Top 10 considerations when choosing a forex broker

Last Updated: 20/03/2021

At Choosabroker we only look at regulated and established firms with a proven track record, giving you peace of mind when choosing the best forex broker.

One of the most overlooked aspects when developing a successful trading strategy is its execution. A sound trading idea or strategy that looks good on a bar chart, and is consistently profitable when traded on a simulated account, can sometimes fail miserably when traded on a real account with real capital. There are several reasons for the cause of this dilemma, some of which can be attributed to the broker that is selected to trade with. Transaction costs (including spreads, fees, and commissions), speed and quality of execution, liquidity, and customer service are some of the important factors that should be considered.

Extensive due diligence is warranted when selecting the best online broker. After all, it will be money that you will be entrusting them with. Below is a list of items to consider when selecting a broker. Choosabroker take the following factors into consideration when we evaluate brokers in order to help you in the process of choosing the best broker. Nonetheless we would like to highlight key factors we deem important when you read our broker reviews in more detail.

  1. Spread Costs

First and foremost to be considered are transaction costs. When developing a trading strategy, it is imperative that transaction costs be minimized and accounted for. Every trade, both on entry and exit, will incur a cost in the form of a spread. The spread is the difference between the bid and ask price that the broker quotes and will vary depending on market conditions. The ask price (also referred to as offer price) is always higher than the bid price, and traders buy from the broker at the ask price, and sell to the broker at the bid price. Consequently, traders are obliged to conduct their buy and sell transactions on the opposite side of the spread. This means that when a trader initiates a trade, it is immediately out-of-the-money (cost) by the same amount as the spread. Price must trade across the spread before the trade becomes profitable.

  1. Commission Costs

Some brokers will offer customers an option of paying commission fees on trades in exchange for tighter spreads. Brokers will offer various types of accounts with several options all of which have advantage and disadvantages. Traders should select the type of account that is most conducive to generating profits with the specific type of trading strategy that is being implemented. These costs are subtracted from the gross profit/loss. It therefore follows that lower costs results in higher profits.

  1. Swap/Roll-Over Interest Costs

Most forex brokers will charge a swap/rollover fee when you keep a position open overnight. This fee takes into account the interest rate differential between the two currencies of the pair. The fee could be positive (a credit) or negative (a charge) depending on the currency pair and whether your position is long or short. Some forex brokers don’t charge this fee at all.  This can have a major impact on choosing the best forex broker for you.

  1. Leverage

Leverage will vary from broker to broker. For traders that utilize a high degree of leverage as part of their trading strategy, a review of a broker’s leverage policy would be prudent. The amount of leverage allowed my also vary depending on the size and type of account and will ultimately determine the capital and margin requirements for trading.

  1. Technology

Computer technology has become an integral part of trading all financial markets; this is especially true for the forex market. In today’s forex market, the use of trading technology offers traders a tremendous advantage. Most brokers offer multiple leading trading platforms. One of the most popular platforms used in the forex market is MetaTrader4 (MT4). MT4 includes excellent trade execution, comprehensive technical analysis capabilities, and is fully mobile for trading on the go. When combined with the MetaEditor and its MQL4 Programming Language, custom trading strategies can be developed, back-tested, and automated. In addition to MT4, many brokers also offer their own proprietary trading platform.

Most proprietary trading platforms are as good or better then MT4. Another important feature that is a must for traders is a trading simulator that mimics the real market as much as possible. Most brokers will allow traders to open a demo account and do as much simulated trading as they want at no cost, while other brokers do place limits on their demo accounts with the expectation that a real account will be opened.

  1. Assets Offered

Most forex brokers list quotes and make-markets for all the major currencies and the crosses. As for the exotic currencies, some brokers will list them, and some won’t. For traders that trade exotic currencies, a close review of what exotics are available to trade with a particular brokerage, and the contract characteristics for them is warranted before selecting a broker. Also important is what assets other than the forexes that a broker lists quotes for. This is important if a trader already trades, or plans to trade other assets including stocks, ETFs, commodities, indexes, and cryptocurrencies.

  1. Quality of Execution

Execution of trades is ultimately the most important element when choosing a broker. Things to consider include the speed of the execution, especially in fast moving markets. Executions that take too long could result in excess slippage and may determine the difference between a trade being profitable or a loser. Restrictions on stop and limit orders should also be taken into consideration. Most brokers are going to require a specified price interval from the prevailing inside market whereby stops and limit orders can be placed. Also important is whether or not a broker allows hedging.

  1. Tax Laws

The physical location of the selected broker will have an effect on a trader’s tax liability resulting from profits generated. The tax policies of the trader’s home country with respect to the location of the broker will vary from country to country. Traders should ensure that they are not in conflict with any of their home country’s tax laws.

  1. Customer Service

The hallmark of a good broker is its customer service. Issues with bad trade executions and technical problems are inevitable. How a broker’s customer service department deals with said problems is what will keep customers with them. It goes without saying that with the level of competition for customers in the forex brokerage industry, brokers cannot afford to lose customers.

  1. Broker’s Reputation

An extensive level of due diligence on a broker’s reputation is well warranted when selecting a broker. Research should include the founders and executive management of the broker, its corporate structure, and the governing jurisdiction (if any) that it falls under. As with any industry in today’s competitive business environment, the forex trading industry has to contend with good and bad reviews posted on social media. Checking theses reviews, both good and bad, will shine a spot-light on any red flags. Based on your day trading experience there are a number of brokerages that are more suited to beginner investors and others for the more experienced investors.