How did Trading Brokers choose our best forex brokers?

Following on from our best forex brokers of 2020, we will now look at what factors are worth considering when looking for an online forex broker.

What makes a good forex broker?

The key factors to consider when choosing an online forex broker include:

Forex broker regulatory authorities

The forex broker should be licensed by one of the top regulators such as ASIC, CySEC and the FCA. You can check a broker’s license number with the relevant authorities to ensure the regulation is up to date and legitimate.

Forex broker trading platforms

Make sure that the broker provides a forex trading platform that you are familiar with. If you have no prior trading experience then the MetaTrader 4 trading platform is considered the most popular option for retails traders due to its user-friendly interface.

FX currency pairs

The forex market contains major and exotic currency pairs for trading. Major forex currency pairs include the EUR/USD and GBP/USD. More exotic currency pairs include the EUR/TRY and USD/HKD. Ensure that the broker offers the currency pairs that you wish to trade. You may want to focus on the EUR/USD for now but if you plan to branch out into other currencies in the future it will be beneficial if they are also available through your existing broker.

Forex broker commissions

Most forex brokers will charge a commission for each trade that you place. Check the commission amount is listed “per round turn”. Some brokers will list a commission of $3.5 per trading lot which is actually $7 once you have opened and closed the trade. It would be a wise idea to factor the commission in to your money management plan as it is a key trading cost, along with the spread.

Forex broker spreads

Every time you buy or sell a currency pair, you need to pay the spread. This is the difference between the buy and sell price. Whilst the spread will be similar across most brokers, some forex brokers have more liquidity providers (LPs) than others which means their spreads can be lower. This is especially important if you are taking short term trades as the spread can quickly add up.

Forex broker leverage

Forex trading is a leveraged product which means that you can trade with a position size greater than your account. This can lead to greater profits but also carries greater risks. It is extremely important to understand leverage before trading online due to the high risks involved. You should opt for a leverage that you feel comfortable with as every trader has a different risk appetite.

Forex broker order types

Forex brokers will usually offer the instant execution of opening/closing trades and stop/limit orders if you wish to enter a specified distance away from the current price. Trailing stops and break evens are other options they can allow. Some brokers will have a minimum distance requirement if you try to modify an order at a level to close to the current price. Most brokers will allow scalpers, hedging and automated trading. It is worth considering what order types you plan to use and if these are supported by the broker.

You will find that most forex brokers offer additional trading tools and educational material which can help assist traders. These tools will usually include chart analysis, economic reports, videos, trading guides and more. If you require specific tools or would find them beneficial, check that they are offered to clients of the broker and if they free or come at an additional cost.

Forex broker funding methods

Ensure that the forex broker offers a suitable and safe method for depositing and withdrawing funds from your trading account. Some broker offer online payment processors such as PayPal and Skrill which can be quicker and more convenient to some traders.

Forex broker customer service

Whatever the skill level of a trader, it is very likely at some point you will need to contact customer service. This may be more frequent for beginners or a one off for the more experienced traders. However, the customer service should respond in a prompt and efficient manner. Consider what customer services they offer as one may be more convenient to you than others. Some traders prefer to communicate over live chat whereas others want to speak to someone directly on the phone. Also consider the location of the forex broker as the time difference may cause difficulties although most brokers should offer multilingual support 24 hours a day, five days a week.

What is a forex broker?

Foreign exchange had previously only been traded on the interbank market by larger clients such as banks and multinational corporations who used it to trade for commercial purposes and to hedge against currency risks. Since then, retail forex trading has been introduced through forex brokers.

A forex broker (short for brokerage) is an intermediary who buys and sells currency pairs on behalf of its clients for a commission fee and/or spread mark up. They allow individual retail traders access to trade the previously inaccessible forex market through online trading platforms.

Since they first began in the 1990’s, forex brokers have offered a service that is essential for traders to be able to trade currencies and have been vastly improving their services over the years. Opening a forex trading account is now a quick and easy online process. All you need is an internet connection, forex broker trading account and trading platform. Previously, this was only available to banks and other financial institutions.

There are hundreds of forex brokers located throughout the world with differing trading conditions, products and services. Most will offer a wide range of major and exotic currency pairs to trade whilst also offering other trading instruments such as stocks, CFDs, indices, commodities, energies, precious metals and cryptocurrencies. This makes it convenient for a trader to be able to trade multiple markets on one trading broker. Trading is risky, thus if you are a beginner trader it is best to start on a demo trading account.

In addition to providing an account and platform to trade from, forex brokers offer other relevant services such as educational material, forex news, market analysis, trading tools and more. These services may be free to the brokers clients or come at an additional cost.

With so many forex brokers to choose from, it is very important to check if the broker is regulated and offers negative balance protection. Regulation will help to ensure that your funds are safe and held in a segregated account away from the brokers account so that they cannot be used for any other purpose. A regulated broker has to stick to strict regulatory guidelines which can give clients peace of mind.

