How to choose a forex broker
Being confident in a forex broker allows traders to devote all their time and attention to perfecting their strategies and becoming successful forex traders.
Key points:
- Choosing a forex broker is the first and most important step for new traders entering the market.
- There are several features to consider when finding a broker, most notably selecting a broker with low spreads, a variety of markets to trade, a demo account, and resources to help improve trader knowledge.
- When conducting research on forex brokers, make sure to find a reputable and regulated broker in the jurisdiction where the trading will take place.
While there’s no one right way to start forex trading, there are common paths that many traders follow.
It starts with learning the ins and outs of the forex market. Traders will typically then use their new knowledge to develop a strategy and a defined trading plan, which they test until they’re happy with the results. That’s usually when they feel ready to take on the markets. However, there’s one very important part that happens before any of this: finding the right broker!
In this article, we’ll explore what forex brokers are, what they do, and how to find the best one for every trader's specific needs.
What is a forex broker?
To understand what a broker is and what they do, we need to briefly describe the market in which they operate.
The currency market is decentralised, meaning there’s no single exchange that all transactions go through – unlike, for example, the New York Stock Exchange or London Stock Exchange. Instead, the forex market is built on an interbank system – a global network where financial institutions trade currencies directly between themselves.
For everyday retail traders to access this network, they need to use a broker. Brokers enable traders to buy and sell currency pairs and offer services like leveraged trading. In turn, brokers make money from the spread – the difference between the buy and sell price – and other fees such as commission charges.
How to choose a forex broker
Choosing a forex broker to trade with isn’t as difficult as a trader might think – even if they are brand new to trading. Start by reading the below list of factors that are important to traders, then use the information to help compare and choose a broker.
- Spreads, costs, and commission
- Variety of markets to trade
- Types of brokers
- Execution speed and slippage
- Trading platform and tools
- Regulation
- Customer support
- Leverage and margin
- Risk management options
- Trading education
- Options for managing funds
- Trading account options and features
- Reputation
1. Spreads, costs, and commission
The spread is the difference between the bid (buy) and the ask (sell) price. In general, the lower the spread, the better it is for the trader. That’s why it is common to see brokers promoting "low spreads”. Check out our live forex spreads in real time.
For example, if EUR/USD is priced at 1.1610/11, a trader could buy the currency pair at 1.1611 and sell it at 1.1610. The difference (1 pip) is what the trader pays as a cost of the transaction. Remember: most brokers earn their income primarily from spreads.
The commission is another charge to consider. Many brokers offer different account types that suit different styles of trading and come with different fee structures.
For example, one account might charge no commission on trades but have slightly higher spreads, while another account might offer lower spreads but have a separate commission charge. That structure is designed so the trader can choose the account type that’s going to work best for their trading strategy and cost them less.
Swaps are another important consideration for traders who open and hold currency positions overnight. These types of trades incur fees, known as a swap rate, and these can be positive or negative, depending on which currency pair is being traded and whether they are long or short.
2. Variety of markets to trade
A strong broker should have a variety of trading products available to trade. Even if a trader is primarily focused on currencies, it’s good to know there are other options available.
For example, traders might spot a trading opportunity in oil, cryptocurrencies, or the stock market that they want to take advantage of, and it would be frustrating if they couldn’t take it simply because the broker didn’t offer that product.
Aside from currencies, look for a broker that offers access to commodities, indices, shares, and cryptocurrencies.
3. Types of brokers
One of the most important things to know about a broker is how they operate within the foreign exchange market. Discover some of the types of forex brokers below:
- Market Makers don't hedge their client's positions with liquidity providers, but instead, take the risk themselves. This means a client's loss would be the broker's profit, and vice-versa.
- STP (Straight-Through-Processing) means there is no manual intervention from the broker when orders (trades) are executed. For the broker, it’s in their best interest that the clients make money, as they will likely trade more and stay with the broker for longer.
- DMA (Direct Market Access) is a similar concept to STP. The key difference is that STP brokers can fill orders directly and hedge them with liquidity providers. On the other hand, DMA means orders are sent directly to the market and filled based on the pricing received by the liquidity provider.
- ECN (Electronic Communication Network) brokers use an Electronic Communication Network to automatically match buy and sell orders.
4. Execution speed and slippage
For most traders, execution speed is important as it provides more accurate pricing in a fast-moving market. However, it’s especially important for traders who use scalping strategies or Expert Advisors (also known as automated trading or ‘trading robots’) that process many transactions in a short time. In these scenarios, delayed trades – even by milliseconds – can cost money. Note here that demo accounts, which allow traders to test a broker’s service, are not always an accurate representation of the execution speed of the live trading environment.
Slippage occurs when a trade order is executed at a different price than initially quoted. For example, if a trader sets a stop-loss order for a buy position at 1.1020 but it gets filled at 1.1019, they have just experienced a negative slippage of 1 pip. Slippage can be both positive and negative – sometimes a trader might get a better price on their limit order than they initially set.
It’s important to note that slippage cannot be eliminated by brokers, but it is more notable during high-risk market events – such as NFP (Non-Farm Payroll) or a central bank meeting – where liquidity can be thin. Traders should therefore be aware of the potential for slippage and prepare accordingly.
