- Transaction costs
- Verifying your broker’s prices
- Deposits & withdrawals
- Trading platform
- Trading tools & information
- Customer service
- Try their demo accounts
In an earlier article, I explained the two major kinds of brokers and discussed some good and bad points of each. In this article I’d like to go into more detail about some of the things you should consider when choosing a broker. There are so many brokers out there, it’s hard to tell the difference among them and make a decision about which one to use. That’s one of the main reasons why we created this website, to help you decide which broker to use.
Een with all our help, at the end of the day it’s your decision. So here are a few points to look for when choosing a broker.
The broker’s reputation in the market will be a good indicator of how good they are overall. Do a bit of research before depositing money with one. See what people are saying. See if there are any outstanding issues with brokers. Especially, read the reputable news sources about the retail FX market, such as Finance Magnates or FinanceFeeds. They can give you well-researched information about what problems individual brokers face.
There are several forums where individuals can vent about their experiences with brokers. When reading these, remember to take them with a grain of salt. People who are unhappy love to complain on the internet, but people who have an ordinary trouble-free experience rarely go online to praise the fact that nothing bad happened. Brokers have thousands and thousands of clients –a few of them complaining doesn’t necessarily mean that there’s something structurally wrong with the broker. Then again, an unusually large number of people making the same complaint or should raise a red flag with you.
Moreover, positive comments aren’t always from happy clients – some unscrupulous brokers go so far as to plant posts in online forums rebutting complaints or saying that they’ve never encountered any such problems. There are even some fake “brokerage review” sites that are run by the brokers themselves!
Finally, if a number of clients have gone so far as to take legal action, that indicates more than the usual disagreement or disappointment.
Most brokers are honest firms just trying to make a living. But be forewarned: not all of them are.
The most important thing to look for in a broker is security. You’re going to be depositing your hard-earned money with them, maybe several thousand dollars. Furthermore, you hope to make money trading, which eventually you’ll want to withdraw and spend. You don’t want them to go bust or to have the management run off with your money.
Of course, you can’t audit every broker and see which ones are healthy and which ones aren’t. For that you have to rely on the regulatory authorities. It’s important therefore that you deal with a broker that is regulated in one of the major financial centers. You should check and see which country your prospective broker is registered in and which regulator is investigating it. The best is if it’s regulated by one of the regulatory agencies in the major industrial countries, such as the US, UK, Germany, Australia, etc. The regulators in these countries are well respected and responsive to complaints.
Of course, even the best regulators can’t prevent all problems – Bernie Maddoff and Enron managed to evade the scrutiny of the US regulators for some time – but you have better chances of avoiding fraud and more recourses in case of problems in these countries.
Britain used to be the regulatory home of choice for firms operating in the EU, but since Brexit, Cyprus has largely taken over that roll. Cyprus has become the Silicon Valley of online FX trading, with over 100 firms operating there.
Other brokers are located in even more exotic places, such as Bulgaria and Malta. Finally, the far-away islands of Mauritius and Vanuatu are also up-and-coming homes for FX brokers. You can open up a brokerage in Vanuatu with only $2,000 in capital and no local office or local employees. Think about that.
And if the broker isn’t regulated anywhere, then don’t even think of putting your money there.
See our in-depth focus piece on regulators.
Transaction costs are probably the second-most important issue for most traders. Once you’re confident you’re going to get your money back, the next question is how much money you’re likely to make.
How important spreads and commissions are to you depends to a large extent on your trading style. If you’re going to be going in and out of the market all day in hopes of making 5 or 10 pips, your transaction costs will be a key issue for you. If you’re going to put on a position for several months and try to ride a trend for 500 pips, then transaction costs are less important for you than other features. So you’ll need to balance cost vs other issues.
Execution could be considered another aspect of transaction costs. You of course want to get the best possible price when you trade. Assuming the market is trading normally, you should get filled (i.e., your order should be executed) at about the price you see on the screen when you execute the trade. You shouldn’t get any re-quotes or slippage unless the market is particularly volatile. You should also get filled almost instantly. Speed is particularly important if you’re a short-term trader trying to make just a few pips here and there. In that case, even a small delay or a small difference in price can make a big difference in your P&L over the course of a day.
Verifying your broker’s prices
You can check your broker’s execution by comparing their prices with those of another broker. You could use another broker’s prices or subscribe to an independent price feed, such as Reuters. And you should always take a screen shot of your screen when you make a trade, so that you have a record of exactly what the conditions were when you pulled the trigger. That will give you some solid evidence in case you ever have to dispute the price that you got with your broker.
Deposits and withdrawals
You want to make sure that you can deposit money easily with your broker. It’s even more important to make sure that you can withdraw it easily when you want to. That money you have on deposit with the broker is yours. The broker only holds it so that you can trade when you want to. There shouldn’t be any issues if you want to withdraw your money. The process should be as easy as depositing money. Learn from our experience with the broker. Don’t put your money into a roach motel, where you can deposit funds but can’t withdraw.
The trading platform is one way that brokers can differentiate themselves. Most use the MetaTrader system – MT4 and/or MT5 - but the front end that you deal with – the brokers’ web site – can make it easier or harder to access. The broker’s trading platform should be easy to use and reliable. Make sure you can access it through the kind of tool that you usually use to access the internet, such as an iPhone or Android phone.
Many brokers also offer their own trading platform. Some of these are better than others. Some brokers only offer their own trading platform and don’t allow you to use any outside ones. This is an important point to consider, especially if you’re a new trader. Do you want to learn to trade on a system that’s not going to be portable? IE if learn to trade on Broker X’s platform and then decide you want to switch to Broker Y, you may have to learn all over again how to use their platform.
On the other hand, some brokers’ platforms are extremely good, maybe better than the MetaTrader system. How difficult is it for you to learn a new system?
Trading tools & information
In addition, some brokers offer proprietary tools or access to information and analysis. Does the broker have any technical or charting tools beyond what another company may offer? Do they offer any additional information, such as a news feed or calendar of events? Do they have any in-house education or information, such as a daily comment or analysis? If so, how good is it? Do they offer access to third-party tools, such as Trading Central or AutoChartist? And even if they do, how much do you value these? Are you a new trader looking for introductory materials or an experienced trader looking for some special tool that will give you a trading edge?
Something’s bound to go wrong at some point. You may have trouble with a withdrawal or you may not understand how to use some feature of the platform. You therefore need to pick a broker that will have someone you can talk to in your language when there’s some problem. Brokers may help to you get your account set up and help you to deposit money, but it’s just as important that they be there to support you when you need to ask a question on some technical issue.
Try their demo accounts
Once you’ve narrowed down the field, you can give the finalists a test run by opening up demo accounts with several of them. It’s free and it will give you a feel for how they operate, what amenities they provide, and how easy it is to navigate them. Just remember though that the prices the brokers supply to their demo accounts aren’t always the same as the ones they offer to deal at, so just because one firm’s demo account seems to offer better execution than another doesn’t necessarily mean that they will when you go live with that firm.
There are a number of things you should consider before signing up with a broker. Their overall reputation is a good way to summarize the market’s opinion of that firm. Foremost is security: if you can’t trust them, stay away. Then transaction costs and execution are important. Deposits and withdrawals should be easy, and the trading platform should be competitive. And just in case something does go wrong, the firm should offer customer service in bad times as well as good. Try out their demo account first to get a feel for how it would be to work with this broker.