Tips: How to Choose a Forex Broker 2023
Now that you’ve finally decided to start Forex trading, it’s time to make one of the most important decisions for your trading success: choosing a Forex broker. It’s no secret that a broker can make or break a trade, especially in times when there are so many scammers wishing to steal your money.
In this article we’re going to talk about how to choose your Forex broker and the main criteria you need to consider before starting on your trading path.
Who is a broker?
Before discussing how to find a broker, let’s learn what a broker actually is.
A broker is a person or a company that provides individual traders and investors with access to financial markets. As it is, an average person doesn’t have direct access to the markets and can’t place trade orders without some sort of intermediary. And this is what brokers do: they receive buy or sell orders and execute them on market exchanges on behalf of retail traders and investors. Some brokers can also give you advice on which securities you should buy or sell.
In return, brokers charge their clients service fees, commissions or take an interest out of uninvested money in their brokerage account. Some online brokers can offer commission-free services, but they make money in other ways, for example, by selling your orders to third-party market makers. This can increase the cost of your trade and slow down its execution, so it’s important to learn about this early on.
Defining your goals
Now that you know who exactly brokers are, it’s time to learn about how to choose one to actually begin trading.
The first thing you need to do before conducting your research of the available brokers is defining your goals. Different brokers offer differing services, and some of them might be more useful to you than others. Here’s a list of question you need to answer before compiling a list of criteria to find your brokers:
- What do you plan to do: invest or trade? Novice traders and investors don’t always understand the differences between trading and investing, so they often overlook this important factor. Investors buy an asset and hold it for a long period of time while traders sell it as soon as the opportunity arises. Because of this and other differences, traders and investors need to pay close attention to commissions and fees brokers impose and how they can influence their final profit.
- Do you need professional advice? There are two distinct types of brokers: full-service brokers and discount brokers. The difference between them is that discount brokers don’t provide investment advice or conduct market research, but the cost of their services is substantially lower. On the other hand, a full-service broker can offer you a wide range of services that can be useful if you’re only starting trading, but it might cost you a pretty penny.
- What securities do you plan on trading? Nowadays, most brokers give you an opportunity to trade a variety of different securities. But if you want to focus only on one or two financial markets, you should find a broker whose offers are more suitable for trading these types of securities.
- What is your trading style? If you plan to trade, you need to decide whether you want to be a short-term or a long-term trader. This is important because different trading styles result in different amounts of commissions. For example, some brokers may charge you for holding a position open overnight, which is an important thing for long-term traders to consider.
Knowing the answers to these questions will help you understand better what things you will need to pay attention to while choosing your broker.
How to choose a Forex broker: key points
The Forex market currently holds the title of the largest financial market in the world, with the daily turnover exceeding several trillion dollars. It’s the only market that’s open 24 hours per day, 5 days per week (except for the weekend). The Forex market is one of the most liquid markets in the world, and the lesser degree of regulation makes it easier for Forex traders to execute large trades.
As you see, the Forex market operates differently from other financial markets, so as a Forex trader you will have different needs and expectations from your broker. And now we’ll look at the main criteria you need to take into account before opening a brokerage account.
Regulation & reputation
The Forex market is by far the largest market in the world, allowing traders to buy and sell more than 170 currencies from all over the globe. Due to this massiveness, the Forex market doesn’t have a centralized regulatory body overseeing its activities. Instead, there are several different supervisory bodies, acting on behalf of governments or independently, that set up specific standards that all brokers belonging to their jurisdictions must comply with.
When you’re choosing a Forex broker, it’s very important to make sure it complies with the existing regulations. In the USA, the primary regulatory bodies that oversee Forex trading are the Securities and Exchange Commission (SEC) and FINRA. So if you decide to use the services of a US- based broker, you would need to make sure it has been following the rules and regulations set out by these authorities.
Another thing to consider is a broker’s reputation. Asking experienced traders and investors for their opinions is a good way to find potential candidates. But it’s okay to walk away if something about a broker doesn’t meet your expectations, even if it has been recommended to you.
Trading fees: commissions, spreads, and swaps
The next important thing to check is how exactly a broker takes payment for its services. This payment can include fees related to trading directly (trading fee) and fees related to other activities, such as account fees, inactivity fees, withdrawal fees, etc (non-trading fees). It’s important to know that if one broker charges money for a certain service, another broker might not. That’s why you should always pay attention to a broker’s fee structure.
Generally, there are two types of trading fees a broker may charge you. These are:
- Commissions. Commissions are fees that a trader has to pay for each trade they make. Commissions can be calculated based on the traded volume, the price of the trade, or they can be charged as a flat fee per each trade you open. If you prefer trading with commissions, FBS offers multiple account types that provide you with this opportunity, including a zero spread account, an ECN account, and a crypto account (for cryptocurrency traders). Other accounts, such as a cent account, a micro account and a standard account don’t charge commissions, but they include fixed or floating spreads.
