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The Ultimate Forex Broker Checklist

 

Overview

The forex market is the largest and most liquid financial market in the world and can be accessed through a live trading account with a forex broker.

However, before you choose a forex broker, you need to consider the type of retail investor you are, what your financial goals and objectives are, and what you expect to gain from trading forex.

Every broker that offers currency pairs to trade, along with other investments, have their features, pros, and cons. Some of the most crucial considerations, which will be discussed at great length later, concerns regulation from reputable market regulators.

The security features from one broker to the next will differ and some brokers have integrated security functions such as two-step verifications, allowing for trading accounts to be safeguarded from hackers.

Another consideration is that forex brokers may have restrictions in some regions because of regulatory requirements, meaning that forex traders may need to choose a broker regulated specifically in their region to be able to trade forex.

Other areas where forex brokers differ relate to their trading platforms, cost and fees, bonuses and promotions, and several other components. Different brokers will cater better for different retail traders and professional traders.

For this reason, it is important to understand the different components that form part of a comprehensive checklist that can be used when choosing a broker.

 

What is Forex?

Foreign Exchange, Forex, and FX all refer to the same global decentralized and electronic marketplace where international currencies and currency derivatives are traded.

Even though it does not have a central physical location, the forex market is the largest and most liquid market according to trading volume, with more than $6 trillion traded daily through banks, forex brokers, and other financial institutions that facilitate trading.

The forex market is open 24 hours a day, 5 days a week with different sessions that overlap.

Forex exists so that large amounts of a currency can be exchanged for an equivalent value in another currency at the current exchange rate, also known as the market rate.

These trades can occur because many market participants need to exchange currencies to conduct business. Forex trading is also used for speculation on price movements on the currency pairs and their corresponding values, allowing traders to earn profits from these price movements.

 

The Basics of Forex Trading

Currencies are traded in pairs that have a base currency and a quote currency such as USD/EUR, EUR/USD, USD/CAD, and many more. The difference between the prices of the currencies is known as the spread which is indicated in pips.

Spreads can either be variable or they can be fixed, depending on the type of broker that you deal with. Fixed spreads are often higher because the broker’s fee is worked into the price.

Variable spreads are lower, but they often have a commission fee charged according to the financial instrument, market conditions, and position size.

The exchange rate between currencies fluctuates and change according to certain driving factors such as interest rate, political and economic situations, news, earnings releases, and several others.

When trading forex for speculation purposes, forex traders use technical analysis, fundamental analysis, or a combination of the two to determine the possible direction in which prices will move based on these driving factors.

If traders speculate that the price will increase, they enter a long position which means that they buy the currency pair, and they profit from the currency pair’s appreciation.

If traders speculate that the price on a currency pair will decrease, they enter a short position which means that they sell a currency pair, allowing them to profit from the depreciation of the currency pair.

There are different trading strategies that traders can use in the financial markets to help them make informed trading decisions. Not all trading strategies work the same and they use different elements such as charts, timeframes, technical indicators, and different orders.

In forex trading, currencies are traded in lots that can be divided into standard, micro, mini, and nano lots. A standard lot is 100,000 units of the base currency, mini lots are 10,000 units, micro lots are 1,000 units, and nano lots are 100.

 

What is a forex broker?

A forex broker can be defined as a financial services company that facilitates the trade in forex currencies through a trading platform, used specifically for buying and selling foreign currencies.

Forex brokers connect forex traders to the forex market and offer their services at different rates and fees. Forex brokers also offer forex traders different trading tools, materials, and resources that they can use to help direct their trading decisions.

Different forex brokers have different packages that they offer according to different trading experience levels, trading styles, and so on.

 

The different types of forex brokers

Dealing Desk Brokers

Dealing Desk Brokers (DD) are also referred to as Market Maker brokers because they make the market for their retail traders and provide them with liquidity to execute their trades.

With this execution model, Market Makers take the position as the counterparty, making it a profitable business model for the broker.

