There has been a surge in the number of online forex brokers in recent years. However, not all brokers are created equal. For profitable and successful trading, it’s important to make sure the one you choose is safe and the best fit for your trading needs.
We will take a look at the 10 critical factors to consider before you entrust your hard earned money to an online broker.
1. Proper Regulation
Regulation is one of the most important factors to consider when choosing a forex broker. Proper regulation helps ensure that your forex broker is adequately capitalized in the event of trading losses, keeps your funds in secure and segregated accounts, and maintains fair dealing practices to so that your trades will be executed at the prevailing market prices. We strongly advise that you select a regulated broker with a clean regulatory record to benefit from these protections.
Most developed countries regulate forex trading, however, the regulatory standards can vary greatly under different regulatory regimes. Brokers doing businesses in more than one country are often registered and licensed by more than one regulator. Most brokers will list which regulators they are licensed by along with the registration numbers on the website. You can always verify this by looking at the website of the related regulator(s).
US Forex Regulation
Forex trading is subject to very strict standards in the United States. Brokers are overseen by the NFA and CFTC. These agencies actively pursue legal action against brokers who solicit US clients without being properly registered. Regulatory capital requirements for US forex brokers were increased to $20 million in response to the global financial crisis. This led many global forex brokers to shut down US operations leaving US traders considerably fewer options.
US regulated FX brokers are not allowed to offer more than 50:1 leverage on major currency pairs or more than 20:1 leverage on minor currency pairs. By contrast, most Europe-based broker will offer at least 200:1 leverage. Regulation also prevents US brokers from accepting deposits via credit cards, a very common practice in other countries. Many brokers outside the US are also able to offer their retail customers Contracts for Difference (CFDs), off-exchange derivative contracts. US retail customers are limited to exchange-traded derivatives, limiting the number of parties they can trade with.
European Forex Regulation
Financial regulation for countries within the European Union (EU) was harmonized in 2004. Brokers who are licensed and regulated in one country have the ability to serve customers in other EU countries without obtaining additional licenses. Each european country still has individual regulators (e.g. the Financial Conduct Authority in UK). However, forex brokers gravitate to countries where regulators have a “lighter” touch.
At present, the Cyprus Securities & Exchange Commission (CySEC) is known for having broker friendly regulation. With lighter regulation and lower compliance costs, Cyprus based brokers are often able to offer their customers more competitive trading terms (e.g. spreads, leverage) than other European brokers. However, there may be some trade offs with less scrutiny and protection. For example, the UK FCA’s Investor compensation scheme covers losses up to GBP 85,000 while CYSEC’s investor compensation fund only covers losses up to EUR 20,000.
Other Markets
There are still a number of countries who do not have forex trading regulation or supervisory bodes in place. Israel only began to regulate forex trading in 2015. As we’ve seen, the level of regulatory oversight in every country is not the same as well. Japan’s Financial Services Authority (FSA) also has a reputation as a strict regulator on par with the US. The FSA actively take actions against unlicensed firms who solicit Japanese nationals. They also limit maximum leverage on forex trading to 25:1. By contrast, some countries like Malta, the British Virgin Islands, Belize, Seychelles and St. Vincent that focus on offshore business, tend to have weak regulation in place with very low capital and reporting requirements.
2. Data Security
To open an account with a forex broker, you transmit a lot of personal and financial data. Brokers often require copies of your passport, utility bills as well as your bank account information and credit card numbers.
Poor internet security practices can lead to your personal financial data being stolen, trading activity disrupted and even put you at risk for identity theft. FXCM was hacked in October 2015 and unauthorized transfers were made from some customer accounts. eToro was taken offline by a malicious DDOS attack in 2014.
Internet Security
You’ll want to check to make sure your broker employs a reputable internet security firm. For example, Hotforex employs Norton Symantec and Markets.com utilizes McAfee Secure.
SSL
You’ll also want to see your broker install Secure Sockets Layer (SSL) encryption to make sure the personal and financial information you transfer isn’t intercepted by the wrong parties. Avatrade uses 256-bit SSL encryption throughout its website.
Two Factor Authentication
Two factor authentication is another security feature that makes your account much more difficult to hack. For example, Etrade requires username, password plus a unique random generated security code from a free app on your phone.
Privacy Policy
You should also check your broker’s privacy policy statement and confirm that it includes a statement to the effect that the data they collect about you remains private and will not be sold to third parties.
3. Trade Execution
In order to get your trades filled at the best rates and in a timely manner, its critical to find a forex broker with good trade execution practices.
There are essentially two types of brokers: ones with dealing desks (also known as market makers) and ones who pass your orders into the interbank market (STP brokers). See our comparison table to find out which brokers have dealing desks and which ones do not.
