How to choose a forex broker
With so many forex brokers to choose from, selecting the best one can be a time-consuming task. To help you make the right choice, our forex trading experts have compiled a list of some key features to consider when choosing a forex broker.
What to consider when choosing a forex brokerCopy link to section
Picking the right broker will depend on your circumstances. If you’re a beginner an easy-to-use platform and educational content will help you get started. If you have some experience with forex trading, then a broker with advanced charting tools may be the best approach. Whatever stage you’re at with your trading, it’s important to learn how to choose a forex broker.
Below, our forex experts have provided a list of what to consider when choosing a forex broker.
Choose a regulated forex brokerCopy link to section
Choose a broker that is regulated and that you can trust to keep your money safe. Every broker must be regulated by a financial authority; in the UK, this is the Financial Conduct Authority (FCA). You can check if a broker is regulated in the UK by looking up its license number, which is normally in the website footer and cross-referencing it on the FCA website.
Regulation is key to keeping your money safe when trading forex. Many regulatory authorities also offer compensation schemes, which cover investors up to a certain amount of money if a broker goes out of business. Take the time to find out what authority protects your region.
Pick the right type of brokerCopy link to section
The type of broker you sign up with can impact your performance. Understanding the different types of brokers can help you select the right one for your trading style. Here’s a brief overview of the types of forex brokers.
- Dealing desk. A dealing desk broker is often referred to as a market maker and takes the other side of your trade. This means your loss would be the broker’s gain and vice versa. There’s a conflict of interest when using a market maker and they’re best avoided if you want transparency.
- No dealing desk. This type of broker connects you directly to the interbank market through a straight through processing model. This means you get the best prices and lowest spreads but will usually pay a commission to the broker for the service.
- ECN. ECN brokers are also classed as no dealing desk brokers and connect your trades with other traders via an electronic communication network. ECN forex brokers often have the lowest spreads but, again charge commissions.
Find a broker with low fees and commissionCopy link to section
Each forex broker has its own fee structure, so the trading costs can vary. Some brokers make money on the spread – the difference between the buy and sell price of a currency pair – while others charge a commission on every trade. There may also be other costs to consider, like inactivity or overnight fees.
Ideally, you want to find a broker that has low spreads or a broker that charges low (or no) commission. In reality, you might have to make a trade-off between the two. Some brokers offer a premium or professional account, which unlocks cheaper trading if you deposit more money, often in excess of £1,000, or trade a significant amount every month.
Overnight fees are charges levied by CFD brokers for keeping your trades open for a few days at a time. They are usually charged as a percentage of your trade size. Inactivity fees come into effect if you don’t use your account for a certain period, normally around 12 months.
Here’s a list of common fees and costs you need to know when choosing a forex broker.
- Spread – The difference between the buy and sell price
- Commission – A charge applied by the broker for facilitating a trade
- Swap – A forex broker will charge a swap rate when holding a position overnight.
- Premium services. Some brokers offer premium services like advanced charts.
- Payment fees. You may be charged a fee to deposit or withdraw funds.
Account typesCopy link to section
Traders have different goals and requirements when it comes to FX. Newer traders with little money may not have the funds to trade full-size lots and, therefore, will be better suited to micro or mini lots. The best forex brokers have a range of account types, including full lots, micro lots, mini lots, and Islamic accounts. Some brokers offer ECN accounts in addition to standard accounts.
Supported pairsCopy link to section
Decide which currency pairs you want to trade and then check that the broker offers those forex rates. Most platforms offer all the major pairs, EUR/USD, GBP/USD, USD/CHF, USD/JPY, AUD/USD, NZD/USD, and USD/CAD. Many offer minors as well. If you want to trade exotics, take more care, as some brokers only offer a few or none.
If you’re a beginner, it’s recommended to stay with just one or two major pairs and as you progress your skills, you can start to include more crosses into your strategy.
Execution speed and slippageCopy link to section
Speed and slippage are important features, especially for day traders or scalpers where every pip counts. Execution speed is the speed at which your broker fills your order. Many brokers advertise their execution speed and the best ones usually are a fraction of a second. Choose a broker who can execute your orders in the shortest amount of time.
Slippage is when your order is executed at a different price than initially quoted. Slippage usually occurs around high-impact news events or when other influences impact prices. It can be positive or negative, meaning you may even get a better price than expected. You can check reviews from other trades to see how often a broker incurs slippage.
LeverageCopy link to section
Leverage is a crucial part of forex trading. As the price fluctuations in currencies are so small (the smallest unit of difference in price, known as a pip, is 0.0001), you have to use leverage to place large enough trades to make money.
While you can find brokers that offer high leverage, the maximum amount available differs across platforms. It can vary from 1:10 up to 1:30 or more. Professional accounts have access to more leverage than retail accounts. Beginners should be careful about using leverage because you can lose money very quickly with it, but it is necessary for regular FX trading.
Trading platformsCopy link to section
The most common trading platform for retail forex is Metatrader 4. Lots of brokers offer several different platforms and many even integrate with TradingView, so there’s lots of choices. If you’re just starting out, Metatarder 4 is a good option; as it’s so widely used, there are lots of guides and additional tools you can use with it.
Most forex trading platforms offer similar features and some are basic while others are designed with experienced users in mind. If you’re not sure which platform to use, it’s a good idea to sign up with a broker that offers a variety, this way, you can test a few options and find the right one for you.
Customer reviewsCopy link to section
Use customer reviews to assess how trustworthy a platform is. The App/Play store is a good source of material to find out what its customers think of a particular broker. Social media and message boards like Reddit are another way to judge the popular view of a platform.
Doing some extra research is the best way to avoid FX broker scams. A few malicious actors can imitate a broker to trick you out of your money. If you spend some time looking up genuine customer reviews, you can steer clear of those platforms and stick to the safe and regulated options.
Risk management toolsCopy link to section
When choosing a forex broker, look for a feature known as Negative Balance Protection, a fallback that prevents your account from going negative. This protection can’t prevent you from losing money on specific trades, but it stops you from losing more than you deposited into the account.
You can also use a broker’s demo account to practice your skills before risking live funds. Demo accounts simulate live market conditions but use virtual funds and are an easy way to understand how a broker works.
Customer serviceCopy link to section
Good customer service can greatly improve your experience when using a forex broker. If you run into issues with your broker, you’ll want to know that any problems are dealt with quickly and by someone with expertise. Before registering with an online forex broker, you can visit their website and ask questions to live support to test how good customer support is.
What is the best way to choose a forex broker for beginners?Copy link to section
Beginners should look for a broker that offers a demo account to practice on before moving to a live environment. Regulation is very important and unfortunately, the forex industry has many unscrupulous individuals preying on new traders, so a regulated broker is key. It’s also important to choose a forex broker that offers different types of accounts so you can start slow and keep risk to a minimum.
How to compare forex brokers with each other?Copy link to section
The easiest way to compare several forex brokers against each other is to register accounts with them and use their demo trading facilities. Although this can be time-consuming so you may want to consider reading online forex broker reviews before choosing one that fits your requirements.
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