How To Compare Forex Brokers
April 22nd, 2019
As they say, are you comparing apples to apples?
One of the biggest challenges new traders face is finding a reputable forex broker who they can trade with safely and securely. Depending on what part of the world you are in, there are several key things to look for when comparing forex brokers.
The single most important detail of any forex broker. Trade with brokers in the grey or black market and you can say goodbye to your funds and you will be crying to nobody because nobody will listen.
A regulated broker has the neccessary licensing to operate in the country for which they have obtained regulation. Tier 1 countries such as the United Kingdom and Australia are the safest because they have a good reputation internationally for being modern. Other countries have regulators who oversee financial services companies but they aren’t as trusted. Put very simply, would you send money to a broker who is only licensed in Cyprus (do you even know where that is?) over a broker who was licensed in the UK? Probably not. Not that there’s anything suspicious about regulators in other lesser known countries but should something go wrong, it would most likely be much easier to communicate through a Tier 1 regulator.
The broker’s model
There are several business models when it comes to forex brokerages. Each model makes money for the brokerage in different ways. First, there’s the “Market Maker” broker – these brokers set their own bid and ask prices for currencies and therefore are creating their own market and act as the counterparty to your trades. They make their money on the difference between the bid and ask prices (the “spread”) and don’t charge commissions per trade.
They may also manage your trades in a way that gives them more profit, depending on your trading profile. For example, if you are losing 80% of your trades, is there really any need for the broker to be a counterparty? They probably won’t open a counter position and let your trade ride, knowing that statistically you are likely to lose.
The other type of brokers are the ECN (Electronic Communications Networks) brokers who act as middlemen between you and a pool of large market participants and simply pass on the best bid and ask prices. They make their money by charging you a commission per trade, but their spreads are generally much tighter because they have multiple sources to quote from and aren’t marking up the prices.
Why is it important to separate the two when comparing? Because the bid and ask prices won’t be similar between the 2 types of brokers so on face value the market makers will look like the better choice. However once you get deeper into the model, you will find that market makers may be less “trustworthy” for lack of a better term because they are the counterparty to your trades hence it really can be seen as a conflict of interest. So when something doesn’t go well for your trade like a sudden volatile movement that stopped out your trade, you might start questioning whether it really did happen in the open market or whether there was some manipulation.
This needs to be fast, no exceptions. You don’t want to be banging your head or keyboard trying to open or close that trade, only for it to take too long and you miss the boat. Particularly important when trading in volatile markets because if you’re too late to get your trade filled, you might suddenly be a massive amount of pips down. Server location and ping times are very important, as well as constant connectivity. You don’t want your trading platform to be getting cut off at all, as it will cause you anxiety.
Latest Articles Read all articles
The 3 Golden Rules of Forex Trading
Mentality of a Forex Trader
What is Leverage in Forex?