The first step in choosing a forex broker is finding out what your choices are.
You don’t just walk into a restaurant, knowing what to order right away, do you?
Not unless you’re a frequent customer there, of course. More often than not, you check out their menu first to see what they have to offer. There are two main types of forex brokers:
No Dealing Desks can be further subdivided into:
Dealing Desk brokers literally create a market for their clients, meaning they often take the other side of a clients trade. While you may think that there is a conflict of interest, there really isn’t.
Market makers provide both a sell and buy quote, which means that they are filling both buy and sell orders of their clients; they are indifferent to the decisions of an individual trader.
Since market makers control the prices at which orders are filled, it also follows that there is very little risk for them to set FIXED spreads (you will understand why this is so much better later).
Also, clients of dealing desk brokers do not see the real interbank market rates. Don’t be scared though. The competition among brokers is so stiff that the rates offered by Dealing Desks brokers are close, if not the same, to the interbank rates.
Trading using a Dealing Desk broker basically works this way:
Let’s say you place a buy order for EUR/USD for 100,000 units with your Dealing Desk broker.
To fill you, your broker will first try to find a matching sell order from its other clients or pass your trades on to its liquidity provider, i.e. a sizable entity that readily buys or sells a financial asset.
By doing this, they minimize risk, as they earn from the spread without taking the opposite side of your trade.
However, in the event that there are no matching orders, they will have to take the opposite side of your trade.
Take note that different forex brokers have different risk management policies, so make sure to check with your own broker regarding this.
This means that they do not take the other side of their clients’ trade as they simply link two parties together.
NDDs are like bridge builders: they build a structure over an otherwise impassable or hard-to-pass terrain to connect two areas.
NDDs can either charge a very small commission for trading or just put a markup by increasing the spread slightly.
NDDs can either charge a very small commission for trading or just put a markup by increasing the spread slightly.
No Dealing Desk brokers can either be STP or STP+ECN.
Forex brokers that have an STP system route the orders of their clients directly to their liquidity providers who have access to the interbank market.
NDD STP brokers usually have many liquidity providers, with each provider quoting its own bid and ask price.
Let’s say your NDD STP broker has three different liquidity providers. In their system, they will see three different pairs of bid and ask quotes.
Their system then sorts these bid and ask quotes from best to worst.
In this case, the best price in the bid side is 1.3000 (you want to sell
high) and the best price on the ask side is 1.3001 (you want to buy
low). The bid/ask is now 1.3000/1.3001.
Will this be the quote that you will see on your platform?
Of course not!
Your broker isn’t running a charity! Your broker didn’t go through all that trouble of sorting through those quotes for free!
To compensate them for their trouble, your broker adds a small, usually fixed, markup. If their policy is to add a 1-pip markup, the quote you will see on your platform would be 1.2999/1.3002.
You will see a 3-pip spread. The 1-pip spread turns into a 3-pip spread for you.
So
when you decide to buy 100,000 units of EUR/USD at 1.3002, your order
is sent through your broker and then routed to either Liquidity Provider
A or B.
If your order is acknowledged, Liquidity Provider A or B will have a
short position of 100,000 units of EUR/USD 1.3001, and you will have a
long position of 100,000 units of EUR/USD at 1.3002. Your broker will
earn 1 pip in revenue.
This changing bid/ask quote is also the reason why most STP type brokers have variable spreads. If the spreads of their liquidity providers widen, they have no choice but to widen their spreads too.
While some STP brokers do offer fixed spreads, most have VARIABLE spreads.
Participants could be banks, retail traders, hedge funds, and even other brokers. In essence, participants trade against each other by offering their best bid and ask prices.
ECNs also allow their clients to see the “Depth of Market.”
Depth of Market displays where the buy and sell orders of other market participants are. Because of the nature ECN, it is very difficult to slap on a fixed markup so ECN brokers usually get compensated through a small COMMISSION.
You don’t just walk into a restaurant, knowing what to order right away, do you?
Not unless you’re a frequent customer there, of course. More often than not, you check out their menu first to see what they have to offer. There are two main types of forex brokers:
- Dealing Desks (DD)
- No Dealing Desks (NDD).
No Dealing Desks can be further subdivided into:
- Straight Through Processing (STP) and
- Electronic Communication Network + Straight Through Processing (ECN+STP).
What is a Dealing Desk Broker?
