The forex market has a daily yield of more than $6 trillion, making it the world’s biggest financial market. Although the forex market is known for its enormous size, it still lacks a central medium for traders to help them trade. Thus, in order to do business in the forex market, traders need the assistance of a middleman, known as a forex broker. A forex broker has a crucial role to play in helping traders conduct their trading activities. Thus, the significance of a forex broker in the trading system cannot be neglected. However, the problem arises when finding a forex broker because many forex brokers are available on the internet. So, how to be sure that the selected broker is the right fit for your trading needs? To help you with the same, here are some factors you can consider while selecting a forex broker.
Regulations
When picking a forex broker, it is vital to check the regulatory status of the broker in question. When you deal with a regulated forex broker, you can be assured that the broker will follow all the guidelines and standards of the regulatory body. It includes maintaining sufficient capital and segregation of clients’ accounts so that their funds cannot be misused at any cost. Furthermore, regulations also protect clients when the brokerage goes bankrupt. This is why a regulated broker would be a good choice, as they follow stringent standards when it comes to the funds’ safety.
Trading Platform
As a trader, it is your responsibility to ensure that the available trading platform is reliable. Since a trading platform acts as a gateway to the forex market, it should have all the necessary features to help you smoothen the trading process. While some forex brokers offer third-party trading platforms like MetaTrader 4 or 5, others have their own proprietary platforms designed to meet your requirements. Nevertheless, a good broker always has a wide selection of trading platforms suitable for desktops, tablets and smartphones.
Broker’s Business Model
You will come across various business models like DD, NDD, STP and ECN brokers. All of these terms are crucial when you select a forex broker. Thus, you must understand what they actually mean. Firstly, you should know that there are two types of brokers in the forex market:
Dealing Desk
A dealing desk, also called a market maker, is a type of forex broker who takes the opposite side of their clients’ trades. This leads to a conflict of interest between the broker and its clients, meaning when the client wins, he loses and vice versa.
Non-Dealing Desk
An NDD or non-dealing desk broker is the one who sends the trades to the third party. There are two kinds of non-dealing desk brokers that exist in the market: STP (Straight Through Processing) and ECN (Electronics Communication Network). While the ECN broker processes the trade orders automatically via the broker’s trading platform without the need of a dealing desk, the STP passes the trade orders directly to another individual to be executed by the dealing desk of the market makers upon receiving them.
Commissions And Spreads
While most financial markets are based on commissions, this is not the case with the forex market. Here, spreads play a significant role instead of commissions. This is why most forex brokers promote themselves as “commission-free” because they actually make money via spreads. Spread is the difference between the buying and selling price. You will encounter three types of spreads charged by forex brokers in exchange for their services. These are explained below:
- Fixed Spread: This spread remains the same and does not fluctuate with the rise or fall in prices. Furthermore, traders know the spread amount before they even start trading.
- Floating Spread: This spread is constantly changing according to market volatility.
- Commission-Fee: It is a set percentage of the forex spread charged by the broker. Before you start trading, make sure you know the cost structure so that you know how much trading with a particular forex broker will cost you.
Ultimately, it depends upon the trader’s requirements which option is better. A fixed spread is the best option if you are seeking certainty in forex trading costs. However, most traders prefer to go with a floating spread because it is comparatively lower than the fixed spread.
