6 Things to Consider Before Choosing an FX Broker

Selecting a Forex broker can be a difficult task.  There are many factors that go into selecting the right broker for your trading account.  It might sound as simple as selecting the broker who offers the tightest spread and the highest leverage, but much more should go into the decision making process.  Below are 6 things you should consider before opening an account with a broker.

  1.   Pricing Model:  All In Spread or Raw Pricing + Commission, which is right for you?

The two main pricing models are All In Pricing and Raw Spread + Commission Pricing.  When choosing which model is right for you, it is important to consider total trading costs and the triggering of resting orders.

Below are simultaneous screenshots of FXCM’s two pricing models (All In Pricing vs. Raw Spread + Commission Pricing)

  All in Pricing                                                                            Raw Spread + Commissions

                                                           

On the left, the total cost of trading is the spread, or 1.3 pips.

On the right, the total cost of trading is the Raw Spread + Commission (in this instance $4/lot/side or in Eur/Usd terms, 0.8 pips) or 1.1 pips. 

In this example, it is clear that the lower cost of trading can be realized with the Raw Spread + Commission (a savings of 0.2 pips).

There is another benefit to this pricing model as well.  Imagine that you have a buy limit order at 1.11418 or conversely a sell stop at 1.11412.  With the All In Spread, your limit order would not be triggered and your stop order would, while on the Raw Pricing + Commission, your limit order would be triggered and your stop order would not.  For those that trade with resting limit and stop orders in the market, it is preferable (all else being equal) to trade on Raw Pricing + Commissions because you are more likely to have your take profits triggered and less likely to have your stop losses hit as a result of the tighter spread.

  1. Execution Model – Dealing Desk vs. Non-Dealing Desk

Execution is an important component when selecting a broker.  There are generally two types of execution models: Dealing Desk and Non-Dealing Desk.  A Dealing Desk execution model is one in which the broker acts as the counterparty to each of your trades (think, “when you buy Eur/Usd, the broker sold it to you”).  The Dealing Desk broker will generally make its money through the spread and managing the risk associated with taking the opposite of its clients’ positions.  A Non-Dealing Desk execution model is one in which your broker aggregates pricing from a variety of liquidity providers and then shows you the best bid and offer.  The Non-Dealing Desk broker will generally make its money by charging a commission. 

Over the years, conspiracy theorists like to argue that Dealing Desk brokers are manipulating pricing to trigger client stop losses and otherwise cause the client to lose money.  While that may have been the case years ago (and perhaps still today with unscrupulous brokers), most Dealing Desk brokers are providing a fair trading environment like their Non-Dealing Desk broker counterparts.

The benefits of trading against a Dealing Desk are often instant execution on all trades up to a certain size, whereas trading on a Non-Dealing Desk will typically offer lower costs of trading but include slippage where there is insufficient liquidity at a particular price.  The drawbacks are a typically slightly higher all in costs of trading than trading with a Non-Dealing Desk. 

  1. Trading Platforms – MT4, Proprietary or Third Party

Choosing a platform is a big question mark for many traders.  When it comes to choosing between a broker’s proprietary platform, MT4 or some third party plugin, our initial advice is to use that which is most comfortable for you when trading.  Trading is hard enough, so don’t further complicate matters by using a platform with which you are unfamiliar.

But for those who are a clean slate, our approach follows this line of thought:

  1. If your mentor or educator trades on a certain platform it is generally better to stay with that platform so you are comparing apples to apples when reviewing charts and discussing trades
  2. If you are a discretionary trader, most proprietary platforms are more conducive and intuitive to use than MT4.  Conversely, if you are using or developing an Expert Advisor or custom indicator, MT4 offers a very flexible and programmable platform
  3. If you are still undecided, choose the broker’s proprietary platform as our experience tells us that it is a more reliable and stable platform

Ultimately, most trading platforms will offer the same functionality and display the same data.  Find your comfort zone and focus on trading rather than your trading platform.

  1. Which Regulatory Body is appropriate?

One of the most important items when selecting a broker is Regulation.  At Forest Park FX we always advocate for traders to work with brokers who are supervised and well regulated.  This typically includes brokers regulated by NFA (US), FCA (UK), and ASIC (AU).  That doesn’t mean that brokers regulated in these jurisdictions are all good, and it doesn’t mean that brokers regulated in other jurisdictions are all bad.  But, it should make you stop and think why there are so many startup brokers in Cyprus, New Zealand, South Africa or other jurisdictions – The reason is that it is much easier for brokers to get registered in these jurisdictions as they tend to have lower capital requirements, looser policies and procedures, and limited oversight and enforcement powers.  This is good for the broker, but bad for you as the client.  Where you have minimal protections as a client, expect bad things to happen.    