Even though many forex traders are wary of Market Maker brokers, they do provide consistent liquidity despite market conditions, and they charge fixed spreads without additional commissions.

In addition, with Market Maker online brokers, traders can also trade nano lots, which are 100 units of the base currency, allowing beginner traders to get exposure to the live forex market without risking much of their capital.

 

Non-Dealing Desk Brokers

Non-Dealing Desk Brokers can be divided into three different types of brokers:

  • Straight Through Processing (STP)
  • Electronic Communication Networks (ECN)
  • Direct Market Access (DMA)

STP Brokers

With STP brokers, the forex broker links the order of the trader to a liquidity provider, which can either be a bank, hedge fund, or other brokers. The STP broker puts a mark-up on the spread which covers their cost for facilitating the trade.

Therefore STP Brokers offer wider spreads than other brokers without having to charge commissions.

Many brokers have different execution models incorporated that they divide between trading accounts. For instance, forex brokers can offer STP Accounts or ECN Accounts, which means that the account will reflect the execution model.

 

ECN Brokers

ECN brokers provide traders with direct access to liquidity providers and instead of marking up the spread of traders’ orders, forex brokers charge a commission on trades.

For this reason, ECN Brokers often offer tight spreads from 0.0 pips but charge a commission per side, per trade, per round, or according to a certain trading volume.

 

DMA Brokers

With DMA Brokers, the trade is sent directly to a stock exchange, ECN liquidity providers, or other market makers on the market without intervention from the forex brokers.

 

Regulation and Safety of Funds

As a forex trader, it is your responsibility to ensure that you partner with a financially sound forex broker. Make sure that you evaluate the financial portfolio of the broker before you sign up for their trading services.

All legitimate brokers are regulated and authorized by one or more reputable market regulators such as:

  • The Australian Securities and Investment Commission (ASIC) in Australia.
  • The Financial Conduct Authority (FCA) in the United Kingdom.
  • The Cyprus Securities and Exchange Commission (CySEC).
  • The Financial Sector Conduct Authority (FSCA) in South Africa, and several others.

 

These market regulators have strict requirements in place to ensure that brokers can meet their financial obligations. They also ensure that the activities of the broker are sound, fair, and safe and that all retail investors are protected if there are any problems, disputes, or queries.

These forex brokers are also required to keep client funds in segregated accounts. This means that all funds are kept in accounts separate from the broker’s account. These funds may only be used towards the trader’s activities.

Most of these reputable brokers are also members of a compensation scheme that provides cover for eligible clients up to a certain amount if the broker is liquidated or declared bankrupt.

 

Types of Accounts

Demo Account

Demo accounts are also referred to as practice accounts or paper trading accounts. These are funded with virtual capital and mirror the conditions of a live market setting.

Beginner traders use demo accounts to gain experience in forex trading and to hone their skills before they register for a live trading account.

Advanced traders use demo accounts to test their trading strategies because the demo account mimics a live trading environment, without traders risking their capital.

Professional traders also use demo accounts in the same way, often using them to discover whether the forex broker caters to their unique trading needs and/or objectives.

 

Micro or Mini Accounts

These accounts are small-cap accounts that allow retails traders entry into the market with low minimum deposit requirements, from $100, and lower.

These accounts are known for their restrictive position sizes, in increments of 0.01 lots, helping traders control the risk factor on their trading accounts. Micro account holders are not likely to receive any benefits from forex brokers.

 

Intermediate Accounts

These account types provide the greatest variation where nomenclature is concerned. Some brokers also name these types of accounts Standard Account, Gold Account, Classic Account, and so on.

The characteristic of this account type is that the minimum deposit can range from $100 up to $500, depending on the forex broker.

With this account type, traders can be restricted to trading standard lots, but some online brokers allow mini or micro-lots on these account types.

Traders who have intermediate accounts are often given bonuses on deposits, referrals, and so on, which will depend on the broker.

