How to Choose a Forex Broker, Not a Dealer

Content

  1. Online Brokers
  2. How to Spot a Scam
  3. Forex Brokers Rating
  4. Information about a Broker
  5. License of a Forex Broker
  6. Trading Platform
  7. Demo Account
  8. Support
  9. Trading Conditions
  10. Types of Forex Brokers
  11. How to Protect Yourself from Scams

You have understood, what is the foreign exchange market. You know how to trade currencies. You are able to distinguish between bearish and bullish candlestick patterns, and understand what is going on when “cable goes up”.

The next step is to pick a broker. A trader and a broker are an inseparable couple in Forex. It’s impossible to attain good results without an honest broker. So how to make a happy choice?

Choosing of Broker

Numerous Forex broker ratings do not secure a clear view on this matter. Seasoned traders often change dealers and brokers, but we will try to get over this way, trying to eliminate mistakes that a novice trader can face.

Online Brokers

The number of brokers and dealing centers grows up dramatically. Surely, only after working with a broker you can evaluate him fairly, but it is important to form some opinion beforehand.

Earlier brokers worked using a phone. In the 21st century the process happens mostly through the Internet, and the market is occupied by online brokers. A broker’s website is his way to represent himself in the most favourable light. Thus, a website should load its pages fast and provide you with all the necessary information.

Test a website at different times of the day: especially during peak hours of trading. Observe how fast the website loads and check whether there will be problems with contacting support.

If the website design looks outdated, things are not going well in this company. Loads of ads like Google AdWords on a website is also a bad sign. If this broker is successful, why would he use someone else’s ads for gaining a profit?

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How to Spot a Scam

If you have provided an overview of Forex brokers and found some trustworthy-looking broker, you should gather information about him. Use Twitter, Facebook, various blogs and forums – any websites where there are mentions of this company.

Forums and chats allow you to talk about anything and with anyone. This is your chance to find out about other traders’ experience with brokers. Do not use brokers’ forum: it is likely that reviews on them are written to order. It is better to ask specific questions on the traders’ forum: for example, ask about potential disadvantages of the particular company trading platform.

If you want to know whether a particular firm is a scam, Google his name and add the words “scam”, “fraud” or “rip-off” to it. Be careful, market competition is so high that competitors throw mud even at honest brokers. PR agents often twist up the image of a broker, promoting the services of their company and giving the false evaluation of other companies. Note: if one person out of a hundred people says that this firm is a scam, it’s a PR agent. If 50 of 100 people claim it is fraud, it surely is.

Often competitors, disguised as clients, offer Forex brokers overview written in a negative way. Usually, there is no useful information in those posts, otherwise, the stress is laid on the emotional tone of a message.

Pay close attention to the information about funds withdrawal. Go further and contact the person who wrote that comment. If this review was written by a competitor, you would not get a response. But if it was a real person who faced the problem of funds withdrawal, you would get an important information at first hand.

Hundreds of reviews are written about fraudsters and still there are people who trust their money to those fraudsters. In this case, advertising is stronger than common sense. Useful tip: do not trust a broker, who changed the name of the firm several times.

Forex Brokers Rating

If you are targeting at a broker rating, then be careful. It is best to check several sources: if you focus on one website, you can be easily deceived by false reviews and ratings.

As practice shows, ratings of the best Forex brokers are created by these very brokers. What is more, each individual broker puts itself on the top of the world’s Forex broker rating. Conclusion: ratings should not be the only reason of choosing a Forex broker.

Information About a Broker

Some things, announced by brokers, are just a “cover-up” for their clients. A novice trader needs to distinguish between important and misleading information.

What you SHOULD pay attention to:

  1. things, related to money. How to withdraw and deposit funds, what payment system a broker uses, what fees he offers.
  2. an organization that regulates a broker. In which country it operates, company’s presence in the regulator’s database, the status of its license.
  3. age of a company. Sometimes unscrupulous firms work for years, but in 90% of cases the impressive age of a company means high quality of provided services.
  4. technical characteristics. Trading platform, your back office and the methods of communication with support must be always available and easy-to-use.

What you SHOULD NOT pay attention to:

  1. extensive advertising campaigns in social networks. It confirms that a company has a big advertising budget, but do not always means that the broker is working honestly. Sometimes thousands spent on advertising are meant to distract customers from unfair practices and negative reviews.
  2. numerous awards, diplomas, certificates. Do not always say about the quality of the broker. There is no need for a successful company to show off – clients know all about its work.
  3. training programs. This is not an indicator of a bad broker but promises to learn how to trade Forex in one week seem ridiculous. Focus on free training courses.
  4. Forex broker rating, getting into the top brokers of some rating. As already mentioned, Forex brokers ratings are unlikely to help you to make a right choice.