Dealing Desk Brokers
If you enter into a CFD trade with a dealing desk broker, they will be your direct counterparty and take the other side of your trade. Any gain on your trades will be a loss to them and vice versa.
This however does not mean that dealing desk brokers are working again you. The broker’s business model is to make the bid / ask spread when clients enter and exit trades. They offset the market risk of your trades with trades from other clients as well as their liquidity provider. Most brokers will run a “matched book” and hedge their exposure accordingly.
Dealing desk brokers determine the rates available to their clients and so they will typically provide fixed spreads.
STP / ECN Brokers
Other brokers will route your orders “straight through” to the interbank market which is comprised of financial institutions like banks, mutual funds, hedge funds, etc… They are also known as straight through processing (STP) brokers. STP brokers see the quotes in the interbank market, add an a few fractional pips to the spread as their compensation, and then route your order to the liquidity provider with the best quote.
As STP brokers don’t have direct control over the quotes you see, they typically provide floating spreads, which tend to widen in periods of market volatility and illiquidity.
Some STP brokers will also allow your orders to interact with other orders within an electronic trading network (ECN). This allows you to not only see the best price offered at the moment but the buy and sell orders of other ECN participants. You can better assess the depth of the market with this information. ECN brokers tend to charge commissions in lieu of spreads.
No-Requotes
When the markets are particularly volatile, some brokers will tell you they cannot fill your order at a rate you see on your screen but give you with the option of executing at a new price. This known as “re-quoting” and it can cause you to miss out on potential profits or prevent you from avoiding losses.
There are some brokers like XM.com that have a strict no re-quote policy who always provide tradable quotes. The re-quote policy is something you should look for in the terms and conditions of your broker agreement.
Guaranteed Stop Losses
A stop loss order is a common risk management technique that traders use to mitigate losses. In most cases, the stop loss orders get executed close to the level at which the stop is triggered. However, if the market gaps sharply, the order could get executed at a much worse level and cause your losses to be significantly greater than expected.
Some brokers like Easy Markets will however guarantee trade execution at your pre-set stop-loss and profit points. Guaranteed Stops Loss policy is feature that a cautious and prudent trader would want from a broker.
Negative Balance Protection
Forex brokers will automatically close out your positions if the trade moves against you and you are unable to meet margin calls. However, you can end up owing your broker more than the funds on deposit in your account if the market gaps violently and your broker has problems liquidating your trades in an orderly fashion.
This happened to many traders in January 2015 during the Swiss Franc crisis. Certain brokers pursued their clients for additional funds after the fact while, others waived negative balances on a one-off basis. However, customers of brokers who offer negative balance protection faced no such uncertainty. They could confidently rely on the fact that they could never lose more than the money in their account.
4. Product Coverage
Nowadays, you can trade more than just currencies with your forex broker. Innovative brokers will allow you to access most areas of the capital markets through a single forex account. Some offer trades on major and minor currency pairs, commodities, precious metals, stock indicies, single stocks, bonds, ETFs, bitcoin, as well as trade currency and index options.
Keep in mind that even if brokers offer broad coverage of different markets, the depth of coverage is often not the same. For example, brokers like XM, Easy Markets and Forex.com offer trades on stock indicies but don’t offer trades on single stocks. By contrast, Plus500 is widely known for its in-depth product coverage and offers CFDs on 81 ETFs and over 2000 individual shares from over 20 countries.
If you’re looking to trade more than just forex, pay close attention to your prospective broker’s product coverage.
5. Spreads, Commissions and Fees
Experienced traders know that trading costs can have a significant impact on profitability. While the difference of pip or two here and there might not seem that important, it will compound over time, particularly for active high-volume traders. If you’re a seasoned pro looking for an inexpensive no-frills broker, Plus 500 is worth considering.
Keep in mind there are trade-offs to choosing low cost brokers. More expensive brokers typically offer a higher level of service including research and market analysis, customer service and support, training materials, trading tools and platforms, etc… After all, you get what you pay for.
Spreads
The spreads are a broker’s primary source of compensation. The tighter the spread, the less costly it is for traders to enter and exit a trade. Spreads will tend to vary with each currency pair and tend to be tighter for high volume pairs.
Spreads can either be “fixed” (a set number of pips between the buy and sell rate) or “floating” (which can vary based on market conditions). Floating spreads are typically tighter than fixed spreads. For example, EURUSD spreads for Avatrade are 3 pips fixed and 1.8 pips floating. However, when adverse market conditions causes liquidity to dry up, floating spreads can widen relative to fixed spreads. If you’re not comfortable with that uncertainty, fixed spreads could be a better option.
Some brokers will give you a choice of spreads (e.g. Markets.com, Hotforex, Avatrade) but most will only offer either fixed or floating. As such, it’s important to decide what type of spreads you’re comfortable with before selecting a broker.
