How to choose the best forex broker, free tutorial

How to choose the best forex broker?

This is a question that you should ask well before making the first forex trade. Most newbies end up paying exorbitantly high fees for clumsy services to a forex broker with the biggest and shiniest banners. Professional traders take forex trading seriously, just as any other business. And since a forex broker is their principal business partner, they make their choice very carefully. This free tutorial will explain you the criteria used by professional traders in evaluating different online forex brokers. It will then guide you in making your informed choice. While reading the tutorial, write down a list of the criteria that are important for you. Try to build an imaginary offer from the ideal, best forex broker. When you are done, find the closest match in our fully interactive comparison of forex brokers.

A regulated forex broker is safer

There are hundreds of online forex brokers and many of them are in fact scams cheating on their clients. To avoid unnecessary problems, it is better to entrust money with a regulated forex broker. Regulated forex brokers are under supervision of a trustworthy regulatory authority. The strictest broker regulations exist in Northern America, Europe, Australia, and Japan. So, before depositing any money on your forex trading account, check whether your broker is registered with at least one of the following agencies:

  • Australia: ASIC, AFSL
  • Canada: CIPF, OSC, BCSC
  • Denmark: Danish FSA
  • Germany: BaFin
  • Hong Kong: SFC
  • Japan: FFAJ
  • Spain: CNMV
  • Sweden: FI
  • Switzerland: ARIF, FDF, GSCGI
  • United Kingdom: FSA
  • United States: NFA, CFTC

Some forex trading brokers are even regulated in several jurisdictions at the same time. For example, Easy Forex is regulated by NFA, CFTC, CySEC, ASIC, and AFSL. But this is an exception and most online forex brokers are regulated only in their home country. Obviously, more oversight brings also more safety for your money. You can easily filter our list of forex brokers to include only the ones that are regulated.

If possible, get an ECN forex broker

There are two basic types of forex brokers. Interbank forex brokers (or ECN) offer the lowest transaction costs (spread) and are extremely reliable. They never trade against their clients and they do not have any capacity to do that. Unfortunately, this royal treatment is not for everyone. ECN brokers generally accept only clients with large accounts. For example, Dukascopy, an interbank broker from Switzerland, only recently lowered its required minimum deposit from 50,000 USD to 1,000 USD.

The so-called Market makers (MM), on the other hand, accept almost anyone. Accordingly, their spread (cost of each trade) is higher. While choosing a market maker, it is usually more advantageous to find one with no dealing desk (NDD). Forex brokers without a dealing desk will execute your orders instantly and at the price that you clicked on. In contrast, market makers with a dealing desk can change the price at which you are entering a trade. This is called “to requote”. According to broker reviews in various fora, some market makers reputedly do requote from time to time and such a new price is rarely at the trader's advantage. Dishonest MM forex brokers may also enter trades against you or manipulate the price itself by sending you artificial “spikes”. Of course, there are also many honest MM brokers, who do not resort to this kind of behavior. You should always read reviews and browse relevant discussion fora to check the reputation of the broker you plan to trade with. Or, if you want to avoid any risk, trade only with a genuine ECN or NDD broker, such as Dukascopy or InstaForex.

The best forex brokers have low spread

The spread is the difference between the sell quote and the buy quote (or the bid and ask price) at any given point in time. It is calculated in pips, which is basically the last decimal point of the price. So, with a spread of 1 pip, you would pay $0.0001 for every dollar traded. Most online forex brokers make money from spread and do not charge any other visible commission. The smallest spread available to small retail traders is currently offered by Dukascopy. Their spread on major currency pairs often drops to zero, plus a minuscule commission of 0.018 pip. For comparison, many of the so-called “no-commission” brokers would charge you a spread of 6 pips on the same currency pair. High spread can completely kill your strategy if you specialize in scalping or day trading.

A forex broker may offer either a fixed or a variable spread. In general, a fixed spread is a bit higher on average, but it remains constant regardless of the trading conditions. A variable spread is generally lower for most of the time, but it may widen considerably during important economic news announcements or at night. You should choose a broker with a fixed spread if you want to trade news or will be active in the periods with low volatility (such as after 5pm EST). eToro offers a very low fixed spread of 2 pips on all majors. If you prefer a variable spread, Dukascopy has the lowest one. You can find more forex brokers with variable or fixed spreads in our database.

You want a forex broker with sufficient leverage

Leverage is a ratio between the total capital available for your trading and the actual capital that you have on your trading account. For example, a ratio of 100:1 means that your broker would lend you $100 for every $1 of your actual capital. Therefore, you would command $100,000 with an account of $1,000.

High leverage increases both your potential profit and your potential loss. For example, if you use your $1,000 to buy USD/CHF and the exchange rate goes up from 1.1000 to 1.1100, your profit would be $10. Had you used the 1:100 leverage instead (investing $100,000 automatically borrowed from your broker), your return from the same trade, with the same starting capital, would have been $1,000. Of course, the same logic also applies to your losses and high leverage can exacerbate them. Use it with caution.

If you have limited capital, you will need high leverage to earn any substantial profits. But, again, do not forget about the risk that comes with high leverage. Leverage offered by online forex brokers starts at 50:1 and may be sometimes as high as 500:1 (LiteForex) or even 1000:1 (InstaForex). If your broker offers a really high leverage, you do not have to use it all and all the time. Your real leverage needs will depend on a particular forex strategy.