Forex brokers that operate through Dealing Desk (DD) brokers make money through spreads and providing liquidity to their clients. Also called “market makers,”Dealing Desk brokers literally create a market for their clients, meaning they often take the other side of a clients trade. While you may think that there is a conflict of interest, there really isn’t.
Market makers provide both a sell and buy quote, which means that they are filling both buy and sell orders of their clients; they are indifferent to the decisions of an individual trader.
Since market makers control the prices at which orders are filled, it also follows that there is very little risk for them to set FIXED spreads (you will understand why this is so much better later).
Also, clients of dealing desk brokers do not see the real interbank market rates. Don’t be scared though. The competition among brokers is so stiff that the rates offered by Dealing Desks brokers are close, if not the same, to the interbank rates.
Trading using a Dealing Desk broker basically works this way:
Let’s say you place a buy order for EUR/USD for 100,000 units with your Dealing Desk broker.
To fill you, your broker will first try to find a matching sell order from its other clients or pass your trades on to its liquidity provider, i.e. a sizable entity that readily buys or sells a financial asset.
Take note that different forex brokers have different risk management policies, so make sure to check with your own broker regarding this.
What is a No Dealing Desk Broker?
As the name suggests, No Dealing Desk (NDD) brokers do NOT pass their clients’ orders through a Dealing Desk.This means that they do not take the other side of their clients’ trade as they simply link two parties together.
NDDs are like bridge builders: they build a structure over an otherwise impassable or hard-to-pass terrain to connect two areas.
NDDs can either charge a very small commission for trading or just put a markup by increasing the spread slightly.
NDDs can either charge a very small commission for trading or just put a markup by increasing the spread slightly.
No Dealing Desk brokers can either be STP or STP+ECN.
What is an STP Broker?
Some brokers claim that they are true ECN brokers, but in reality, they merely have a Straight Through Processing system.Forex brokers that have an STP system route the orders of their clients directly to their liquidity providers who have access to the interbank market.
NDD STP brokers usually have many liquidity providers, with each provider quoting its own bid and ask price.
Let’s say your NDD STP broker has three different liquidity providers. In their system, they will see three different pairs of bid and ask quotes.
| Bid | Ask | |
|---|---|---|
| Liquidity Provider A | 1.2998 | 1.3001 |
| Liquidity Provider B | 1.2999 | 1.3001 |
| Liquidity Provider C | 1.3000 | 1.3002 |
Will this be the quote that you will see on your platform?
Of course not!
Your broker isn’t running a charity! Your broker didn’t go through all that trouble of sorting through those quotes for free!
To compensate them for their trouble, your broker adds a small, usually fixed, markup. If their policy is to add a 1-pip markup, the quote you will see on your platform would be 1.2999/1.3002.
You will see a 3-pip spread. The 1-pip spread turns into a 3-pip spread for you.
This changing bid/ask quote is also the reason why most STP type brokers have variable spreads. If the spreads of their liquidity providers widen, they have no choice but to widen their spreads too.
While some STP brokers do offer fixed spreads, most have VARIABLE spreads.
What is an ECN Broker?
True ECN forex brokers, on the other hand, allow the orders of their clients to interact with the orders of other participants in the ECN.Participants could be banks, retail traders, hedge funds, and even other brokers. In essence, participants trade against each other by offering their best bid and ask prices.
ECNs also allow their clients to see the “Depth of Market.”
Depth of Market displays where the buy and sell orders of other market participants are. Because of the nature ECN, it is very difficult to slap on a fixed markup so ECN brokers usually get compensated through a small COMMISSION.
6 Crucial Things to Consider When Choosing a Forex Broker
The retail forex market is so competitive that just thinking about
having to sift through all the available brokers can give you a major
headache.
Choosing which forex broker to trade with can be a very overwhelming task especially if you don’t know what you should be looking for.
In this section, we will discuss the qualities you should look for when picking a forex broker.
The
first and foremost characteristic that a good broker must have is a
high level of security. After all, you’re not going to hand over
thousands of dollars to a person who simply claims he’s legit, right?
Fortunately, checking the credibility of a forex broker isn’t very hard. There are regulatory agencies all over the world that separate the trustworthy from the fraudulent.
Below is a list of countries with their corresponding regulatory bodies:
Every single time you enter a trade, you will have to pay for either the spread or a commission so it is only natural to look for the most affordable and cheapest rates. Sometimes you may need to sacrifice low transaction for a more reliable broker.
