If you are considering to start investing in forex, one of the first things you need to consider is choosing the right forex broker that meets your trading needs. The retail forex market has become quite competitive lately, meaning there is a multitude of brokers you can choose from, each of them binging their own set of qualities and disadvantages.
When choosing a broker, there are a few things you need to pay attention to, such as commissions, the type of support they provide, as well as the reputation of the broker. Another thing you need to take into consideration is the type of broker you want to collaborate with. But worry not, because we got you covered in the following article.
But, first things first…
What is a forex broker?
To put it simply, a forex broker, or FX broker, for short, is a company that provides traders with the means to access a trading platform and enter the market, to begin trading currencies. Brokers that allow individuals to access the forex market are called retail FX brokers, and these are the ones you will be working with.
In exchange for getting access to the platform and begin trading, brokers will ask for a sort of compensation, which is usually the bid-ask spread of a currency pair, or a sort of commission that you need to pay. We will discuss the costs below in a short time.
Usually, brokers will allow potential clients to test the type of services they provide and practice trading on a demo account. This is how traders will get a better understanding of how the broker is doing business and is a highly recommended practice.
Types of forex brokers
At first glance, you may think all FX brokers provide the same services. While, in theory, that is not entirely false, FX brokers do operate in various ways, so choosing the right one can have a tremendous impact on your overall trading experience.
The first thing you need to consider when choosing a forex broker if whether your broker has a dealing desk or not. A dealing desk means your broker will operate in a closed environment, whereas a broker that does not have a dealing desk will link their price quotes to liquidity providers, such as banks and other brokers.
Usually, you will find your broker fits into one of the three categories below:
Market Maker brokers are FX brokers that have their own dealing desk, meaning that, as the name suggests, they are creating a market for their clients.
All trades are conducted in an enclosed environment, with the broker either finding a counterparty for a trade out of the orders coming from their other clients or, if that is not possible, they will take the counterparty themselves. This allows brokers to set their own prices and leads to the misconception that market markers are betting against their clients, but that is not how it happens at all.
Electronic Communication Network (ECN) brokers are those that directly connect traders with counterparties in the interbank market and don’t have a dealing desk. This means that their role is resumed to providing a link between various buyers and sellers, without the possibility of setting their own price rates or manage inventories.
The advantage of getting access to the Forex market via ECN brokers is that you get direct price rates from the interbank market, which usually means tighter spreads. Such brokers do come with a set of limitations for the traders, as you will usually need to make a much higher first investment.
Straight Through Processing (STP) brokers, just like ECN brokers, don’t have their own dealing desk. They do, however, employ part of the practices Market Makers have, to provide a more flexible trading environment and remove some of the limitations trading withing the interbank market has.
STP brokers display, for most of the time, the same price rates as the interbank market and, just like ECN brokers, they will first try to find a counterparty in the interbank market. However, when such thing is not possible, STP brokers have the possibility to act like Marker Makers and match orders within is own client base, or even take up the counterparty themselves.
Tips on choosing the right forex broker
After you have decided on the type of broker that suits you best, it’s time to start prospecting the market and deciding on one broker. To do so, you must also take into consideration some other factors besides their connection to the market. Such factors are:
The first thing you need to consider when choosing a forex broker is the security of your trading account. After all, it’s your money we are talking about here. Luckily, checking the integrity of your broker is quite easy. All you need to do is make sure the broker you are considering is regulated by at least one of the major regulatory bodies in the world.
No matter the type of broker you choose, you will, in one form or another, have to pay transaction costs. Usually, brokers will charge either a commission or the spread for every trade you enter. Keep in mind that, in order to find a reliable broker, you may sometimes have to pay higher transaction costs.
Each broker provides access to one or more trading platforms. The platform is, in simple words, the tool through which the trader conducts its activity. Make sure the platform your broker provides is reliable and user-friendly, for better trading experience.
Reputable brokers don’t only provide traders with a trading platform, but also with access to market news and other analytic tools that help them make more educated decisions. Consider what your broker has to offer before opening an account.
Whether you like to admit it or not, there may be times when you need assistance in your trading journey. This is why you need to choose a broker that provides good customer support and can help you out with any account or technical issue.