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COMPARE FOREX BROKERS' TOP 10 TIPS FOR CHOOSING A FOREX BROKER IN 2021
CompareForexBrokers.com TOP 10 TIPS FOR CHOOSING A FOREX BROKER IN 2021 WWW.COMPAREFOREXBROKERS.COM 2 TOP 10 CONSIDERATIONS WHEN CHOOSING A FOREX BROKER
Choosing the right forex broker requires careful consideration. There are 10 key features that every trader should research when selecting a new forex broker.
Although spreads and pricing drive a traders decision when choosing a broker, there are several factors that contribute to a well-rounded trading experience.
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1. TYPE OF BROKERS AND BUSINESS MODELS
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There are two basic types of brokers that offer retail investor accounts for forex trading. These are:
MARKET MAKER BROKER: also known as a B Book broker or dealing desk broker.
NO DEALING DESK (NDD) BROKER: also known as an A Book broker.
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DEALING DESK BROKERS Dealing desks or market makers set their own bid/ask spreads (or align with pricing from global liquidity providers) and use their own internal sources of liquidity for the trade.
For each trade, the market maker will be the trader’s counterparty, which means they profit when the trader makes a loss and makes a loss when the trader profits.
As dealing desk brokers do not charge additional commission fees on top of the spread, spreads are wider than what no dealing desk brokers offer.
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NO DEALING DESK BROKERS No dealing desk (NDD) execution means brokers match orders directly with external liquidity providers, thus eliminating the need for intermediaries (dealing desk). This is done using execution methods such as straight through processing (STP), electronic communication network (ECN), direct market access (DMA) or hybrid combinations of STP, ECN and DMA.
No dealing desk brokers offer the tightest spreads as they pass on bid-ask prices from liquidity providers with no markups and instead charge a flat-rate commission fee. While dealing desk brokers are compensated through wider spreads, NDD brokers profit from the commission fees they charge. NDD execution is suited to day traders, scalper, algorithmic traders (traders that use automation).
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2. SPREADS, COSTS AND TRADING CONDITIONS
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When choosing a broker, one of the most important considerations is trading costs. There are two key trading costs to research before selecting a broker, being spreads and commission fees. Spreads are expressed in pips or points and equate to the difference between bid and ask prices for a financial instrument.
With each Pip costing USD$10 or pro-rata (USD $1 for 0.1 pips) to open a position and again Commission fees are the second main trading cost. No dealing to close a position (i.e. USD$20 desk brokers may offer lower spreads, but high commission costs in total), using a broker that can negate these savings. It is important to factor in the cost of offers tight spreads canhelp to both spreads and commission fees when assessing a broker's reduce costs. competitiveness.
TOP 10 TIPS FOR CHOOSING A FOREX BROKER IN 2021 WWW.COMPAREFOREXBROKERS.COM 9 ACCOUNT TYPES AND SPREADS
COMMISSION NO COMMISSION VARIABLE FIXED SPREAD ACCOUNTS ACCOUNTS SPREADS Fixed spreads remain Often referred to Often called standard Also called floating constant regardless as ECN accounts. or classic accounts. spreads, variable of market conditions. Commission account Commission-free spreads fluctuate inline While the fixed spreads types provide low accounts have a with market conditions tend to be significantly spreads as no wider spread than such as available wider than variable commission costs are ECN Accounts as liquidity and major spreads, they enable included in the spread. commission fees are news events. predictable trade Instead a commission included in the spread. planning as traders will fee to open and close Variable spreads use know what they can a position (round-turn) For example, EUR/ market execution. expect to pay for each for each lot that is USD spread = 1.4 pips + trade. traded. no commission fees. Some brokers may change fixed spread For example, EUR/ Many brokers offer in the most extreme USD spread = 0.4 pips traders a choice of conditions. + $3.50 commission either variable spreads fee per side, per 100k that move with market Fixed spreads use traded. conditions or fixed spreads that are set instant order execution. by the broker and constant.
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On top of spreads and OVERNIGHT FINANCING FEES: INACTIVITY FEES: commission fees, there are Traders that keep leveraged positions If a trader leaves their account open for longer than one day may dormant and doesn’t make any other fees and trading costs need to pay overnight financing fees trades for a short-term period to consider when choosing a (also called swap rates). Depending (usually 6-24 months), many broker: on whether a leveraged position is brokers will charge monthly long or short, a financing cost that is inactivity fees. derived from interest rates will either be paid or received.
