There are many forex brokers out there to choose from, so knowing what differentiates a good broker from a not so good broker is essential.
First and foremost, there are two conditions that must be met by every broker, and those include regulation and fund safety. A good forex broker needs to be registered with at least one financial authority. You’re not going to want to deal with a broker if you don’t trust them with your money. Global regulatory agencies make it easier for you to check the credibility of your chosen broker. Some major countries with regulatory bodies include the National Futures Association (NFA) and Commodity Trading Commission (CFTC) from the United States, the Australian Securities and Investment Commission (ASIC) from Australia and the Financial Conduct Authority (FCA) and the Prudential Regulation Authority (PRA) from the United Kingdom.
Good forex brokers will also ensure they provide top quality service and follow all licensing and forex trading regulations. An unregulated broker can not only get themselves into trouble, but they can also drag you along with them and cost you a lot of money. Typically, a broker will provide their financial licence number from the regulatory agency they are associated with in the ‘About Us’ section of their website (if not in their footer). There are many inherent concerns about the safety of your deposits and the integrity of the broker, therefore, opening and keeping your funds at a regulated forex broker should allow some peace of mind.
Segregated Client Funds
Another crucial aspect a good broker should provide you with is the safety of your funds. It is standard practice that every brokerage will swear by the fact that your funds are safe, however, you should still look for clues that prove this to be true. This could include asking the broker some questions in regards to segregated funds. Asking if funds are segregated or if the broker happens to offer segregated accounts, and if they answer yes to your questions, then you would know that the broker is not able to touch any funds that you deposit or use them for financing any businesses. If a brokerage does not operate segregated accounts for client funds it is not the end all be all, however it is a red flag to keep in mind. If you sense that your funds are not safe in the hands of your chosen broker, then they should be avoided at all costs.
Leverage And Margin
Even if these two conditions are met, there are still some factors that you should consider when looking for a good forex broker. Every broker will offer you a variety of different account features. When looking into such offers, be sure to assess these differences. One of these features is leverage and margin. A forex trader could have access to leverage made available in their margin account, but this is dependent on the broker. For example, a broker may use 50:1 leverage, which would mean that for an account size of $1,000, a trader can hold a position that is valued at $50,000. Leverage is essential for retail forex traders, as the changes between currency exchange rates are typically very small, requiring large position sizes to gain worthwhile profits. Some brokers may offer a much higher leverage, up to 3000:1. For a trader, leverage can work in your favor as it enhances your winning positions. However, ensure to use leverage with care, as besides greatly increasing your profits, it can just as quickly destroy your trading account as losses are enhanced as well.
A key aspect to tell if a forex broker is good is their trading costs. When dealing with any broker, you will always encounter trading costs. Depending on the broker and the account type you will either be charged a large spread or a commission based on position size, and it is inevitable that you eventually start to look for the more affordable or cheaper options. It is important to consider that more often than not, you’ll have to sacrifice low transaction costs in order to find a more reliable and trustworthy broker. There is no valid reason for a good broker to make it difficult for you to access or withdraw your profits from your funds. After all, it is your money in an account shared through the broker. The main reason a broker will have access to your funds is to facilitate trading and to make trading easier for you. A good broker will ensure to provide you with a deposit and withdrawal system that is simple and hassle free. There are many reliable forex brokers that also cover any bank or payment transfer fees.
What Is The Spread?
The spread is the difference between the rate the broker offers you to buy at (ask), and the broker offers you to sell at (bid). The spread exists for a number of reasons. The two key reasons are:
- The spread allows the broker time to execute your order in the market without losing money. The difference between the two prices typically removes the risk that the price will change outside of the quote by the time the broker executes the order.
- The broker may make their profit through the spread.
Raw Spread or No Commission? Which Account Type Is Better?
The short answer is raw spread is better than a no commission type of account. Whilst this isn’t a blanket statement for all brokers account types it generally rings true. With “Raw Spread” accounts you typically pay between $3 to $4 dollars commission per lot, whereas on “No Commission” account types typically the spread is over 1.0 pips, which typically is equivalent to around $10 per lot. Below you can see how IC Markets “Raw Spread” account (in green) compares to IG Markets “No Commission” account (Blue). The values are for the spread with commission factored into the spread.