Make sure you know if you need tight spreads for your type of trading, and then review your available options. It’s all about finding the correct balance between security and low transaction costs.
Brokers really have no reason to make it hard for you to withdraw your profits because the only reason they hold your funds is to facilitate trading.
Your broker only holds your money to make trading easier so there is no reason for you to have a hard time getting the profits you have earned. Your broker should make sure that the withdrawal process is speedy and smooth.
When looking for a broker, always check what its trading platform has to offer.
Does it offer free news feed? How about easy-to-use technical and charting tools? Does it present you with all the information you will need to trade properly?
Under normal market conditions (e.g. normal liquidity, no important news releases
or surprise events), there really is no reason for your broker to not
fill you at, or very close to, the market price you see when you click
the “buy” or “sell” button.
For example, assuming you have a stable internet connection, if you
click “buy” EUR/USD for 1.3000, you should get filled at that price or
within micro-pips of it. The speed at which your orders get filled is
very important, especially if you’re a scalper.
A few pips difference in price can make that much harder on you to win that trade.
Brokers aren’t perfect, and therefore you must pick a broker that you could easily contact when problems arise.
The competence of brokers when dealing with account or technical support issues is just as important as their performance on executing trades.
Brokers may be kind and helpful during the account opening process, but have terrible “after sales” support.
Choosing which forex broker to trade with can be a very overwhelming task especially if you don’t know what you should be looking for.
In this section, we will discuss the qualities you should look for when picking a forex broker.
1. Security
The
first and foremost characteristic that a good broker must have is a
high level of security. After all, you’re not going to hand over
thousands of dollars to a person who simply claims he’s legit, right?Fortunately, checking the credibility of a forex broker isn’t very hard. There are regulatory agencies all over the world that separate the trustworthy from the fraudulent.
Below is a list of countries with their corresponding regulatory bodies:
- United States: National Futures Association (NFA) and Commodity Futures Trading Commission (CFTC)
- United Kingdom: Financial Conduct Authority (FCA) and Prudential Regulation Authority (PRA)
- Australia: Australian Securities and Investment Commission (ASIC)
- Switzerland: Swiss Federal Banking Commission (SFBC)
- Germany: Bundesanstalt für Finanzdienstleistungsaufsicht (BaFIN)
- France: Autorité des Marchés Financiers (AMF)
- Canada: Autorité des Marchés Financiers (AMF)
2. Transaction Costs
No matter what kind of currency trader you are, like it or not, you will always be subject to transaction costs.Every single time you enter a trade, you will have to pay for either the spread or a commission so it is only natural to look for the most affordable and cheapest rates. Sometimes you may need to sacrifice low transaction for a more reliable broker.
Make sure you know if you need tight spreads for your type of trading, and then review your available options. It’s all about finding the correct balance between security and low transaction costs.
3. Deposit and Withdrawal
Good FX brokers will allow you to deposit funds and withdraw your earnings hassle-free.Brokers really have no reason to make it hard for you to withdraw your profits because the only reason they hold your funds is to facilitate trading.
Your broker only holds your money to make trading easier so there is no reason for you to have a hard time getting the profits you have earned. Your broker should make sure that the withdrawal process is speedy and smooth.
4. Trading Platform
In online forex trading, most trading activity happens through the brokers’ trading platform. This means that the trading platform of your broker must be user-friendly and stable.When looking for a broker, always check what its trading platform has to offer.
Does it offer free news feed? How about easy-to-use technical and charting tools? Does it present you with all the information you will need to trade properly?
5. Execution
It is mandatory that your broker fills you at the best possible price for your orders.A few pips difference in price can make that much harder on you to win that trade.
6. Customer Service
Brokers aren’t perfect, and therefore you must pick a broker that you could easily contact when problems arise.The competence of brokers when dealing with account or technical support issues is just as important as their performance on executing trades.
Brokers may be kind and helpful during the account opening process, but have terrible “after sales” support.
How to Protect Yourself Against Forex Broker Scams
While you may feel like a dwarf among big bad brokers, it doesn’t mean that you have to take their abuse!
If you are disheartened because it seems that brokers have all the advantage, rest assured that there are a few simple measures to help even the odds.
If there is a hurdle in front, this horse has no other choice but to exert the additional effort needed to jump over it. This horse is a very sad horse.
