How to choose the best forex broker?

Market Analysis

In order to guide you as best as possible taking into account your trading style, we designed the summary table below, underlying the relative importance of eleven major criteria according to the length you intend to hold your positions. Indeed, each of you will not be looking for the same characteristics in a broker; this will very much depend on how much time you want to devote to forex trading. We hope this summary table will help you identify which criteria are so crucial to you that they will determine the choice of your future broker.

	Short term positions	Middle term positions	Long term positions
Reputation	***	***	***
Types of accounts	***	***	***
Commission	***	**	*
Spread	***	*	*
Slippage	***	*	*
Leverage	*	*	*
Margin	***	***	***
Rollover	*	**	***
Execution of orders	***	***	***
Trading platforms	***	***	**
Word-of-mouth	***	***	***

   ***   Very important
     **   Important
       *   Little or no effect on your trading style

Reputation

Unlike brokers acting on other financial markets, Forex brokers are attached to banks or lending companies because they require large amounts of capital. Brokers need to be registred with a regulatory authority such as the Commodity Futures Trading Commission (CFTC) for US companies or the SFC (Securities and Futures Commission) for Hong Kong. If the broker is part of a large group of companies, you can be more confident since it will be watched by the group itself. Nevertheless, this is not a 100% proof strategy, as we all remember Refco, one of the largest Forex and commodity brokers in terms of capital, going into liquidation. ?So finding out how long the broker has been established on the Forex market constitute an important criterion. The longer the broker has been active on the market, the more chance you will have to gather feedback from traders who have used their services.

Types of accounts

Individual investors may choose between different types of accounts:

Demonstration accounts or "demo accounts"

They allow you to test the trading platform and the related work environment. Free practice accounts are a great way to experience Forex trading since you can truly put yourself in the shoes of a trader with a live account. The demo account is of course set up with fictitious money.

Mini accounts

Choose a mini account if you are just starting on the Forex market. It is possible to use a leverage higher than in a standard account but as we will see later, using leverage is not necessarily a wise move when starting trading on the Forex.

Standard accounts

These accounts are the real thing. The minimum capital is higher than the mini account and the leverage is less important. The bank account where your money will be placed is also not to be neglected and it is advisable to choose a broker who uses a well-known and well established bank. Some brokers also offer the possibility to open an account in various currencies: euro, dollar, yen, etc. Beware: if you decide to trade in a currency which is not that of your own country, you need to take into account the exchange rate between your national currency and the currency you decided to trade with.

Commission

This term "commission" designates a fixed sum of money taken prior to a position being opened. Most brokers offer commission-free trading. Should a broker ask for one, you need to check whether or not he offers additional services (marketplaces news, economic analysis, etc.). So, how do they earn a living? Saying that brokers offer commission-free trading is only partially true, since they get paid for their services partly through spreads. Their "commission" is therefore proportionate to the size of your position. Brokers also have additional internal mechanisms at this disposal to earn money but this does not fall within the scope of this page.

Spread

The spread is the difference between the sell quote and the buy quote (or bid and ask price). Its importance can be significant if you buy/sell a lot or have trades with low pips. A pip is the smallest price increment a currency can make. For example, if EUR/USD quotes read 1.2658/1.2659, the spread is the difference between both quotes, or one pip in this example (its value here being à 0.0001). You can negotiate the spread with the broker if you are planning on trading large volumes. The spread is generally fixed. When variable, it varies according to market conditions when volatility changes. In any event, the spread will vary during economic statistics. It would be utopic to try and find a spread that is 100% fixed, as the broker would loose money. If you do find a 100% fixed spread, it may therefore indicate that the broker « makes money » via other services, which may not necessarily be very transparent.You should avoid to trade economic statistics, all the more with a broker who offers a variable spread, since you will be unable to know the spread value prior to your order being executed due to a phenomenon called slippage. When you pay for a spread, part of the price goes to the broker's data flow service provider. Indeed when a broker offers a 3 pips spread, 1 pip may be attributed to his service provider.