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License of a Forex Broker

A mandatory condition while choosing a broker is a license possession. Do not consider brokers without a license, even if they enter the rating of the best Forex brokers. The company must be registered in a country with an acting regulator. Such organizations often provide a database of brokers: you enter the name of the company and get information about it. If a company has no problems with its license, its status will be “active”.

To get an idea of how it works, try to make a search using some regulator’s databases:

The UK: the Financial Conduct Authority (FCA)

France: Financial Markets Regulator (AMF)

Germany: The Federal Financial Supervisory Authority

Belize: The International Financial Services Commission (IFSC)

The US: The National Futures Organization (NFA)

Canada: The Canadian Investor Protection Fund (CIPF)

Malaysia: Securities Commission (SC)

Australia: The Australian Securities and Investments Commission (ASIC)

Japan: Financial Services Agency (FSA)

forex-regulators

Not all regulators work the same way and it is normal. There are different requirements for registration and conditions under which an organization operates; traditions or religion play great role as well.

Why a broker with a license from a regulatory agency is better? Regulated brokers provide monthly reports, conduct annual audits, fulfill the requirements of the capital size.

Sometimes regulatory agencies publish statements claiming that some broker is not regulated by this organization. Fraudsters often say that their company enters the list of brokers in the Forex market controlled by the regulator, although it is a lie. They just use regulator’s reputation to seem more respectable.

Some brokers use the name of the well-known brokerage company and create a clone, hoping that a trader won’t notice the difference and take scams for a one of the top Forex brokers.

Trading Platform

Can you understand how a platform works without spending hours sorting this out? The software you are going to use should be functional and user-friendly.
A normal trading platform provides an immediate orders placing and trades closing, it does not break and respond to commands.
Reliable and high-performance software is especially important for traders who open a lot of orders in a short time. Usually they use the following strategies:

  1. scalping;
  2. algorithmic trading;
  3. news trading;
  4. copy trading (copying of other traders’ trading signals).

More relaxed and conservative trader who does not monitor Forex round-the-clock will be more flexible.

Depending on a trader’s individual preferences, there are different types of platforms: apps installed on a computer or web-based (java) versions. Additional charts and tools must be simple to install and apply. It is a significant advantage if the platform is available as a mobile application.

To get an idea of how the software operates, work with a demo account.

Demo Account

Demo accounts provide an opportunity to trade in conditions so close to real. A trader uses broker’s software and trading conditions, but does not invest the real money.

The main problem of a demo account is wrong psychological mood during trading. The trader is not uptight about his hard-earned money, feels no fear and greed, becomes inattentive.

Another important shade: often traders, having tested execution of orders on a demo, complain that a real account is not so good. There is no catch – orders on demo accounts are not put on the interbank market, so there is an excellent execution and practically no slippage. As a result, a demo account is a great way to learn the platform, evaluate the broker’s trading conditions and test strategy. But it is still far from the real Forex. Therefore, a long staying on the demo account is risky.

Support

Everyone likes to be treated politely. No matter whether he buys fruits, a car, or trades on Forex. Support should help you to achieve success.

Imagine a situation in which a platform is frozen and do not respond to you requests. In this moment, you became fully aware of the importance of support team.

How long does it take support to respond to your email? Can you contact them in chat? Is it possible to talk to support agents through chat or messenger? Do they have a phone number? Do you find them knowledgeable? The way how they respond to your questions can be the way how support will respond to your needs in a real situation.

24/7 support is a feature of a reliable broker. Feel free to “terrorize” support, especially when you just start working with them.

Tip: your broker should have support in your language. In the event of force majeure, it would be quite difficult to explain the support in bad English that the order does not execute because your platform hang.

Trading Conditions

What is worth considering:
Spread size. If you do not know, a spread is the difference between the purchase price and the sale price of the currency pair at the current time. Moreover, it is broker’s income. There are two types of brokers: some work with a fixed spread, others – with floating.

At fixed spreads the difference between bid and ask will be determined by a broker, not a market. A trader knows in advance the value of the spread and adapts to it his orders. The fixed spread is not a bad thing, and many novice traders are safer to trade with it, without fear of sudden extensions. But in this case, the spread is no longer dependent on a market, and trade is a fallacy. Most often fixed spreads are offered by dealers.