If you only use the price feed on your trading platform, you are basically trading like a horse with blinders on. You have no idea what’s going on in the rest of the forex world because you have limited yourself to your broker’s price feed.
If your broker chooses to widen spreads, manipulate rates, and run your stops, you have no way of knowing if the move resembled the general market.
You do not want to be a sad horse. Because you are a smart trader, you want to have the most complete view of the market as possible.
The best way to do this is to subscribe to a second, third, or even fourth price feed. That way, you get another view of the market, and you’d have a chance to confirm whether price really moved the way it did.
Always keep a detailed journal tracking ALL of your transactions! Always, always, always! Like in a courtroom, you need evidence to make a case. You may FEEL cheated, but if you have nothing to back it up, then that feeling will remain just a feeling.
The easiest way to keep records is to take a screenshot of each order you put, each trade you take, and other suspicious broker activity like odd price feeds.
Not only is this good trade journaling, but it will come in handy if have been victimized by an errant fill. By properly tracking the trades you take, you can assure yourself that you will always have the evidence needed to support your case in the event that you file a dispute with your broker.
The CFTC has a Reparations program that provides an “inexpensive, expeditious, fair, and impartial forum to handle customer complaints and resolve disputes between futures customers and commodity futures trading professionals.” You can check out their program here.
Likewise, the NFA has an Arbitration/Mediation program that helps resolve disputes. For more information, just head on over to the NFA’s website.
In
any case, even with the proper weapons to protect yourself against evil
brokers, the most important thing is still to become a better trader.
Know that no matter how advanced your charting software is, no matter
how much time you put into finding the right broker, no matter how
complicated your trading system is, without proper discipline, you will
end up losing.
It is very easy to put the blame on brokers, but at the end of the day, it is really your choices that get you to where you want to go.
If you are disheartened because it seems that brokers have all the advantage, rest assured that there are a few simple measures to help even the odds.
Compare Price Feeds
Imagine a horse with blinders. This horse’s vision is limited to what’s in front of him.If there is a hurdle in front, this horse has no other choice but to exert the additional effort needed to jump over it. This horse is a very sad horse.
If you only use the price feed on your trading platform, you are basically trading like a horse with blinders on. You have no idea what’s going on in the rest of the forex world because you have limited yourself to your broker’s price feed.
If your broker chooses to widen spreads, manipulate rates, and run your stops, you have no way of knowing if the move resembled the general market.
You do not want to be a sad horse. Because you are a smart trader, you want to have the most complete view of the market as possible.
The best way to do this is to subscribe to a second, third, or even fourth price feed. That way, you get another view of the market, and you’d have a chance to confirm whether price really moved the way it did.
Record Everything
Always keep a detailed journal tracking ALL of your transactions! Always, always, always! Like in a courtroom, you need evidence to make a case. You may FEEL cheated, but if you have nothing to back it up, then that feeling will remain just a feeling.
The easiest way to keep records is to take a screenshot of each order you put, each trade you take, and other suspicious broker activity like odd price feeds.
Not only is this good trade journaling, but it will come in handy if have been victimized by an errant fill. By properly tracking the trades you take, you can assure yourself that you will always have the evidence needed to support your case in the event that you file a dispute with your broker.
File Legal Action
If you cannot settle your conflict with your broker, then it is time for you to take legal action. Most brokers give in when faced with the threat of legal action, but if they do not, you can approach either the Commodity Futures Trading Commission (CFTC) or the National Futures Associations (NFA).The CFTC has a Reparations program that provides an “inexpensive, expeditious, fair, and impartial forum to handle customer complaints and resolve disputes between futures customers and commodity futures trading professionals.” You can check out their program here.
Likewise, the NFA has an Arbitration/Mediation program that helps resolve disputes. For more information, just head on over to the NFA’s website.
Good Trading Habits
Like a disciplined nun who wears a habit, you too should develop good trading habits. We know that joke doesn’t make sense, but it sounded funny so we might as well put it here.It is very easy to put the blame on brokers, but at the end of the day, it is really your choices that get you to where you want to go.
How to Open a Forex Trading Account
So after demo trading on at least three broker platforms, you’ve narrowed down your choice to a single forex broker?
After finding the right broker for you, you can open a forex trading account in three simple steps:
In the past, when opening a forex trading account, you’d also have to choose whether you wanted to open a “standard” account, a “mini” account, or a “micro” account.
