Your forex broker must be an efficient and reliable partner in your forex trading success. Here’s a checklist for choosing a forex broker.
Firstly yes, let’s be upfront - FlowBank offers the services of a forex broker! The reason for creating this checklist in 2021 is because FlowBank is a pioneer for sweeping changes across online & digital financial services through what is now known as fintech – finance and technology.
What does that mean for you? You no longer need to chose your forex broker separately from the other financial services you use in your life – it is possible to have it all under one roof – including a digital Swiss bank account. Of course, you can choose to use only the Forex features in your FlowBank account if youp prefer– but the trend is towards integration. Please read on to find out more…
Reminder: What is a Forex Broker?
A forex broker offers you the possibility to buy and sell currencies on the forex market through a forex account. The broker’s job is to connect a buy and seller. Individual forex buyers and sellers cannot transact directly because forex trades are conducted on the interbank OTC foreign exchange market. You need a forex broker to trade on your behalf, just like you need a stockbroker to trade on your behalf if you are trading on the stock market. Of course, forex brokers charge a fee for this service, which is normally embedded into the bid/ask spread on each trade. There will typically also be rollover fees to hold trades overnight – and sometimes extra commission.
How to Choose a Forex Broker
There are some universal rules that we advise all aspiring forex traders adhere to when choosing the best forex broker. And there are some features offered by forex brokers that will be more important to some traders than to others, depending on your goals when investing in forex.
For example, it is important to trade with a competitive spread in forex but having the very tightest spread is really only needed for high frequency traders or scalpers. This checklist for choosing a forex broker should help you decide which is most important for you.
1. Regulated Forex Brokers only 👮
There are multiple facets to why it is best to use a regulated broker but it all boils down to keeping your money safe. The countries known to have the best protections include Switzerland, the US, the UK, Canada and Australia. TD Ameritrade and Interactive Brokers are two well-known financal companies in the USA, however it should be known that CFD trading is illegal in the USA, which limits the available trading options for forex brokers regulated there. Brokers regulated in other lesser-known financial centres are known as ‘offshore brokers’. These typically offer more flexibility in account functionality but come at the expense of loser regulation and less protection for your forex account.
Can a forex broker go bust?
There are never any guarantees and even regulated brokers can default. The most famous example in recent years was MF Global. However, choosing a regulated broker means there is a government agency that will be working on your behalf if you cannot access your funds. Regulated brokers are required to segregate client money into a separate bank account than the account the forex broker uses for business operations.
How to avoid forex slippage
Regulated brokers are required to offer ‘best execution’ on your trade- which means when you click a market order to deal on a forex pair, your broker should give you the best price available to them. Trading with unregulated brokers increases the chance that your trades get ‘slipped’ – meaning the price might be a pip or a fraction of a pip worse than it was when you clicked the button. Over time, this slippage cost adds up and acts like a hidden fee on top of the bid/ask spread to the cost of trading.
Here is a handy list of the most-respected regulatory bodies by country:
USA: Commodity Futures Trading Commission (CFTC)
Switzerland: Swiss Federal Banking Commission (SFBC)
UK: Financial Conduct Authority (FCA)
Germany: Bundesanstalt für Finanzdienstleistungsaufsicht (BaFIN)
Australia: Australian Securities and Investment Commission (ASIC)
Canada: Investment Information Regulatory Organization of Canada (IIROC)
2. Best Forex Customer Service 🛎️
This might seem obvious but customer service can be critical when you are unable to carry out some operation by yourself. Customer services can be useful for anything from moving a stop loss to checking margin balance to finding out an open trade deficit. Behind the scenes of customer service is the operations department, which also need to be on point to make sure you have quick and secure deposits and withdrawals.
