| Updated: November 8, 2024- Jump to:
- Licensing and Regulation
- Spreads and Fees
- Variety of Account Types
- Trading Platform
- Financial Instruments
- Order Execution
- Trading Conditions
- Safety and Security
- Customer Support
Choosing a Forex broker can be a tricky task, especially for those who have little experience in the foreign exchange market. Thankfully, there are many online reviews of different brokers, so you can easily learn more about their pros and cons, and determine which broker best suits your needs.
Traders based in the United States would have a limited choice when it comes to Forex brokerages simply because there is only a handful of licensed firms that operate in the country. It is essential to choose a broker that offers a good range of financial instruments, tight spreads, and convenient payment options. There are many other things that you must pay attention to when selecting a Forex broker and in this article, we have put together some of the most important characteristics every good Forex broker should have.
Licensing and Regulation
Forex brokers operate with their clients’ money, store their credit/debit card information, bank account details and more personal information that should not be disclosed to third parties. This is why traders should check whether the broker they have chosen is licensed and regulated by a reputable authority. This ensures that the firm complies with a wide range of rules and regulations designed to guarantee fairness, transparency, and customer protection.
Depending on the location of a broker’s headquarters and the country it operates in, it may be regulated by one of the following regulatory bodies:
- The National Futures Association (NFA) and the Commodity Futures Trading Commission (CFTC) for brokers registered in the United States
- The Financial Conduct Authority (FCA) for brokers operating in the United Kingdom
- The Australian Securities and Investments Commission (ASIC) for brokers located in Australia
- The Financial Market Supervisory Authority (FINMA) for brokers in Switzerland
- The Federal Financial Supervisory Authority (BaFIN) for brokers in Germany
- The Autorité des marchés financiers (AMF) for brokers registered in France
- The Cyprus Securities and Exchange Commission (CySEC) for brokers registered in Cyprus
Traders should know that brokers in the European Union fall under the jurisdiction of the European Securities and Markets Authority (ESMA), EU’s financial watchdog that supervises the financial markets and all market participants within the EU. All EU brokers are required to comply with the rules set up by ESMA and key European legislation, namely the Markets in financial instruments directive (MiFID and its updated version MiFID II).
This means that brokers in the EU follow the same rules and place the same restrictions on trading activities. In addition, brokers registered in Germany, for example, can offer their services anywhere in the EU and the European Economic Area. In fact, there are currently dozens of major Forex brokers based in Cyprus, where they enjoy the advantageous fiscal and tax structure. They obtain licenses from the CySEC and are automatically registered with all national regulators in the EU and EEA.
There are also hundreds of firms that operate without a license, offering seemingly better trading conditions to their clients, including deposit bonuses, low spreads, and extremely high leverage. However, we advise traders to stay away from such firms since many of them are scams. In case of delayed and canceled withdrawal of profits or any type of fraud and unfair treatment, clients will not be protected by any specific law or regulation.
Spreads and Fees
Some brokers charge their clients for every transaction in and out of their real money account. While deposits are often free, withdrawals are usually imposed with a small fee. More importantly, traders also have to pay a commission for every trade – usually in the form of a spread. The spread is the difference between the bid and the ask prices of each currency from a currency pair – it is calculated in pips and is covered by traders.
Different Forex pairs come with different spreads – major pairs usually have the lowest spreads. Trading other financial instruments may also be associated with fixed commissions charged by the brokers. In addition, traders may need to pay interest fees on overnight positions. Of course, lower spreads and fees are always preferred by traders, but we should keep in mind that sometimes, unregulated brokers are the ones that offer the best conditions. As we have already mentioned, brokers with unrealistically low spreads and high leverage should be avoided.
Depositing and Withdrawing Money
A reputable Forex broker would always provide clients with fast, secure, and convenient ways to deposit and withdraw money from their accounts. Most firms offer at least several different banking options so that their customers can choose the best solution for themselves. Usually, this includes bank wires, online banking, and credit/debit cards by leading brands such as Mastercard, Visa, Visa Electron, Maestro, Amex (American Express), or Diners Club International.
Many firms have also integrated modern payment options into their banking systems. Forex traders now can make deposits and withdrawals in a faster and more convenient way than traditional bank transfers if they choose to use a digital wallet. Such services are available around the world and clients can opt for Skrill, Neteller, PayPal, ecoPayz, WebMoney, QIWI, etc. They can be linked with a bank account, credit or debit card, or with some other online payment account. Additionally, an increasing number of Forex brokers are now accepting Bitcoin payments.
Variety of Account Types
Many brokers offer their clients tiered account structure that is usually based on the deposit amount and the minimum size of trading lots. Typically, there are standard, mini, and professional accounts, but there are also micro accounts that allow less experienced traders to start off with a deposit as low as $20 or $10 and open positions with extremely small minimum lots. Professional accounts, on the other hand, are usually designed for expert wealth managers, firms, and various institutional traders.
Some Forex brokers would offer up to ten different accounts and the higher the tier, the better the trading conditions – spreads, additional commissions and fees, better access to advanced software tools and market analysis, personal account managers, and many others. In addition, the vast majority of online brokers offer novices and new clients demo accounts where trading occurs with virtual money rather than real finances. This option comes with no real risk and is a great way to learn the basics of Forex trading or test the trading platforms provided by the broker.