Now, that isn’t much of a problem since most brokers allow you to trade custom lots. This is great for newbie and inexperienced traders who only have a small account of capital.
This provides you great flexibility, as you won’t have to trade bigger than you’re comfortable with.
Also, always, always, always remember: Always read the fine print.
Some brokers have a “managed account” option in their application forms. If you want the broker to trade your account for you, you can pick this.
But is this what you really want? After all, you didn’t read through the whole School of Pipsology just to have someone else trade for you!
Besides, opening a managed account requires a pretty big minimum deposit, normally $25,000 or higher. Also, the manager will also take a cut out of any profits.
Lastly, make sure you open a forex spot account and not a forwards or futures account.
They are usually provided in PDF format and can be viewed and printed using Adobe Acrobat Reader program.
Also, make sure you know all the associated costs, like how much your banks charges for a bank wire transfer. You’d be surprised how much these actually costs, and they may actually take up a significant portion of your trading capital.
After
these steps have been completed, you will receive a final email with
your username, password, and instructions on how to fund your account.
After these steps have been completed, you will receive a final email
with your username, password, and instructions on how to fund your
account.
So all that’s left is for you to login and start trading. Pretty easy huh?
Time to log in, pop open those charts, and start trading!
But wait just one minute!
We strongly advise you DEMO trade first. There’s no shame in demo trading – everyone has to start somewhere.
If you have been demo trading for at LEAST six months, then maybe you can dip your feet into live trading. Even then, we suggest you go in the shallow end and consider how much you want to risk.
Trading live is a different beast altogether. It’s like the difference between sparring against your kid brother (or sister) and fighting Manny Pacquiao.
If you start trading live without any demo trading experience, this is what usually happens:
But no matter how successful you were in demo trading, nothing can replace the feeling of having real money on the line.
And once you’ve started trading on a live account, never get too comfortable. Always remain vigilant and use proper risk management.
Otherwise, this might happen:
After finding the right broker for you, you can open a forex trading account in three simple steps:
- Selecting an account type
- Registration
- Activating your account
Choosing an Account Type
When you’re ready to open a live account, you have to choose which type of forex trading account you want: a personal account or a business (aka corporate) account.In the past, when opening a forex trading account, you’d also have to choose whether you wanted to open a “standard” account, a “mini” account, or a “micro” account.
Now, that isn’t much of a problem since most brokers allow you to trade custom lots. This is great for newbie and inexperienced traders who only have a small account of capital.
This provides you great flexibility, as you won’t have to trade bigger than you’re comfortable with.
Also, always, always, always remember: Always read the fine print.
Some brokers have a “managed account” option in their application forms. If you want the broker to trade your account for you, you can pick this.
But is this what you really want? After all, you didn’t read through the whole School of Pipsology just to have someone else trade for you!
Besides, opening a managed account requires a pretty big minimum deposit, normally $25,000 or higher. Also, the manager will also take a cut out of any profits.
Lastly, make sure you open a forex spot account and not a forwards or futures account.
Registration
You will have to submit paperwork in order to open an account and the forms will vary from broker to broker.They are usually provided in PDF format and can be viewed and printed using Adobe Acrobat Reader program.
Also, make sure you know all the associated costs, like how much your banks charges for a bank wire transfer. You’d be surprised how much these actually costs, and they may actually take up a significant portion of your trading capital.
Account Activation
Once the broker has received all the necessary paperwork, you should receive an email with instructions on completing your account activation.So all that’s left is for you to login and start trading. Pretty easy huh?
Time to log in, pop open those charts, and start trading!
But wait just one minute!
We strongly advise you DEMO trade first. There’s no shame in demo trading – everyone has to start somewhere.
If you have been demo trading for at LEAST six months, then maybe you can dip your feet into live trading. Even then, we suggest you go in the shallow end and consider how much you want to risk.
Trading live is a different beast altogether. It’s like the difference between sparring against your kid brother (or sister) and fighting Manny Pacquiao.
If you start trading live without any demo trading experience, this is what usually happens:
But no matter how successful you were in demo trading, nothing can replace the feeling of having real money on the line.
And once you’ve started trading on a live account, never get too comfortable. Always remain vigilant and use proper risk management.
Otherwise, this might happen:
Quiz Time!
Brokers 101
Before
you start trading on a live account, you should make sure you’ve
mastered the Brokers 101 lesson. Prove it by passing this quiz!
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