The floating spread reflects the real market situation, which means that it can expand in the release of strong economic news, during the closing/opening of the trading session, and during the market passing through the weekends the gaps may occur. Trade with the floating spread at such times is more risky, but this is the real market. A novice trader is better to refrain from trading in such situations or to adhere to the rules of risk and money management.

In quiet hours in the market the floating spread is always less than the fixed, and sometimes it may even be zero, depending on the type of account and broker’s trading conditions, which creates the best conditions for entry into the market. Many brokers use small uplifts to the floating spread, i. e. markups, but do not charge fees for orders processing.

Currency pairs. You need to know which currency pairs are available. Many firms offer trading with standard pairs, but brokers, offering exotic pairs, are not easy to find.

Minimum Requirements. This sum varies from broker to broker, so you need to find one that meets your budget.

Bonuses. A bonus will be a nice supplement to the deposit. Some companies hand out no deposit bonuses after registration – 5-10 dollars, for which you can trade usually with output gains. These shares are usually used as an advertising campaign, and don’t say anything about the quality of brokerage services. Too big package of bonus offers should cause concern, perhaps this company has nothing else to attract customers.

Leverage. Sometimes it is called “double-edged sword”. What leverage does a broker offer you? Huge leverage can be dangerous because it can destroy your account with only one trade. US brokers offer 1:25, but companies from other countries can give you much more. It is important that you can adjust the leverage size on the trading account by yourself.

conditions-trading

Types of Forex Brokers

The list of Forex brokers can be divided into two primary categories:

DD (Dealing Desk)

NDD brokers (Non-Dealing Desk)

The first category includes dealing centers or DD brokers (DD stands for Dealing Desk). On the Internet, you can also come across the concept of “market-maker” and “kitchen” in this sense. Such companies are the opposite side of the order with respect to its clients, as it does not represent the entry into the interbank market. That is, client’s losing makes gains for the company. DD-brokers are characterized by fixed spreads.

Disadvantages of the dealing centers are in manipulation of quotes for their own benefit through controlling the price and information about clients’ orders. In this case, trading depends entirely on firm’s honesty.

NDD brokers allow clients to work directly with liquidity providers (for instance, large commercial banks, such as Deutsche Bank). In this case, the broker does not tamper with the pricing in the market. NDD brokers cash on commissions or spreads.

types-of-brokers

NDD technology uses 2 types of protocols: STP and ECN.

STP is abbreviation from “straight-through processing”. STP brokers send clients’ orders directly to one or several customers’ liquidity providers. The more liquidity providers in the market, the better for the customer. The fact that traders get access to real market prices and make transactions without any broker intervention makes this platform “straight-through processing.”

STP-brokers do not trade against the client, their income is a small supplement to spread.

ECN stands for Electronic Communications Network. ECN brokers pass on prices from different market participants and display their bids/asks on trading platforms.

ECN brokers allow their clients’ orders to interact with orders of other ECN participants. In fact, participants trade against each other by offering the best buy and sell prices. ECN allows customers to see “Market Depth” (also known as Level II). ECN brokers send money straight to the interbank market, rather than the an artificially created market. Brokers are interested in the client’s’ success because of commission. The commission is the main income for ECN brokers.

How to Protect Yourself from Scams

Personal Information

Your broker might ask you to send the copy of your ID or address verification. He can ask you to take a photo of your card. In this case, blur or hide the middle number or CVV. A firm might ask you to send him a screenshot of your account – blur all the detais which are confidential.

credit-card

As with any contract, you need to read it carefully – especially the fine print. If you do not understand some terms or clauses, ask broker’s support for clarification.

Comparing Brokers

Open accounts with a minimum deposit of several companies to compare the size of the profits, losses and broker commissions. So you will make the personal rating of the Forex brokers. If one of the companies goes bankrupt, you won’t lose all capital. Many traders choose to work with several companies.

compare-brokers

Other services

If a broker, besides currency trading, offers futures trading, options trading, CFD trading, it is a good sign. That means that company manages a large business and has a lot of clients.

Choice of a broker is one of the most important moments in Forex trader’s career. Fusion deposits, the inability to trade successfully, permanent deception and losses lead to traders’ departure from the market. Just a few beginners manage to withstand the pressure and gain a foothold in the Forex.

Information is your main weapon in the fight against dishonest brokers. The more you learn about their methods, the easier it is to protect yourself. Even if something goes wrong with your broker, move on. Do not let any obstacles and mistakes get in the way of your stellar Forex career.