Most intermediate accounts, depending on the online broker, will also have negative balance protection applied automatically to the account. Negative balance protection means that the trading account cannot go into a negative if the trader experiences a significant loss.

 

Premium/VIP Accounts

VIP, Premium, or Platinum trading accounts, as the name suggests, are for VIP traders. These account types are suited to professional traders and active traders who trade large volumes.

The minimum deposits on these accounts are often significantly higher than other accounts, anywhere from $1,000 and higher. These account types are often given better bonuses and discounts, premium benefits, and access to more advanced trading tools and other features.

 

Islamic Account

An Islamic Account is considered one that is halal and offered to forex traders who respect the Quran, and who want to invest in financial instruments while following the principles of Islamic finance.

These accounts are also known as swap-free accounts, and they differ in several ways from other Forex accounts. The Sharia law forbids the accumulation of interest and with Islamic Accounts, traders neither pay nor receive interest rates.

In addition, the transactions on these accounts are carried out immediately, with the transaction costs settled upon delivery.

 

Trading Costs and Non-Trading Fees

Spreads

The spread is the difference between the bid and ask prices expressed in pips. The wider the spread, the more traders pay for trading fees. Spreads can either be fixed or they can be variable.

STP brokers have marked-up spreads that are wider but that do not have a commission charge. ECN brokers have tight variable spreads but charge a commission on trades.

Market Maker brokers charge a fixed spread which typically includes the broker’s fee.

While many online brokers offer both fixed and variable spread accounts, most brokers will offer either one or the other according to their execution models.

 

Commission

Commissions can either be a flat fee or they can be tiered according to trading volume. Commissions are typically charged by ECN brokers who offer tight, variable spread accounts as payment for their trading services.

 

Rollover, overnight or swap fees

These are also referred to as a financing rate which is charged when traders hold a leveraged position for longer than a trading day. The cost will depend on the position that traders hold and whether they hold a buy/sell position.

 

Margin Requirement

Leverage is used to allow traders to open larger positions with a lower initial deposit. The Margin rate or requirement is the collateral that the broker charges for the trader to execute the trade.

 

Deposit/Withdrawal fees

These are fees or commissions that are charged when traders fund their trading account or withdraw funds from it. The broker may charge their fees in addition to the processing fees that traders may pay their financial or banking institution.

 

Inactivity Fees

These fees are charged by brokers if the trading account goes dormant and there is no activity for a certain period, typically for longer than 3, 6, or 12 consecutive months.

The broker will deduct a certain amount from the trading account every month until the trading account balance is zero, after which the trading account will be closed automatically and traders may pay a penalty to have it reopened, or they must reapply.

 

Conversion Fees

These are charged when a transaction requires a currency conversion either when trading or when depositing/withdrawing funds in different currencies.

 

Account Maintenance and management fees

There are many brokers, especially those who cater for professional and institutional clients, who charge administrative fees to maintain and manage trading accounts. These are not typically charged for retail trading accounts.

 

Range of Markets

This refers to the tradable financial instruments that online brokers offer. Many forex brokers offer a wide range of tradable assets which are spread across several asset classes:

  • Forex pairs
  • Commodities
  • Metals
  • Energies
  • Cryptocurrencies
  • Stocks
  • Indices
  • Exchange-traded funds (ETFs)
  • Mutual Funds
  • Bonds, and many more.

 

Most forex brokers do not only specialize in the facilitation of trades in the forex market but also offer a wide range of other instruments as well. However, some forex brokers only offer a wide range of forex pairs that can be traded.

Forex traders need to consider their trading objectives and their reason for trading to decide whether they only want to trade forex, or whether they want a diversified portfolio, making it easier to manage their exposure to trading risks.

 

Margin and Leverage

In forex trading, forex traders can start trading with a very small amount of capital outlay which is known as initial margin. Margin is used to create leverage, with leverage being the “trading power” when traders use a margin account.

With leverage, traders can trade larger positions despite the capital they have in their trading account. Leverage is expressed as a ratio that signifies the amount of capital that the trader has and the amount that they can trade.