Last, but not least, some Forex brokers, especially those with a truly global presence, have Islamic accounts. Also known as swap-free accounts, these trading accounts have a different pricing structure, among other things. There are no interest payments on overnight positions but at the same time, Islamic accounts also come with higher spreads and commissions.
Trading Platform
Another thing to consider before selecting an online Forex broker is to check what trading platforms are on offer. The software platform is what links traders with millions of other traders around the world and facilitates the buying and selling of various assets, including Forex pairs. The choice of software is essential – using the right trading platform increases traders’ productivity and allows them to excel at Forex trading.
Some platforms are designed specifically for currency trading, while others were made to give access to a wider selection of instruments and markets. While the most popular trading systems, including MetaTrader and cTrader, are developed by software companies, there are also many proprietary platforms that can be accessed only by the clients of one particular broker. Of course, certain software platforms were also designed with professional traders in mind and offer much more advanced trading tools and features, whereas most standard platforms also come with standard features and functions.
Traders should also take into account their trading style and preferred device when choosing a good Forex broker that would suit their needs. For instance, not all brokers offer the so-called social trading where you can copy other people’s positions or their entire portfolio. More importantly, good software platforms are also fully mobile compatible. In most cases, traders can download their preferred broker’s trading app for free – whether it is for an Android or iOS device.
Selection of Financial Instruments
Most Forex brokers nowadays offer much more than just currency trading. In fact, the leaders on the market try to constantly expand their product coverage to attract new clients or give their existing clients a wider choice of financial instruments. Many online brokers that focus on the foreign exchange market cover all major pairs, along with most minor and exotic pairs (often, totaling more than 80 pairs) plus various derivatives such as CFDs (contracts for difference).
Often, good, reputable Forex brokers also allow their clients to trade in various stock indices, as well as individual stocks, commodities, precious metals, bonds, ETFs (exchange-traded funds), and cryptocurrencies. Of course, traders should not expect brokers with a diverse selection of financial instruments to also provide true market depth.
Order Execution
There are many different types of orders in Forex trading. The term “order” refers to the instruction to the broker on what specific action he should take in the market – either right now or in the future. In other words, orders are the different ways traders enter or exit a trade and they can be for immediate or pending execution.
The most basic type of order in currency trading is the market order, which is for immediate execution. It is used whenever traders want to execute an order immediately at the market price, i.e. at the current, live price to buy and sell displayed on the screen. Another common type of execution is the entry order, which is used to open a position only when the price passes a certain point.
Limit orders, on the other hand, are placed to buy or sell at a certain price but also for a specific amount of time. With these orders, traders determine the specific price at which they wish to sell or buy a pair and the duration that the order should remain active. A similar order is the stop order, which is a quite effective risk management technique also known as a stop loss. With stop orders, traders specify the stop loss and profit points to mitigate their losses or guarantee their profits.
Trading Conditions
As you can see, many different factors should be considered when choosing a suitable Forex broker. There are also plenty of other important things that can be found in the Terms and Conditions section of the broker’s website. But there are several fundamental aspects of currency trading that must be taken into consideration, namely the leverage and margin requirements.
Often listed simply as trading conditions, these two are basic terms in trading and are among the first things we should all pay attention to. Leverage is a wonderful feature that allows you to trade much larger volumes than you can actually afford to buy or sell with the equity you have. It is the borrowed capital offered by Forex brokers that makes global markets accessible to the individual, retail traders.
It is usually displayed as a ratio between the borrowed capital and the client’s initial capital – for instance, 20:1, 100:1 or 500:1. If you have $500 and use 100:1 leverage, you can open a position of $50,000. The margin requirement, on the other hand, is the required minimum funds traders should have in their account when opening a trade. While small margins and huge leverage rates seem attractive at first, they are extremely risky – the greater the leverage, the greater your potential profits or losses.
Other trading conditions include the spreads and the swap rates (interest rates) we have already mentioned. Traders should also consider the trading hours of the broker – they should be 24 hours a day, from Monday through Friday.
Safety and Security
A license from a reputable financial regulator does not guarantee high levels of Internet and data security. Privacy remains a huge concern for many traders who wish to protect sensitive data when trading Forex. This is why they should always look for brokers who have good security practices in place, including firewalls, security software, and SSL/TLS encryption. These measures will help protect the personal and financial information traders share with their brokers during account registration and money transfers.
Another good security feature is the two-factor authentication implemented by an increasing number of Forex and CFD brokers. This means that in order to log in, traders will not only use their username and password but they will also be required to enter a unique security code sent to their mobile device. Last, but not least, before opening a live account, traders should always review the privacy policy statement of their chosen online broker. All respected firms would guarantee that no sensitive information would be provided to third parties.
Customer Support
Good customer support is also essential – it is a key contributing factor for the quality and trustworthiness of every business that is conducted online. Traders should opt for Forex brokers that offer professional, multi-lingual support available 24/5 or 24/7. Indeed, some of the largest firms right now provide support services on the weekends even though the markets are closed.
In addition, respected Forex brokers provide fast email and phone support, as well as live chat, which allows clients to contact the firm’s representatives or support agents directly. After all, Forex brokers deal with our money, so we should have a reliable way to communicate with them, ask for assistance, or simply ask a question.