Forex broker fees

A forex broker makes money by charging a fee for using their services. This fee is usually a commission for each trade made through the brokerage and/or a spread mark-up if using a market maker. These brokers charge zero commission but will increase the liquidity providers spreads to cover costs and make profit from every trade processed through them. They can offer fixed spread accounts which is not always a sustainable model as actual spreads may be greater than the fixed spread set by a broker. When using a fixed spread trading account you should check the small print as they are not always fixed 24/5 especially around economic releases or hours of low liquidity. When a broker charges a commission they tend to offer variable spreads which will depend on the liquidity pools that they use, without any mark-up. This will often mean lower spreads and overall trading costs, even after the brokers commission fee is factored in.

Market makers

There are forex brokers who operate as a market maker and use a dealing desk. These brokers can take the opposite position of a trader and add mark-ups to the spread which can increase trading costs. Some may even delay order fills that can lead to negative slippage. A dealing desk model can be problematic if there is a conflict of interest, although broker regulation has helped to significantly reduce this happening.

STP/ECN forex brokers

Other brokers have no dealing desk and provide STP/ECN accounts with direct access to trade the markets through liquidity providers (LPs) for a small fixed commission fee. This model usually gives lower spreads, faster execution and more favourable trading conditions as there is no broker interference with your trading. This is why it is so important to compare and choose only the best forex brokers with strict regulation in place.

What is forex?

The Forex (FX) is a currency trading market. The forex market is the largest financial market in the world, with trillions of dollars in volume traded every day. Anyone who opens a forex trading account with a forex broker can trade the extremely liquid forex market.

The forex market does not have a centralized location, instead it is an electronic network consisting of participants who have foreign exchange currency needs such banks, financial institutions, brokers and speculative retail traders. The main factors that move the forex market are speculation, economic growth and strength and differentiating interest rates.

Those who participate within the forex market place orders to buy and sell currencies from each other through a forex broker. The forex market is open 24 hours a day, five days a week, excluding holidays. The size and deep liquidity of the forex market, combined with its availability make it an appealing choice for traders. This allows you to buy or sell currency pairs anytime during the week.

The largest forex markets are based in major global financial locations such as London, New York, Singapore, Tokyo, Frankfurt, Hong Kong, and Sydney. Trading liquidity usually peaks when these markets are open or overlap, especially when trading a currency pair that includes a major markets currency.

FX currency pairs

Forex currencies are listed in pairs, such as the most popular fx pairs the EUR/USD and GBP/USD. When you are trading the forex market, you buy and sell a currency pair of one country that is relative to another. When you sell one currency, you are buying another and if you buy a currency you are selling another. The most traded currency is the U.S. dollar whereas the euro is the most traded counter currency. Other significant pairs include the Japanese yen, British pound and Swiss franc.

Each currency pair has its own price on which traders can speculate to make profits from increasing or decreasing value of the associated currencies. If you anticipate a currency pair will decrease in value then you would look to short (sell) the pair. If you expected a price increase, then you would look to long (buy) the pair. A profit or loss is made between the difference in prices from when you entered and exited your trade position.

Forex lots

The forex market is traded in lots which can be micro, mini or standard.

Micro Lot: 1,000 currency value (0.01 lots)

Mini Lot: 10,000 currency value (0.1 lots)

Standard Lot: 100,000 currency value (1 lot)

You can trade single or multiple lots, e.g. six micro lots (0.06) or thirteen standard lots (13).

Forex rollover

Retail forex brokers will usually charge a rollover fee for holding trade positions that is applied at 5pm EST each day. This rollover can be a credit or debit for the difference in interest between the two currency pairs being traded. Rollover fees or either added or deducted from the transaction when the trade is closed. Weekend rollover is charged on Wednesday which will give a credit or debit of triple the normal amount. Some forex brokers offer Islamic accounts (also known as swap free accounts) for clients who cannot earn or pay interest due to their religious beliefs.

Forex market differences

The forex market is different from other major markets. There are less rules especially when not using a regulated forex broker. Fees and commissions can vary depending on the forex broker you use. Most will charge a commission for each trade you make whereas some may also add a mark up to the spread. The spread being the difference between the bid and ask prices. The forex market is available to trade 24/5. Forex brokers can provide leverage of up to 1:500 or even higher in certain jurisdictions. This means that you can have $1,000 in your account and take a position of $100,000 when using 1:100 leverage. Whilst this may seem attractive, it can increase both profits and losses. High leverage makes forex trading very risky and most traders lose money attempting to trade in this way.

Trading with a regulated forex broker that has no dealing desk can help to provide the best possible forex trading conditions. Traders should always manage their position size and control risk so that one trade does not results in a large loss.

What other markets can I trade online?

Forex is one of the most popular markets for online traders and is a large focus of the service that trading brokers offer. One of the reasons is due to the advertising campaigns and high leverage on offer. However, there are other markets that you can trade including CFDs, Indices, Commodities, Energies, Precious Metals, Stocks, Bonds, ETFs and Cryptocurrencies.

How much money do I need to start trading forex online?

You can start trading forex with as little as $1 depending on the minimum deposit required by the broker. As forex trading is risky by nature, never trade with more than you can afford to lose.

Can you make money trading forex online?

Forex trading requires patience, discipline and lots of practice. According to our research across hundreds of forex brokers, most online forex traders actually lose money. Most aspiring traders start trading on a demo trading account before going live.

How to open a forex trading account?

Simply choose an online forex broker, follow the account opening process and you will be able to start trading currencies online through one of their trading platforms.