Forex brokers offer different ratios according to certain regulations, the experience level of the trader, or the country of residence of the trader.

 

Trading Platforms

The trading platform provided by a forex broker is a piece of software that allows traders to perform analysis on markets as well as manage their trades. The trading platform assists the forex trader to read the market and it also acts as an intermediary between the trader and their broker.

Different forex brokers offer different software, with each trading platform featuring its unique features and functions. Traders must ensure that they evaluate the trading platform to see whether it suits their trading needs and objectives.

 

Deposit and Withdrawals

This refers to the funding options that the forex broker offers to traders through which the trading account can be funded, and funds can be withdrawn.

Common deposit and withdrawal methods include:

  • Credit Cards
  • Debit Cards
  • Bank Transfer
  • Bank Wire Transfer
  • SEPA
  • Neteller
  • Skrill
  • PayPal
  • Bitcoin Wallets, and many more.

 

Forex traders need to consider the type of funding options and the processing times of each.

Certain deposit currencies may be supported, and traders need to ensure that they understand that they may be subjected to currency conversion costs when they deposit/withdraw funds in currencies other than the accepted deposit currency.

 

Customer Support

Customer support or customer service refers to communication with the forex broker and their team, whether traders have questions, queries, or issues to report.

The forex broker must have a wide range of communication channels through which they can be contacted, along with flexible hours to ensure that someone is available to tend to forex traders.

Many forex brokers only operate during the same time as the markets, typically on weekdays during week hours. However, some forex brokers have customer support available 24 hours a day, 7 days a week.

Some of the ways through which forex brokers can be contacted include:

  • Live chat functions on the broker’s official website
  • Email
  • Telephone
  • Social Media
  • Online contact Request Forms

 

Trading Tools, Education, and Research

This is another component that forex brokers offer their traders, but it is not something that all forex brokers will have. For this reason, forex traders must know what their trading needs are before they choose a forex broker.

Trading tools and research refer to the applications that the broker offers that will help traders in making informed trading decisions such as economic calendars, trading calculators, market analysis, technical analysis tools, fundamental analysis tools, blogs, news feeds, and so on.

Education refers to the tools, materials, and resources that the forex broker offers to traders of all skill levels, helping them increase their knowledge of trading.

 

Bonuses and Promotions

Some forex brokers have special offers such as sign-up bonuses, deposit bonuses, welcome bonuses, referral bonuses, trading contests and competitions, and more.

These are offered to forex traders for several reasons including attracting more prospective clients, rewarding loyal customers, encouraging higher trading volumes, and several others.

Many of these trading bonuses also allow traders to start trading with lower capital as they often provide trading credit that can be used.

 

FAQ

Why is regulation important?

Because it ensures that the forex broker is fair, safe, and transparent and that forex traders are protected.

 

How much do forex brokers typically charge?

Each broker has its unique trading conditions. Many brokers have a standard minimum deposit of $100, but others can go as low as $1.

 

Are all forex brokers regulated?

No, not all forex brokers are regulated.

 

Do I need a trading plan?

Yes, every forex trader must develop a trading plant as it will help them understand the type of trader they are, what they need, and what their objectives are. This makes it easier to choose a forex broker.

 

Why should you use a broker checklist?

Because there are many elements to consider before choosing a forex broker. A checklist will help you remember what to evaluate and what to look for in a broker.

 

How risky is forex trading?

It can be very risky, especially if you do not have enough knowledge about trading and you do not use risk management tools to protect yourself in a volatile market.

 

Is forex trading legal?

Yes, forex trading is completely legal. However, some regions restrict forex trading because of the risks involved, while other regions restrict leverage ratios.

 

Should I combine forex trading with other financial markets?

All financial markets are interrelated in some way. However, it is important to know that each works differently and have their risks. Learn about one market first and make sure you understand it before you expand your trading activities to others.

 

Author Details

Louis Schoeman

Louis Schoeman

Featured Forex and Stocks writer

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