The choice of a forex broker is the next step after making a decision to start forex trading. It is a crucial element and should be done carefully to ensure that you get a forex broker that offers the best services, the right leverage, spreads, conditions, and is legally registered to allow you to trade in the location where you live. Here are some common and important questions that you should ask when choosing a forex broker:
Is the forex broker a non-dealing desk or dealing desk broker?
A dealing desk forex broker is one who interferes with your orders, by monitoring them and then often puts a trade in against them. On the other hand, the non-dealing desk broker offers you a direct access to the foreign exchange markets. The main difference between the two is that the dealing desk brokers usually have fixed spreads while non-dealing desk brokers have variable spreads as they are getting the rates from a liquidity provider.
What is the maximum leverage that the broker offers?
Leverage is additional capital from a liquidy provider (usually a well-known bank) that a broker offers you so that you are able to hold a larger order in the market. It is given in terms of a ratio like 50:1. Leverage is used because the movements in the currency markets, so if traders did not have access to leverage the gains would be too small. Brokers usually offer leverage anywhere from 200:1 to 800:1, depending on what liquidity provider they are doing, and also dependent on your experience as a trader. When it comes to leverage, traders need to be very careful and understand it well.
Leverage is important to understand because it can either work for you or against you. It’s advisable that for retail traders with a little experience to be careful with the amount of leverage that you use in your trades because the risk exposure can be significant. As your trading history grows, and the broker sees that you are trading successfully, they could offer you increased leverage on your account.
DO FOREX BROKERS OFFER TOOLS FOR ME TO USE IN MY TRADING?
Brokers usually offer forex tools like calculators, economic calendars as well as trading signals so that you have all your trading information in one view. The main tool that any trader will be using is either MetaTrader 4 or 5, or the platform that is offered by the broker for the purpose of researching and enacting the trades.
When you sign up with a broker, ask the account manager what tools you will have access to for free, and which they will charge you for. This is often posted on their website, but having this discussion with the broker before you have made your first deposit will get you more from them for free.
How wide are the spreads?
The spread is the difference between the buying price and the selling price. It is with this difference that a broker makes their money. Different brokers will offer different spreads and the difference is often determined by the kind of broker you are going to trade with, and also the deal they have with their liquidity provider.
What type of accounts does the forex broker offer?
Brokers usually have demo accounts, which are free accounts where you can practice your strategies and trading, and real accounts that are funded by your bank account or credit card. To read more about demo accounts, we have a section on the what they are, and some of the best brokers that offer them.
When it comes to real accounts, brokers will sometimes have different tiers of accounts for you to select from. Based on how much capital you intend to deposit with the broker, the account size will be bigger, and you will get more access to account managers, data, signals and ultimately lower spreads and higher leverage.
What is the minimum initial deposit that the broker allows?
Brokers have different minimum deposits starting as low as $5 and going up to $500. I would always recommend that you consider that you only want to deposit an amount of money that you are comfortable losing because while trading can be very successful, it can also be very unsuccessful.
Does the broker have a demo account?
A demo account is very helpful especially for forex beginners as well as for the professionals for testing different trading strategies. Some demo accounts will be time limited, where after your demo period you will be encouraged to sign up for a funded account. Most brokers allow you to keep your demo account once your real account is created.
Does the forex broker offer customer services?
It is important that you choose a broker that offers customer service since you will be able to communicate. It is safe to say that all brokers offer customer service 5 days a week, it is only the more advanced accounts that will give you access to a dedicated account manager and weekend assistance.
Does the broker offer bonuses to first timers?
There is a controversy about if giving bonuses away for first-time traders should be allowed. Some regulators in Europe have decided that it should be stopped, while others around the world still allow it. That said, some brokers offer bonuses based on the amount that you deposit to your account, and others give you offers or run tournaments. Some offer no deposit bonuses to get your started.
Important note: do not rely on bonuses because they are often come with fine print and are used as a mechanism to drive in new customers. You will not be able to withdraw them.