trading environment with no third party intervention, a ‘true market’ so to speak as opposed to a market that is created for you artificially, as is the case with dealing desk brokers.
Dealing desk brokers are often taking the other side of your trades (if they can’t offset your order with that of another client) and therefore are competing against you.
Not a good situation considering that they can usually see where your stop loss levels are. Also because you’re trading in an artificially created environment it is not too difficult for your broker to manipulate prices / spreads in order to take out your stops. However, although dealing desk brokers have a bad reputation it is actually unwarranted for the most part. The reality is that (with the exception of bucket shop operators) dealing desk brokers actually don’t want their clients to lose money and blow up their accounts because that means they will stop trading with them and they lose business. However, they don’t want you to win either (on trades they take the other side on) because that takes money out of their pockets. Ultimately, they want their clients to pretty much ‘break even’. This way they will likely keep on trading and they can keep making their money on the spread, which is their core business model.
True non-dealing desk brokers have no hidden agenda and no need to manipulate prices. They exist to provide a gateway to real market liquidity and make their money by adding a small mark up to the bid and ask prices that are streaming into their platform from their liquidity providers.
In the case of STP + ECN (Electronic Communications Network) brokers not only do you have straight through processing but you can also ‘see’ this liquidity via market depth and are able trade against all other participants in the network. This includes the banks, market makers and other individual traders who are all placing competing bids and offers into the system. All trading orders are matched between counter parties in real time. STP + ECN brokers generally charge a small fee. Standard STP brokers generally do not.
Here’s a quick comparison between dealing desk, STP and STP + ECN brokers.
|Dealing Desk (Market Maker)||No Dealing Desk (STP)||No Dealing Desk (STP+ECN)|
|Most Have fixed Spreads.||Most have variable spreads.||Variable spreads or commission fees.|
|Will take the opposite side of your trade.||Direct gateway to liquidity providers.||Direct gateway to liquidity providers and other participants.|
|Artificial quotes. Not true market.||Prices come from liquidity providers.||Prices come from liquidity providers and other ECN particpants.|
|Orders are filled by broker on a discretionary basis.||Automatic execution, no re-quotes.||Automatic execution, no re-quotes.|
|Displays the Depth of Market (DOM) or liquidity information.|
The bottom line is that you most definitely want to choose a non-dealing desk forex broker that offers straight through processing (STP).
You’ll get better and faster fills on your trades and you can scalp and trade news events without restriction i.e. no intervention from your broker, provided however that they truly are a non-dealing desk broker.
Forex Trading Platform – Your Forex Tool Of Trade
All of your trading is going to be done through whatever forex trading platform(s) your broker offers. What makes for a good platform? Well, one that is stable, easy to use and allows for fast execution of buy and sell orders. You’ll also want to have comprehensive technical and charting tools as well as live news feed(s) to keep you informed of new market developments.
Exceptional Customer Support – Gotta Have It!
This should really go without saying as all forex brokers should provide consistently great customer support, however many do not. You’ll want to give preference to those forex brokers that offer 24 hour support via multiple avenues i.e. phone, email and live chat. You should be able to contact your broker at any time day or night and get a quick response. After all, what if something goes wrong (such as your Internet goes down or you lose power) and you need to close out your trades quickly? You’ll want to be able to pick up the phone and have your positions closed out within a minute or two. You’ll also want to know that should you incur losses due to the fault of the broker (e.g. their servers go down, price spikes, buy or sell orders not getting filled when they clearly should have etc) that your broker will reimburse you for these losses or profit that you should have made.
Ultimately you know what good support is when you get it. You feel satisfied and valued and that the broker clearly wants to keep you as a happy client.
Cash Back Forex – Does Your Broker Pay You To Trade?
The last thing I consider when choosing a forex broker is whether or not I can receive cash back on every single trade that I make with them. Many forex traders do not even realize that they are missing out on additional money that they could be making every single month. I’m talking about actually getting paid on the trades that you make every month, regardless if they are winners or losers. This is a great little bonus in those winning months, and also a nice little buffer when you going through a drawdown phase. To learn more about how you can start cashing on the trades that you’re already placing, read my cash back forex review.
Finding The Best Forex Broker: Where To From Here?
Finding the best forex broker for you can be a case of trial error. As you do your research around the Internet, you’ll find both positive and negative reviews / ratings of the same brokers as clients tend to have different experiences. That’s why it’s important to first find brokers that fit most of the criteria I have outlined above (I’ve not found one that is 100% perfect by the way) and then try out their demo trading platform. Although there are some differences between demo and live platforms (i.e. speed of execution, slippage etc) it will give you valuable insight into what live trading will be like.
Once you feel comfortable with a particular broker and have been successful trading their demo accounts, then go ahead and open a live account. Be sure to start out small though and as mentioned above you should do a test withdrawal to see how quickly you can get your funds back and also test their 24 hour support desk by calling them outside their regular business hours.
Cash Back Forex Brokers List
To get you started, here’s a link to a list of popular Forex Brokers from different countries throughout the world where you are currently able to get cash back on your forex trades (see our cash back forex review to learn how). I don’t recommend any of these brokers in particular, so you will still need to do your due diligence. Make sure you check out the reviews that each broker has over at Forex Peace Army by clicking on the links provided. Good hunting!