Familiarize yourself with different forex trading account types

Online forex brokers usually offer several types of trading accounts. Sometimes, they differentiate between a “mini” account and a “standard” account. The former requires a low starting capital, but often provides a user with a limited trading platform or worse spreads. Standard, fully-functional accounts require deposits over a certain threshold, for example $1,000. Before you send out any forex investment, always read the trading conditions related to the account you are opening.

Nevertheless, many forex trading brokers do not make the distinction between standard and mini accounts at all. For example, FxOpen lets you open a “micro account” with as little as $1 and you pay the same spread as you would pay with a standard account. Marketiva has only one type of forex trading account and it is up to you whether you deposit $100,000 or $1. If your resources are limited, choose a broker that does not discriminate against small traders.

If you plan to trade small, you should also know that many forex brokers require a prohibitively high minimum trade size. They often use 1 lot (100,000 units of the base currency) as the smallest trading volume. That means that you would need to buy at least 100,000 USD while trading USD/JPY, for instance. With a leverage of 200:1, you would have to risk at least $500 of your capital to be able to trade 1 lot of USD. Fortunately, online forex brokers are becoming more and more flexible and they often offer also mini lots or micro lots. Using our previous example, 1 mini lot would be equal to 10,000 USD and you would risk only $50 with a standard leverage of 200:1. 1 micro lot would be equal to $1,000 and you would risk $5. Some forex brokers go even further. For example, FxOpen lets you trade 100 units of the basic currency and Marketiva has no limits at all.

Play around with a demo account

A demo account allows you to test your trading strategy in real time, on the broker's trading platform, but with virtual money. Demo trades can reveal weaknesses of your strategy. They can also help you discover any problems with the broker's trading platform. At the same time, you do not bear any risk. It is essential to use a free practice account before you trade for real. However, demo trading might sometimes differ from live trading because of the non-existing slippage (difference in price between the time you place an order and the time it is executed) in demo accounts. In addition, your own psychology becomes much more significant when you trade live.

Choose a forex trading platform with the features you will need

Forex trading platforms usually feature real-time forex charts, technical analysis tools, and real-time economic news. What you should be interested in besides user-friendliness are functions related to trading itself.

Some forex trading platforms allow you to trade only major currencies (such as EUR/USD), but others also include crosses (such as AUD/JPY), exotic pairs (such as USD/INR), gold, silver, and oil. Although many forex traders specialize only in few pairs, availability of additional financial instruments naturally brings more trading opportunities. Moreover, some exotic currencies have a very high interest rate, making them very interesting for carry trading. Gold offers wonderful trading opportunities during political crises. Some currencies, metals, and oil also exhibit correlations that can be exploited by a savvy trader. As a novice trader, you may simply want to experiment with different currencies and commodities to find the ones that fit your mental profile. Either way, a greater number of currency pairs is always welcome. Easy Forex offers the largest variety of trading instruments, 182 currency pairs and precious metals.

An important feature of advanced forex trading platforms is hedging. It allows you to hold both short and long orders at the same time. Hedging is often used to decrease risk and it is also required by many sophisticated trading strategies (such as numerous flavors of grid trading). A trader pays for this risk reduction by higher transaction costs. However, not every forex broker will allow you to hedge. You can find the forex brokers, who offer hedging in our detailed comparison of forex brokers.

Other useful yet rare feature is a trailing stop. It allows you to ride a trend without a fear that you would lose money in case of a sudden reversal. Trailing stops provide the easiest way to lock in your profit (or limit loss), but, again, they are not always included in forex trading platforms.

If your trading strategy is based on technical analysis, you may want to automate its execution at some point in the future. The biggest advantage of automated forex trading is that a trader does not need to stare at the monitor the whole day, waiting for a trading signal. You will also never miss a trading opportunity while you are sleeping, eating, or on a vacation. The computer will trade for you. Automated forex trading is an integral part of several forex trading platforms, including the popular MetaTrader 4.

Some forex brokers also provide mobile trading. With a cell phone, a trader can check or execute orders from any place. This gives more independence and flexibility. Mobile trading is more and more widespread among forex brokers.

The best forex broker should combine hedging, trailing stops, automated trading, and mobile trading. FxOpen, LiteForex, and Nord FX are some of the online forex brokers that offer all of these services. You can find even more such forex brokers in our interactive forex broker comparison.

Think about how you want to fund your forex trading account

Most forex accounts are denominated in USD. But if you live in the Eurozone, you would probably prefer a forex broker offering accounts in Euro. Many brokers allow you to deposit and withdraw money in your local currency. For example, Easy Forex not only offers accounts in USD, EUR, JPY, and GBP, but also in ILS, PLN, SGD, and other "exotic" currencies. When you are actively trading, your money (including profits) will sit in your account for some time. If you expect your currency to depreciate in a long run, you may want to hold your account in a different currency. In last few years, American traders have lost a lot of money not because of bad trades, but simply by cashing their profits in American dollars.

Another question is whether you prefer to make your initial deposit by a credit card, bank wire or PayPal. Some forex brokers (for example Easy Forex) would accept any of them, but this is rather an exception. Most brokers also offer deposits and withdrawals in e-currencies or other alternative payments. For example, FxOpen accepts C-Gold, cashU, China Union Pay, Moneybookers, Perfect Money, WebMoney in addition to standard bank wires. Probably the easiest way to withdraw money from your forex trading account is to a debit card. A dedicated debit card is provided by InstaForex and few other forex brokers.

How to find an online forex broker meeting your criteria?

After you decide which conditions are important for you, you can compare forex brokers in our database. Just specify your criteria and the interactive page will return a list of those brokers who match them. There is no single best forex broker out there. But we will help you find the one that suits your needs the best.