- Spreads. A spread is the difference between the bid and the ask prices at the particular moment of time. The price you pay to buy a currency pair is called the ask price while the price at which you sell the pair on the market is called the bid price. The ask price is always slightly above the market price, and the bid price is always slightly below it. For example, if you come to a bank to exchange currency, you will see that the price the bank is offering to buy the currency from you is lower than the sell price. This difference is the profit the bank and brokers who use this type of trading fee get from transactions. Spreads can be floating (depending on the current market conditions) or fixed. Some brokers might even reduce the amount of spread for a limited period of time, which gives you a great opportunity to retain more profit. For instance, FBS has announced a period of new reduced spreads for all financial instruments, including a 10% spread reduction for EURUSD, a 25% reduction for USDJPY, and an almost 60% reduction for USDCAD. We recommend taking advantage of that offer while you still can.
Usually, when Forex brokers claim to offer zero-commission trades, it means they are charging spread instead. Nowadays spread is the most preferred payment method among Forex brokers, but they can still charge commissions if they offer no-spread trading.
Other trading fees that a broker may charge you with include:
- Swaps. A swap is the interest you have to pay for holding a trade open overnight on the Forex market. This interest is charged because when you buy one currency, you borrow the other currency in the pair. Swap fees are primarily used in Forex trading, and traders can even make money from swaps, but some brokers offer swap-free accounts for clients who can’t pay or receive swap fees (for example, for religious reasons).
- Margin rate. A margin rate is an interest traders have to pay if they decide to borrow money from your broker to control larger trades than your current funds allow you to.
- Conversion fee. If you trade in a currency that is different from your account’s base currency, your broker might charge you for converting the money from one currency to another.
It’s also important to analyze the whole fee structure if something feels too difficult or unusual. There might be a chance that a broker is trying to hide additional fees from you, so make sure to read the fine print in the account agreement before expressing consent with its terms.
Account: types, conditions and maintenance
The next thing you should pay attention to is what trading accounts a broker offers to its clients. Different accounts come with different conditions and perks, so knowing what options you have on hand can help you decide if a broker is right for you.
For example, FBS offers the following account types:
- standard account — this is the most common type of trading accounts that allows traders to buy and sell standard-sized lots and requires a considerable initial deposit (different for each broker);
- demo account — this account works like a standard account, but it serves as a training tool for beginners to practice their strategies without risking real money;
- micro account — this account type allow traders to start trading with a much smaller initial deposit (from $5), which present a great opportunity to novice traders who don’t have a big capital yet;
- cent account — cent accounts display the balance in cents. The transactions from these accounts are carried out in cents as well, and the minimum initial deposit can be as low as $1. A cent account is useful to beginner traders as it allows them to get used to trading with real money without taking huge risks;
- ECN account — this account is based on an ECN, a system that automatically matches and executes orders from buyers and sellers. An ECN account allows Forex buyers and traders to trade directly without using any middlemen. This helps traders to complete transactions outside of traditional trading hours and avoid wider spread.
Apart from knowing what types of accounts a broker offers, it’s also important to know the amount of minimum initial deposit expected of you, which can vary from $1 to $1,000 and more, depending on the broker, and whether you need to pay to create a brokerage account.
There are also separate fees associated with account maintenance, for example, annual account fees, inactivity fees, transfer fees, etc. If you close your account and decide to transfer your balance to another broker, you will also have to pay for this. But if you look hard enough, you can find brokers that don’t charge many account fees, and save money this way.
As you see, finding the right account with more beneficial terms and conditions is also an important thing to consider while choosing a Forex broker.
Leverage is very common among Forex traders as it allows them to buy more than they can afford with their own capital. When traders use leverage, they borrow money from a broker and then return it when they make profit. Forex brokers offer various leverage ratios, which determines the maximum amount of money they’re ready to lend Forex traders. A leverage ratio is also one of the things you might want to consider while looking for a Forex broker. But do remember that while high leverage can bring you better returns, it may also multiply your losses.
Tools & education
Another important thing to consider is what tools a broker can offer to aid you with trading. Some brokers are equipped with only very basic tools, while others can provide you with more advanced services. If you’re only starting out, what tools you use might not make much of a difference at first. But as you gain more experience and understand the market better, they will come in handy and make trading easier.
Education is another aspect that novice traders should pay attention to. Some brokers offer free educational courses, video tutorials, guides, even analytical reviews. As you continue learning, you will need to know about more advanced trading strategies, so finding a broker that can provide you with useful information is also a good thing.
It’s no secret that brokers use promotions as a way to attract new clients. However, when you can’t decide between two or three options, learning about special promotions for new customers may help you make your decision.
There are a lot of factors to consider before choosing a Forex broker. To make the process easier, you should identify your needs and preferences as a Forex trader, and look for a broker that aligns with them.
If you’re finding it hard to choose a broker that suits your needs, you might want to consider trading with FBS. FBS is a Forex broker with multiple years of experience in online Forex trading. With multiple available account types, low floating spread, high leverage (up to 1:3000), advanced tools and many educational resources, FBS is always ready to welcome new clients and help them get accustomed to the world of trading.