A good forex broker will provide the best quality forex trading platforms for their clients. A trading platform is your portal to the forex market, and so it should be making your trading experience easier and provide you with all the information you may need. A top quality forex broker will have a trading platform that comes with technical and fundamental analysis tools and have the ability to provide trades that can be entered and exited with minimal issues. A good trading platform will be easy to use and understand, assuring that the platform is well designed with clear buy and sell buttons. An even better trading platform will have a “panic” button option, which if needed, can close all of your open positions in a click. Other features of a good trading platform will include customisable options, order entry types, automated trading options, strategy builders, backtesting features and trading alerts. In retail forex trading MetaTrader 4 is the golden standard of trading platforms. Other great trading platforms include Tradeview, Tradingview, cTrader and MetaTrader 5. Some forex brokers such as IG Markets or Plus500 offer their own trading platforms. Some unique trading platforms are very high quality, whereas others lack adaptability and transparency for traders.
Range of Tradable Products
A large range of trading instruments is indicative to a good forex broker as it reduces variation and risk for the trader, allowing diversification across assets. If your chosen forex broker is providing you with access to a wide range of currency pairs, shares, commodities or other trading instruments, they are ensuring that you are provided with a range of markets to diversify risk and generate profits. A good forex broker offers you these advantages as they value their clients freedom of choice and their right to diversify. Foreign exchange is a large global market with a wide range of currencies available for trading, but only a handful of currency pairs are considered to be major currencies, which trade with the greatest liquidity / depth of market. In saying that, a good forex broker will provide you with an immense variety of forex pairs and it is essential that they offer you the pairs that interest you the most when wanting to trade. Over the last 12 months XAUUSD (gold against the US Dollar) has become one of the most popular markets to trade at retail forex brokers.
Paper Trading / Demo Account
Another defining quality of a good broker will be that they offer clients a free demo account with fake money. This is so a trader can try out the platform before making any real trades or investing any real money. A demo account is very beneficial as it can provide you with the ability to become familiar with the trading platform and help you narrow down your search in finding the best forex broker that suits your needs. A demo forex trading account will also allow you to test your forex trading strategy in the market without risking real money. A good forex broker will have no troubles with offering you a free demo account to assist you with trading and helping you get comfortable with the forex markets, as well as their brokerage.
Another defining aspect of a good forex broker is quality trade execution. This means that your trade is executed quickly and at the price you were quoted, or very close to it. If your trading style is scalping, then a really good forex broker will fill your order at the best possible price. Faster trading systems typically are more difficult to execute at a good price, however some brokers are better at executing trades than others. In 2020 TradeProofer found that IC Markets gave our community members the best trade execution, with around 97% of trades getting good trade execution, compared to the average across all our members trades, which showed that on average 67% of trades had good trade execution.There are some reasons why a trade may be executed at a worse price than quoted (we call this slippage), such as high impact news or market volatility. Outside of these reasons, a good broker fills you at the best possible price as even a few pips difference in the price can make it difficult for you to profit on a trade. If you want to make sure that you’re getting the best trade execution be sure to run TradeProofer’s free MT4 software that monitors for slippage!
Any good forex broker worth their salt will have a range of tools designed to support their clients trading. This may be technical analysis tools such as Trading Central or AutoChartist, or they may have their own in-house analysts to provide advice on hot markets. A good MT4 broker also will provide a suite of plugin tools for their MT4. Global Prime has a neat plugin that shows the spread on the terminal chart, allowing traders to easily see the trading conditions of a symbol before trading. Some forex brokers also offer tools to analyse your trading performance and identify ways to improve. The more of these benefits that the brokerage offers, typically the better.
One essential quality you would want from your forex broker is exceptional customer service. To a trader, this is a very valuable asset especially if they are offered round the clock customer service. An even better quality is if this 24-hour service is managed by a real-life technician. Customer service could be offered via phone, email or even live chat, and a good forex broker will be sure to solve any issue you could be facing in a timely manner. A forex broker may be more than competent when it comes to executing trades, but their ability to deal with clients’ accounts or technical issues is just as valuable. If you are having technical issues, or problems withdrawing from your forex broker account then having live support 24/5 is invaluable!
If you’re still not sure about how to pick a forex broker check out Hammer Capital’s forex broker reviews here!