The foreign exchange or forex market accounts for over $5 trillion in terms of average traded value on a daily basis. This makes it the largest financial market in the whole world. As the forex market does not have a central marketplace, traders are required to choose a forex broker who will be able to help them conduct their trades. A large number of forex brokers are out there in the market and new brokers are setting up shop on a daily basis. It is, therefore, a challenging task to choose the right broker who can help you achieve your financial goals. The aim of this post is to provide you with information as regards the five key aspects you must look at when choosing the best forex broker work with in the marketplace.
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Tips To Choosing The Best and Trusted Forex Broker
#1: Regulatory Compliance
The first and foremost aspect that you have to ascertain is whether the forex broker with whom you are going to work is regulated or not. If the broker you are planning to work with is not regulated, you cannot expect to get any kind of legal protection.
However, you should keep in mind the fact that all countries do not regulate forex brokers in the same manner. Further, the regulatory environment as well as requirements varies from one country to another. It is, therefore, a good idea to choose a forex broker belonging to a country that monitors their activities on a regular basis. You must also ascertain whether the broker’s on-shore and off-shore operations are regulated or not. Some of the countries that have dedicated regulatory agencies are USA, UK, Eurozone, Australia, Japan, Indonesia and Switzerland.
When choosing a forex broker, make sure that the broker is well capitalized. This ensures a great deal of safety for your hard earned money. You can find details regarding the capitalization of a company by visiting the website of the concerned regulatory body. The OTC nature of the forex market makes it extremely difficult for brokers to obtain competitive pricing without making margin deposits in a bank or a lending institution. Therefore, a well-capitalized broker will be in a position to establish better credit relationships with the liquidity providers and provide more competitive pricing to their clients. The regulatory authority in a country specifies the minimum capitalization level that a forex broker must comply with so as to stay solvent.
Type of Forex Broker
When it comes to OTC forex trading, there are different types of brokers with whom you can conduct your trades.
A forex broker is just a conduit between you and a dealer/market maker. They allow the processing of your orders through computer systems without any manual intervention or the involvement of a dealing desk. Therefore, this type of transaction is also referred to as Non Dealing Desk transaction. The broker makes use of a technology known as Straight Through Processing (STP) for sending orders to another party and getting it executed by a market maker’s dealing desk.
Further, the spreads that you receive are dependent on the dealer or market maker through whom the broker routes your transactions. Spreads may be fixed or dynamic. Generally, these brokers charge a fee for the services they provide. The market maker may also provide a compensation for the transactions that the broker routes to the dealing desk of the market maker.
A market maker operates through a dealing desk, a traditional method used by most financial institutions and banks. Throughout the trading day, they provide two-way pricing to customers. They may follow either fixed or dynamic spreads (prices change according to the changes in liquidity in the case of certain pairs). The market makers interact with each other in order to manage their global forex positions/risk. Market makers make money on the basis of their ability to manage risk.
The ECN broker acts as a broker to several market makers/dealing desks. Each dealer sends a quote to the ECN broker along with a specific volume applicable for the price. The ECN broker then distributes the price to customers. However, the responsibility of execution does not rest with ECN broker. In this case, spreads are determined on the basis of the difference between the best ask and bid quotes. The ECN broker charges a fee to the customer and also earns a commission from the dealing desk.
You need to have a clear understanding as to which type of broker will be best suited to achieve your financial goals.
#4: Account Features
The features of the forex trading account offered by each trader are different.
Forex brokers offer different types of accounts and include micro, mini, and standard accounts on the basis of the lots traded. Whereas a standard lot consists of 100,000 units, a mini lot consists of 10,000 units and a micro lot consists of 1,000 units. Some forex brokers offer fractional unit sizes so that you can establish a position size of your own. The micro/mini accounts enable you to trade with minimum amount of capital.
Leverage and Margin
Leverage is the loan provided to margin account holders by brokers. Leverage may range from 50:1 to 200:1 or even more. Leverage is helpful to traders in the case of winning positions as it enhances profits. However, it can quickly destroy the trader’s account as losses get magnified as well. You should always use leverage with caution.
Ease of Deposit/Withdrawal
Each forex broker follows a different deposit withdrawal policy. Therefore, you must go through the deposit and withdrawal policies of the forex broker with a tooth comb. Choose a broker that offers the best terms and conditions, as for forex Indonesia the good deposit or withdrawal with a local bank for easy service.
#5: Customer Service
As forex trading happens round the clock, the broker that you want to work with should be available to you at any time. The ease with which you can communicate with the customer service representative is also a key aspect that you should take into consideration.
This is not an exclusive list of aspects to be considered when choosing a forex broker. There are other aspects such as the trading platform, customization options available, order entry type, automated trading options, etc., that you need to take into account as well. Finally, you should take some time off and do a little bit of research before making any commitment to a broker.