Some brokers also offer tiered accounts, usually based on the amount you deposit with them. Generally, spreads will typically be tighter for accounts with higher deposit minimums.
Commissions
Most forex brokers do not charge commissions for most accounts with the exception of currenex accounts (where speards are typically 0.2 pips) or zero spread accounts. For example, HotForex charges $5 per lot for zero spread accounts only.
Miscellaneous Fees
Trading costs are not limited to spreads and commission. Some brokers will charge additional fees for withdrawals, deposits, wire transfer, credit card, inactivity, and account closing.
These fees tend to be higher for brokers who are based in less competitive markets like the US. For example, Forex.com charges $40 for international wire transfers and a $15 / month inactivity fee and ETrade will charge $2 / month for paper statements and $60 account transfer fee.
6. Trading Platforms
Your trading platform is your portal into the exciting world of forex trading. You’ll want to find software that is user friendly and intuitive but also feature rich and powerful enough to meet all your trading needs.
Most forex brokers offer demo accounts so you can always given their trading platforms a try before signing up for a real account.
Metatrader
The undisputed standard for retail forex trading software is Metatrader 4 (MT4). It is a programmable and highly customizable platform well suited for experienced traders. It provides a wide range of charting and back testing tools. Its’ low latency allows for immediate order execution. It also offers integrations with “expert advisors” for algorithmic trading as well as services like Autochartist, 3rd party technical analysis software.
Some brokers will also provide a “multi-terminal” version of Metatrader which allows you switch between and trade multiple accounts.
Most forex brokers offer if not primarily rely on Metatrader. It is a windows based platform, but some select brokers like XM.com will also offer browser-based and / or mac compatible versions of metatrader as well.
Web Based Trading
Many brokers offer proprietary web based trading platform that allows you to trade via browser only, obviating the need to download software. This can be particularly useful to mac owners or traders who might not have access to their personal PC during trading hours.
These web based platforms tend to be less feature rich compared to metatrader, however, you should still be able to perform most basic trading and charting functions. For novice trades or the less technically inclined, web based trading platforms tend to be more intuitive and user friendly.
There may even be certain advantages to using web based trading platforms with certain brokers. For example, Easy Markets only provides stop loss guarantees to trades placed via webtrader and only makes it “Inside Viewer” and “Trade Controller” tools available through webtrader as well.
Social Trading
Social trading is a growing trend where you can learn and discuss trading strategies with your peers and even watch and copy trades from more experienced traders. The clear leader in the social trading movement is eToro with an active community of 4.5 million traders in 170 countries. It uses proprietary social trading technology so its network is closed to traders who have accounts with other brokers.
There are a number of 3rd party social trading platforms available: Markets.com uses Sirix Webtrader, Hot Forex uses FXstat, and Avatrade offers Zulutrader and Mirror Trader. While they do offer a social trading experience, their user base doesn’t come close to eToro’s at this time.
Mobile Trading
Most forex brokers will offer one or more mobile trading apps to allow you to monitor and trade your account on the go. Metatrader mobile is available for ios, android and windows phone. It will sync up with the desktop version of your Metatrader account.
Some brokers also offer mobile app versions of their proprietary trading software. This usually includes ios and android apps, however, blackberry and windows versions are less common.
7. Trading Style
Your trading style can factor greatly into which forex broker is best suited for you.
Time Frame
If you are a short-term trader looking to scalp a few pips, you’ll want to make sure your prospective broker allows scalping and provides Currenex account. Currenex accounts come with institutional grade trading software, very low spreads and access to the deep liquidity of the interbank market.
If you are a longer-term position trader looking for big moves in exchange rates, you may be might be less concerned with spreads and the speed of trade execution but more sensitive to overnight interest rates (a.k.a swap / rollover rates) offered by your broker. It will be important to study your prospective broker’s overnight rates and policies before choosing them.
Self-Directed vs Automated Trading
If you are a self-directed discretionary trader, you’ll want to make sure your forex broker provides you with good fundamental and technical analysis with which to make your trading decisions.
If you prefer using automated trading strategies, you’ll need to make sure your broker provides the required integrations in their software platform. Brokers who offer Metatrader 4 typically allow for “expert advisor” integration. There also are number of other automated trading systems available like Signal Trader from Avatrade and MQL5 from Hot Forex.
Algorithmic traders should also consider getting a virtual private server (VPS) that will continue to run your trading strategy even when your computer is powered off or disconnected from the internet. Hot Forex and XM.com offer a free VPS service to any clients with deposits of more than $5,000.
Managed Accounts
If you would like some or all of your funds to be managed by one or more skilled professional(s), you’ll want to choose a broker that provides PAMM accounts (percentage allocation management module). Hotforex allows you to choose from over 300 vetted managers who are required to co-invest in the strategy.