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3. EXECUTION SPEED AND SLIPPAGE
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To ensure quick order execution, many brokers place their servers at data centres near major liquidity providers. Faster execution reduces the risk of slippage and a good broker will advertise their average execution speed that is typically expressed in milliseconds (ms).
As forex markets are volatile, if you are trading with variable spreads then it can help to minimise slippage. Slippage refers to the difference between the expected price when an order is placed and the actual price the trade is executed which can occur due to lag time during execution. Slippage can be positive or negative and can become exaggerated in a volatile market.
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To find a best broker with the least amount of slippage, you can compare market order and limit order execution speeds. Certain brokers will make this information publicly available to highlight their transparency.
MARKET ORDERS: Market orders are placed at the current market price with no price limits. Market orders are commonly used for automated trading.
LIMIT ORDERS: Limit orders allow traders to predetermine a price to buy or sell, with the order being automatically executed if markets reach the preset price, otherwise the order will not be executed.
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4. REGULATORY OVERSIGHT
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Financial regulation varies between jurisdictions, and it is recommended to use a broker that uses the regulator of your country of residence. Trading with a locally regulated broker ensures they are following the business and financial requirements of your country and provides the best protection if your broker were to run into problems. It also ensures traders have recourse to resolve issues with the broker should a dispute arise..
If a broker does not use the local financial regulator of your country, then you may still be able to trade with that broker, but there is no guarantee what protection you will receive. Financial regulators can only help traders of the country they monitor.
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Tier-1 regulators such as the Financial Conduct Authority (FCA) in the UK impose the strictest financial regulation worldwide. Depending on the financial authority and country, brokers will provide different levels of investor protection including:
LEVERAGE CAPS NEGATIVE BALANCE PROTECTIONS
SEGREGATED TRADING ACCOUNTS Some brokers hold offshore licenses from regulators such as the Securities Commission of The Bahamas (SCB) or are not regulated by DOCUMENTED COMPLAINTS any financial authorities. While this does not necessarily mean your PROCEDURES funds are unsafe with these brokers, it is always advisable to use a tier-1 or tier-2 regulated broker.
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5. CUSTOMER SUPPORT
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Whether you are a high-volume trader or a beginner with account queries, getting in touch with your broker should be quick and easy. When researching a brokers’ customer support, it is important to note the hours of operation as well as contact methods.
COMMON CONTACT METHODS INCLUDE: • Email • Phone • Live chat (via website or trading platform) Depending on your location, multilingual customer support may also be helpful.
OTHER METHOD OF SUPPORT INCLUDE: • Support via social media (Facebook, twitter, line) • FAQ • Glossaries • Forums
TOP 10 TIPS FOR CHOOSING A FOREX BROKER IN 2021 WWW.COMPAREFOREXBROKERS.COM 19 EDUCATION
To supplement customer support teams, many brokers offer educational materials designed for all levels of forex trading experience. Resources such as webinars, trading platform courses and tutorials can usually be accessed for free.
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6. TRADING PLATFORMS
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Whether you prefer to fully automate trading or use social trading tools, it is vital to select a trading platform that provides the market access and trading tools required to achieve your investment objectives. There are 3 key types of trading platforms:
MAINSTREAM PLATFORMS: Freely available platforms such as MetaTrader 4, MetaTrader 5 (MT5) and cTrader.
PROPRIETARY PLATFORMS: Trading platforms built by the broker exclusively for their clients.
SOCIAL TRADING PLATFORMS: Can be pure social trading platforms or add-ons to existing platforms.
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When choosing a platform, you need to consider a range of factors to find the best trading platform for your need:
The costs involved to access the trading platform - most software including MT4 and MT5 is free
The selection of technical analysis tools available, such as charts and indicators
Whether you can place orders through the charts
The platform’s ease of use and the quality of its graphical user interface
The quality of historical data and how far it dates back to
The backtesting tools available for optimising trading strategies
Whether you can integrate other apps with the platform, such as social-copy trading systems
The size of the trading community where you can share ideas and learn from others
The reputation and reviews of the trading platform and features
The range of asset classes and financial instruments you can trade
Whether you require automated trading features
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Automated Trading Features
ALGORITHMIC TRADING: A method of automating trading using trading robots (algorithms) that automatically enter or exit trades based on a predetermined set of rules. You can write their own trading robots or implement other traders’ algorithmic trading strategies.
