Forex Broker is the intermediary that facilitates your trading. Although traders prefer to remove the middle-man, a broker forms an important part of trading. In this article we will help you choose forex broker. While most traders tend to take the idea of choosing a forex broker very lightly, its consequences can be very harsh at a later point in time. As the saying goes, better be safe than sorry; it is worth paying attention to while choosing a forex broker. After all, it is only with a forex broker that traders (retail traders such as you and me) can trade with. In this article you will learn about some important points to remember while selecting a forex broker and towards the end you should have enough knowledge and confidence to help you pick the right forex broker for you.
We cover the following topics in this article
1. Forex Broker – The basics
A broker, as mentioned is a middle-man who accepts your order and matches it against other buyers and sellers. In retail forex trading, a forex broker is essential as they match thousands of orders thus adding to the overall transaction value. If you were you avoid a forex broker, you would need to have capital in amounts of millions to be able to trade directly with the buyers and sellers.
Forex broker types
Forex brokers can be made up of two primary categories
Market Makers: These types of brokers are known as counter-party brokers. In other words, they trade against their customers (traders). So when you buy, the broker takes an opposite sell position against you and vice versa. Sometimes, the market maker can also match your order against another of their clients. The bottom-line being that with a market maker type of broker, most of the trades are done in-house or with the broker’s dealing desk.
STP or NDD (DMA) brokers: The second kind of brokers acts as a true intermediary. They do not take any counter-party positions but merely pass your orders (or trades) to either their liquidity providers or to other traders. They do not interfere in your trades as they charge a commission or fee for the service they provide.
While there can be a lot of debate as to which of the two is better, remember that most market maker type of brokers have low account opening requirements; whereas an NDD type of forex broker usually requires a minimum deposit of $500 or in most cases above $1000.
Commissions and Spreads
Besides the above classification, brokers can also be classified further based on other criteria such as commissions and spreads. They fall into the following three categories:
Fixed Spread brokers do not charge any commission but instead markup a couple of pips on the actual price. For example, if EURUSD is currently trading at 1.31423, your fixed spreads broker will show you a quote of 1.31429; thus adding a markup of 6pips. The problem with such type of brokers is that in order for you to profit, your trade must move 6 pips in profit to cover the broker’s spreads. For scalpers, this can be a problem.
Variable spread brokers are similar to a fixed spread broker (they do not charge any commissions) but charge a spread that changes (variable) with market conditions such as market liquidity and volatility. During periods of high liquidity, variable spread broker’s spreads can narrow down to even 0 pips (ex: EURUSD during the London and US market overlap time). While variable spread brokers might seem ideal, note that spreads can vary during off market hours. For example, the same EURUSD could see as much as 6 pips or even more during early Australian (Pacific) trading session.
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Commissions only broker on the other hand do not markup the spreads. However, the spreads can vary. If the broker has a large liquidity network (i.e: banks and other market participants who can offer better bid/ask prices) the spreads can narrow down to 0.5 pips for example.
2. How to compare brokers
When selecting a forex broker, it is always advisable to compare a couple of brokers to get a better view of things. In this section you will learn about the important criteria to look into while selecting or comparing forex brokers.
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Choose forex broker :
If you have questions: Which forex brokers with low minimum deposit? Which forex brokers with highest leverage? Which forex brokers with free VPS? Which forex brokers accepting US clients? Which forex brokers accept PayPal etc. – You can find answer by using our advanced search filter of forex brokers (Comparison table)
3. How to start trading
Considering that you have done your due diligence on the forex brokers and you have decided to open a trading account with them, always test the waters by making a small deposit (perhaps $100 – $500) and trade normally. During the course of the month, you will obviously be interacting with the broker and thus be able to gauge if the broker is indeed true to what they mention on their website. After a couple of months, you can slowly fund your account with larger deposits as you grow to trust your broker.
A forex broker is unavoidable and there are many brokers out there who bring the rest of the business a bad name. By spending time doing due diligence about a broker and starting slow (with small deposits) you will be able to not only discover more things about the broker but also build a mutual business relationship.