Social Trading
As mentioned earlier, social trading is a growing movement and a great way of sharing knowledge and building community amongst forex traders. That said, only a select number of brokers offer social trading. Further, the level of engagement on each trading platform differs greatly.
If social trading is an important to you, eToro is worth looking into. It has the largest user base and will even pay you when other people copy your trades.
8. Account Options
When opening an account, you’ll find brokers can differ greatly when it comes to minimum deposit amounts and methods, account features and trading terms. A lot of these details are buried within a broker’s terms of service but analyzed these and provided the details in our broker reviews.
Generally speaking, brokers outside of the US and Japan tend to be more accommodating given the higher level of competition.
Minimum Deposits
If you’re fairly new to forex trading and or just trying out a new broker, you may not want to commit a substantial portion of your net worth to your trading account at first. Some brokers offer very low minimum deposits to open a real trading account. For example, you can open “micro” accounts at Hot Forex and XM.com for just $5. Most non-US brokers will set their minimums around $50 to $100.
Account Types
Many brokers will have a have a tiered account structure, usually based on your deposit amount. Terms will generally improve for larger accounts with more favorable spreads, greater access to software tools and market analysis, dealing room access, personal account managers and free VPS.
Hot Forex is a real innovator in this respect. It offers 9 different account types with one to suit the needs of almost every type of trader.
Base Currencies
It’s always preferable to have your trading account in the currency of your home country. That removes the need to change money when you open your account.
Furthermore, having a trading account with a base currency different than your home currency can also expose you to unwanted currency risk. Even if your trading account is profitable, if the base currency of your account weakens relative to your home currency, you can end up lose money when you withdraw and convert your funds.
Some but not all brokers will let you choose from many base currencies. XM.com offers 11 base currencies and Easy Markets has 10. By contrast, other brokers like Forex.com, HYCM, eToro and Etrade only offer USD accounts.
Lot Size
The minimum trade size tends to vary with your account type. Most entry level accounts offer “micro-lots” or trades of 1000 units of currency. One exception is Easy Markets where the smallest trade is 5000 units.
Spreads
As mentioned earlier, most brokers do not offer a choice of fixed or floating spreads. Brokers with dealing desks tend to offer fixed spreads and STP brokers usually provide floating spreads. There are some exceptions – Markets.com, Hotforex, Avatrade allow you to choose between floating and fixed accounts.
Leverage
Maximum leverage can vary greatly amongst brokers. As previously mentioned, the regulatory maximum is 50:1 leverage for US customers and 25:1 for Japanese traders. However, some Europe based brokers offer maximum leverage on currency majors anywhere from 200:1 up to 1000:1.
While most brokers will set your leverage by default, some allow traders to customize this to suit their individual risk tolerance. For example, XM.com allows you to set your own own leverage between 1:1 to 888:1 and eToro.com allows you to set it between 2:1 to 400:1.
Payment Options
Acceptable deposit methods will vary greater amongst brokers. As mentioned, US regulation prevent brokers from accepting payment via credit card where this is a common practice amongst Europe based brokers. By contrast, most US brokers will accept deposits via cheque while very few European brokers will do so. Almost all brokers will accept payment via wire transfer. Certain Europe based brokers will also accept payment via some type of online payment services like Paypal, Skill, Neteller, Webmoney, etc…
9. Customer Service
Good customer service is especially important for novice traders. Helpful support staff can help smooth out bumps in road in the account opening process, figure out difficult trading software and accelerate your learning in the arcane world of forex trading.
One broker is who widely recognized for excellent customer service is Markets.com. They won the London Investor Show Forex “Best Customer Service 2012” award and the Global Banking & Finance Review “Best Broker in Customer Service Europe 2012” award.
Most brokers will offer 24/5 multi-lingual phone support and live chat. There are some exceptions like Plus500 who offers only email support and live chat and eToro who can only be contacted via a difficult to find contact form.
Some brokers also assign personal account managers to ensure continuity in the support that you receive. This service is often subject to meeting minimum deposit thresholds, which can vary with each broker.
10. Educational Materials and Trading Tools
Another important consideration for novice trader is the training provided by your forex broker. Many brokers will provide a combination articles, ebooks, videos, e-courses, webinars, and seminars free of charge. Note that the quality of these materials can vary greatly.
Avatrade gives its customers access to premium forex education service, Hushtrade. Hushtrade covers fundamentals of forex trading and technical analysis for beginners as well as trading strategy and insights from professional traders for advanced students.
There are also exclusive benefits for higher tier accounts with certain brokers. Easy Markets provides its VIP accounts with free access to its dealing room. You’re assigned dedicated specialist who provides you with one to one training and help you with trading strategy. Hot Forex gives VIP accounts three private half hour consultations with their Chief Market Analyst, Janne Muta.