SOCIAL-COPY TRADING: The other form of automation is social-copy trading where you use account mirroring services to copy the strategies of other traders. This may include copying the trades of more experienced traders or also gaining access to a social network of forex traders.
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7. LEVERAGE AND MARGIN REQUIREMENTS
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Leverage allows traders to increase trade sizes while only contributing a fraction of the trades total value. When trading with leverage, you are contributing a percentage of the trades total size, with the broker fronting the rest. Different maximum amounts of leverage are available when trading CFDs. The leverage you can use depends on:
• The CFD and asset class being traded. • The broker’s financial regulator As trading forex and CFDs is a high-risk activity, you should be and its local leverage limits. cautious when entering a highly leveraged position. While favourable • The broker’s individual risk price movements can lead to large returns, unfavourable price management policies. movements can lead to crippling losses.
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8. BROKERS TRADING TOOLS AND FEATURES
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To provide protection against market volatility and the high risk of forex trading, most good brokers will offer a range of risk management tools in the form of order types and demo accounts. Negative Balance Protection Negative balance protection (NBP) ensures you cannot lose more than the balance in your trading account, no matter how quickly the market may move against you. Some brokers choose to offer NBP, while others are required to due to local financial regulation. If you are a European trader signed up to a broker’s European subsidiary, you will receive NBP automatically.
Order Types Order types can help minimise your losses when market prices move in an unfavourable direction. Useful order types include:
MARKET ORDERS
STOP-LOSS ORDERS
TAKE PROFITS
GUARANTEED STOP-LOSS ORDERS (GSLOS)
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Other risk management tools Some brokers specialise in risk management tools and provide exclusive tools not offered by other brokers. This can be useful for new traders and risk averse traders.
Demo Accounts Whether you are a new trader wanting to find user-friendly software or an experienced investor seeking advanced trading tools, demo accounts allow traders to test trading strategies and familiarise themselves with the trading platform prior to opening a live account.
As traders can practice strategies and test trading robots with real-time market data, demo accounts are a great tool to help reduce the high risk of forex trading. While most brokers offer demo accounts with time restrictions and limited virtual funds, some brokers allow unlimited access and virtual trading balances.
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9. FUNDING POLICIES
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The initial minimum deposit, deposit and Common Funding Methods withdrawal methods plus funding fees all vary • e-Wallet payment methods such as Skrill, between brokers. When choosing a broker, it is Neteller, PayPal and Bitcoin Wallets important to check whether fees are attached to • Credit cards, commonly restricted to Visa and your preferred funding method. Mastercard Minimum Deposits • Bank transfer, wire transfer and broker to broker transfer To open an account and start trading, many • Cryptocurrencies (i.e. Bitcoin) brokers require customers to make an initial deposit into their trading account. If the broker Deposit and Withdrawal Fees doesn’t require a deposit to open an account, you will still need to meet margin requirements when • It can help to be aware of a broker’s fee you go to open a trade. schedules when assessing funding methods as they can differ between: • Free unlimited deposits and/or withdrawals • A limited number of free deposits or withdrawals per month with any subsequent funding incurring a fee • Fees for all or selected deposit or withdrawal methods
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10. REPUTATION
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With today’s online resources, it is easy to gauge a broker’s reputation within the forex trading community. To learn more about a forex broker and their reputation among traders, you can use the following resources:
Broker comparisons such as www.compareforexbrokers.com
Review sites such as Trustpilot or Google reviews
Forums where brokers, forex trading, and trading platforms are discussed
Awards from respected industry voices
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CONCLUSION
The wide array of brokerage choices is both a Most importantly, give yourself plenty of time blessing and a curse. The blessing is that the vast to choose an online broker, ensuring the pricing choice of brokers translates to the opportunity structure, trading features and platforms suit your to find a broker that suits your individual trading trading style, needs and objectives. This eBook needs. The curse is that with so many choices; it is looked at ten of the most important considerations easy to get confused and overwhelmed with the when choosing a broker. Ultimately, when it number of choices and features. comes to choosing a broker, you need to consider the type of trader you are and what trading considerations are important to you.
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