Slippage

The quote difference occurs when market volatility increases: as quotes change very quickly, by the time you place an order and it is executed, the quote has already changed again. Either the broker makes you pay the last quoted price and not your asking price, or your order has not been executed. Some trading platforms do have a tolerance threshold: if the real price difference is less that X pips, your order is being executed at the real price. This phenomenon is common during economic statistics. You therefore need to select a broker whose data flows are fast enough, so that you are quickly informed of price changes and your orders executed rapidly.Practising on a demo account is sadly not a guarantee of success, as on the one hand, one can never be certain that data are sent over to the same server (despite the fact that services offered by brokers are identical), and on the other hand, it is proving rather tricky to clearly identify a broker's reliability in terms of slippage. I therefore encourage you to discuss this subject with other traders to check whether they did not experience major issues with a specific broker. The quest to find a broker with no slippage at all is only an illusion. Even if you trade with a top notch highly reputable broker, if your Internet connexion slows down for half a second, you will experience some slippage.

Leverage

Leverage allows you to multiply your position on the market: with a leverage of 100:1, you will use $100 on the market for each $1 of your capital. All brokers offer 50:1 leverage minimum. Using a 100:1 or even a 400:1 leverage is not necessarily an advantage, because the more you increase your leverage, the more you increase the risk. To sum up, leverage is not a determining factor when choosing your Forex broker, since all brokers do offer sufficient leverage for all types of trading.

Margin

It is the deposit required to open or maintain a position. If you experience high losses, your margin deposit available decreases in order to control your position. In any event, your risk is limited to the size of your initial capital. When your margin deposit goes down to a low percentage, your broker will have to close your positions still open so as to ensure a positive balance on your account. Each broker applies his own "margin call" policy, i.e. the operation consisting in closing your positions. You therefore need to check what margin you need in order to hold your positions, as well as whether it is fixed or variable.

Rollover Policy or "Tom- Next" (Tomorrow Next Day)

A position is said to be "rolled over" when it is being held overnight. In this case, you pay or receive what is called a rollover fee. This fee is calculated by the difference in the interest rates that apply to the two currencies in the currency pair you chose to trade in. Each currency bears an interest rate imposed by central banks. For instance, 3.75% for EUR or 5.25% for USD. This rate is applied at the end of each day to your open positions. If, for instance, you purchased EUR/USD at 15:00 on Monday, you will see a loss displayed on your order since the EUR rate is below that of the USD. If you had a seller's position, a profit would have been added to your position. These rollover fees are neglectable amounts in the short and middle term, but they can add up in the long term. The way brokers manage these interest rates varies. You therefore need to check whether these interest rates are indeed applied to both profits and losses, if you need a minimum size in order to hold your position or if there are special conditions applicable.

Execution of orders

How fast are orders executed?Is it possible to execute automatic trades?What is the maximum amount you can trade before you need to ask the broker for a price?Does the broker trade against its clients? (management of pre-market stops, etc.)

Trading platform

The trading platform is crucial. You will use this tool very often, so you need to feel as comfortable as possible with it. Beyond its user-friendliness, ask yourself whether it is reliable during significant market movements and statistical announcements (avoid crashes, frozen platform, etc.). How many currencies does it allow you to trade? Does it give you the ability to program your own trading strategy? What functionalities does it have (One-click trading, stop loss, trading via your mobile, etc.)?

Word-of-mouth

What do other traders using the broker(s) you are interested in have to say? You will often find opposite feedback posted on websites by traders on the same broker: some very satisfied, some extremely dissatisfied...hence not giving you a great deal of constructive answers to move your selection process forward. As we were saying earlier on this page, traders have different selection criteria for their broker. They do not all look for the same characteristics or level of services according to their style of trading, whether they need to hold short- medium- or long-term positions. A second explanation for radically differing comments goes towards the fact that a large number of traders tend to blame their broker for their losses. It is easier to blame one's broker than take responsibility for one's mistakes. You can therefore easily distinguish the constructive testimonies and experiences from comments posted under the potential influence of anger.