Often times these unregulated or under-regulated brokers have appealing offerings on the surface, such as deposit bonuses or extremely high leverage, but trading conditions and withdrawals can present problems.  It is best to avoid them all together and stick with strongly regulated brokers.

  1. Which broker best suits your trading style?

Trading styles, like brokers, vary greatly.  You have high frequency traders (HFT), arbitrageurs, scalpers, price action traders, intraday traders, swing traders, position traders, hedge traders and others.  Choosing the correct broker for your trading style can make the difference between success and failure.  Liquidity, execution quality, execution speed, and pricing are key factors to consider in choosing a broker.  If you are a high volume trader that is in and out of the market quickly then fast execution and low costs of trading are two of the most important factors for consideration.  If your strategy is built on long term position trades you will want to consider the swap rates and price stability of a broker through all market conditions (liquid, illiquid, news events, and rollover).  

Once you know who you are as a trader and the strategy you plan to deploy, you can then ask the right questions to the brokers you are considering or your introducing broker, who can help you to find the right fit for your strategy. 

  1.  Can An Introducing Broker Add Value?

Not all introducing brokers operate with integrity and the trader’s best interests at heart.  Some will only introduce you to the broker where they make the most money.  Some will markup your costs of trading.  Some will revenue share with the broker and hope you lose money.  These are obviously not brokers that are adding value to you.  Like anything else in life, having a roadmap and a trusted guide can help you avoid the pitfalls in choosing a broker. 

At Forest Park FX, we have an intimate knowledge of the FX broker landscape and can help all different types of traders find the right fit for them.  And, in the process, we offer additional value through our cash back rebate program which will reduce your costs of trading below what you would get by opening an account directly with the broker and the concept of strength in numbers.

As an individual trader you are one account, one voice.  But by working with a well-respected and large introducing broker that introduces hundreds of clients to that broker, you benefit from the other clients we have introduced to that broker and the prospect of all the additional clients we will introduce to that broker.  Because Forest Park FX is a major referral source for our brokers, they know that our clients must be treated with the highest level of professionalism and fairness or they risk losing Forest Park FX as an introducing broker. 

Choosing market direction is hard enough.  Let Forest Park FX help you choose your broker. 

About Forest Park FX

Forest Park FX is a CFTC registered, NFA member Forex introducing brokerage firm.  With an experienced staff of industry professionals, Forest Park FX specializes in creating custom FX brokerage and trading solutions for retail traders, service providers, institutional traders, money managers and hedge funds. Forest Park FX offers a wide variety of value-adding services, including market access through the world's top Forex brokers, cash back rebates for retail traders, built-to-specification trading algorithms, administrative and operational support for money managers and customized liquidity for hedge funds and high volume traders.

Risk Disclaimer

Before deciding to participate in the Forex market, you should carefully consider your investment objectives, level of experience and risk appetite. Most importantly, do not invest money you cannot afford to lose.  There is considerable exposure to risk in any off-exchange foreign exchange transaction, including, but not limited to, leverage, creditworthiness, limited regulatory protection and market volatility that may substantially affect the price, or liquidity of a currency or currency pair.  Moreover, the leveraged nature of Forex trading means that any market movement will have an equally proportional effect on your deposited funds. This may work against you as well as for you. The possibility exists that you could sustain a total loss of initial margin funds and be required to deposit additional funds to maintain your position. If you fail to meet any margin requirement, your position may be liquidated and you will be responsible for any resulting losses.  Ambassador Capital Management, LLC (d/b/a Forest Park FX) is registered with the Commodity Futures Trading Commission as an Independent Introducing Broker and is a member of the National Futures Association (ID# 0457189).

 

 

Risk Disclaimer

Before deciding to participate in the Forex market, you should carefully consider your investment objectives, level of experience and risk appetite. Most importantly, do not invest money you cannot afford to lose.  There is considerable exposure to risk in any off-exchange foreign exchange transaction, including, but not limited to, leverage, creditworthiness, limited regulatory protection and market volatility that may substantially affect the price, or liquidity of a currency or currency pair.  Moreover, the leveraged nature of Forex trading means that any market movement will have an equally proportional effect on your deposited funds. This may work against you as well as for you. The possibility exists that you could sustain a total loss of initial margin funds and be required to deposit additional funds to maintain your position. If you fail to meet any margin requirement, your position may be liquidated and you will be responsible for any resulting losses.  Ambassador Capital Management, LLC (d/b/a Forest Park FX) is registered with the Commodity Futures Trading Commission as an Independent Introducing Broker and is a member of the National Futures Association (ID# 0457189).