3. How many Forex Pairs available? 💹
FlowBank offers trading on over 60 forex pairs in all the major currencies including the Swiss franc (EUR/CHF), Canadian dollar (USD/CAD) , Australian dollar (AUD/USD), British pound (GBP/USD), euro (EUR/USD) etc. If you are only focused on the major currencies for short term day trading strategies, the number of pairs available is less relevant. If you do swing trading or use long term trend following strategies – then you will want access to as many pairs as possible. The same goes for anybody trading robots or using algorithmic trading, or following trading signals. If you plan to trade other asset classes like options trading, stocks trading or commodities trading, then this should be a consideration too.
4. Forex Leverage and Margin Requirements ⚖️
The issue of leverage is increasingly becoming a trade off for trading with a regulated forex broker. The rules are always changing but at the time of writing, leverage in Europe (regulated by ESMA) is capped at 30:1. In the USA it is 50:1. It is still possible to trade with leverage as high as 500:1 with an offshore broker. One of the few places left that can offer both a reasonably high amount of leverage and quality international forex regulation is Switzerland, where FlowBank operates.
5. Forex Spreads and Commissions 💸
The new trend is for zero commission trading using mobile trading app, pioneered by RobinHood. Zero commission has been a feature of the foreign exchange market for years. Forex brokers charge a bid ask spread measured in pips. Brokers will often quote their ‘minimum spread’ but try to find information on their ‘average spread’ to give you a better idea of what to expect.
Typically, the choice is between working with a market maker (99% of brokers) where the commission is built into the bid/ask spread. Or trading with an ECN and you receive raw spreads (as traded on the interbank market) and pay a flat commission on top. Keep this in mind, the broker has to make money somehow, if the spread is too tight or non-existent, the broker must be making money in other less visible ways. Also, check the currency pairs that you trade for a tight spread.
6. Minimum Deposit 💲
There is typically not a minimum deposit to trade FX. Some brokers like Saxo Bank used to have high minimum deposit requirements of five or ten thousand dollars. What a beginner trader must consider is the how much money you need to trade forex. That comes down to position size and margin requirements. Also bear in mind the payment methods available, such as debit card, bank transfer and online payment methods and the transaction costs. Regulated brokers do not normally accept cryptocurrency because they cannot follow AML regulations if they do. The FlowBank app includes a place to see all the latest forex rates and an easy-to-use currency converter.
7. Introducing Broker or Direct? 👨
Some online forex companies are not a broker in themselves, they are what is known as an IB (introducing broker). They introduce clients to brokers. If the IB offers a worthwhile service such as forex signals or a forex robot to trade with, then it can be worthwhile. If a company has caught your attention via affiliate marketing on Instagram or other social media, they are a forex affiliate, which means you will only pass through them to register for an account that is direct with the broker. In most cases it tends to make sense to sign up directly with the forex broker.
8. Which Forex Trading Platform? 📲
A good forex trading platform should have a reliable charting package with the technical indicators you use in your trading strategy, quick execution of trades and be reliable. The classic forex trading platform is Metatrader 4 or MT4 for short. Forex brokers license this software from a Russian company called Metaquotes. Metatrader 4 is needed in order to run an MT4 EA, which is short for Expert Advisor – a type of forex robot. The FlowBank trading platform is powered by Exante. It is state-of-the-art and was developed years after Metatrader 4 so it included a lot more updated technology, and many more features and available markets to trade.
9. Trading Education and Forex Signals 🏹
Tips for beginner traders are helpful to get started. The internet is awash with trading ideas, forex trading courses, FX signal services, price action courses, forex news trading strategies etc so this is more of a nice-to-have than essential. But it can save time if the trading education is available through your broker, and it makes it easy to ask follow up questions based on your own historical trades. FlowBank offers forex signals from Trading Speak Easy (TSE).
10. One Account for all Platforms 🔣
Owning multiple financial accounts has traditionally made tracking your investment returns a lengthy process. Combining your banking, insurance, long term investing, short term trading and other financial services into one hub, visible 24 hours per day via a smartphone app just makes life easier. Eventually all financial services will work this way, but you can step ahead of the crowd with FlowBank.