5. Trading platforms and tools
Many brokers offer their clients access to the MetaTrader 4 (MT4) trading platform, then complement it with additional trading tools and resources. Some examples of these include:
- A copy trading app that allows traders to copy other proven traders, based on their performance.
- Automated technical analysis tools, such as AutoChartist.
6. Regulation
Trading with a licensed and regulated broker is important. At the most basic level it gives traders assurance that there are certain standards in place and that if something was to go wrong and the broker was unable to resolve the issue independently, there is the possibility of going to a regulator to have the concern addressed fairly.
If the broker is operating in multiple jurisdictions, look for the corresponding regulation. Examples of this are the Financial Conduct Authority (FCA) in the United Kingdom, the Australian Securities and Investments Commission (ASIC) in Australia, the Financial Markets Authority (FMA) in New Zealand, and the Monetary Authority of Singapore (MSA) in Singapore.
7. Customer support
As with any service, things can go wrong – it’s a platform outage, a pricing error, an incorrect account statement, or some other technical issue. No broker is immune to this, but as a trader, it's important to know that the broker is reachable and that they will be accountable, and act quickly to resolve issues and in a fair manner. It’s also worth checking to see that the broker offers support in your language.
At Axi, we have created hundreds of supporting articles to answer the most common frequently asked questions at our Help Centre. If there is a problem that doesn't have an answer in the Help Center, please contact our support team over live chat (24/5).
8. Leverage and margin
In certain jurisdictions, the maximum amount of leverage available is set by the local regulator and there will be no differences between brokers. In other jurisdictions with no leverage restrictions, the amount of leverage is flexible to suit the client. Whatever levels are available, it’s very important to remember that the more leverage that is used, the higher the risk.
9. Risk management options
Most brokers will offer free access to a demo account which lets traders open trades in a replica trading environment using virtual funds. While demo accounts will expire after a set period (most commonly a month), clients who open a live account will often be given the option to keep using the demo account indefinitely.
Initially, demo accounts are useful for testing out the broker’s products, pricing, and service. Later, it can be useful for testing new strategies without risking any real money.
It’s also worth checking whether the broker supports all order types that help traders manage risk. At a minimum, this should be a stop-loss order to minimise the potential risk on trades, alongside a take-profit order.
10. Trading education
Brokers often offer education and tools to help their clients build trading skills and knowledge. This can vary from simple blog posts to e-books and courses or proper online academies and partnerships with specialist educators. In-person seminars and online webinars are also popular ways to help traders progress on their journey.
At Axi, education is an important part of helping our users learn and stay up to date with changes in the markets.
11. Options for managing funds
Having multiple options to deposit and withdraw funds from a trading account can be handy. Typically credit card deposits are the most popular, efficient, and safe way to deposit funds, but some brokers offer localised options for certain markets (for example, P24 in Poland). The available options have been increasing over the past years, and deposits/withdrawals using cryptocurrencies are increasingly common.
12. Trading account options and features
Brokers generally offer multiple account types to suit different traders and strategies. Most will have a ‘Standard’ account that has all the necessary features for ‘everyday’ traders and is designed to make the trading process as simple as possible.
Traders will also find accounts targeted to Professionals and these might have additional features or separate pricing structures. Beyond this are things like VIP accounts for higher-volume or high-net-worth traders, plus targeted accounts such as the ‘Swap-Free’ account, which is for Islamic traders who, for religious reasons, are not able to be charged or credited with interest payments.
13. Reputation
Sometimes the only way to find out if a broker is the right one is to try them. However, doing a bit of research first certainly helps narrow the field.
Things like checking out reviews, discussions on trading forums, news releases, awards, and publicly listed financial information can very quickly help to build a profile about whether the chosen broker is trusted and worthy of your business.
What is the best broker for new forex traders?
Here’s a quick checklist to make sure the broker being researched has plenty of features that someone new to trading will benefit from.
- A free demo account and access to a trading platform like MT4.
- Tutorials to help traders learn to use the trading platform.
- Free educational content and events (including seminars and webinars) that will help build and develop trading knowledge.
- Reliable customer support, in languages that you need.
- Self-service options so traders can manage their accounts, including deposits and withdrawals.
- A range of trading tools, such as copy trading, and other indicators help with basic market analysis.
How do I calculate forex trading costs?
Depending on the account type, there are three major factors to consider when calculating the cost of opening a forex trade:
- The spread (difference between the bid and ask price) can be calculated by looking at the broker's pricing for the specific currency pair. Spreads are variable and can change abruptly, especially during times of high volatility.
- Commission charges by brokers are fixed and therefore easy to calculate. They can change, but typically this does not happen frequently and will be communicated to clients in advance.
- Swap charges should also be considered for positions held overnight, or for a prolonged period. If traders are trading a currency pair where the interest rate differential is significant, and they are buying the low-yielding currency against the high-yielding currency, costs can add up quite quickly. Swaps are variable, so traders need to keep a close eye on them.
How do I know if my forex broker is regulated?
The majority of brokers will display regulatory information in the footer of the website and legal documents, along with risk disclaimers and other information. It will also state within the application form when opening a trading account. To verify if the information provided is accurate, traders can always check the regulator's website to find out if the broker is listed there.
For example, let's say a trader wants to verify that Axi is regulated by the FCA. On the Axi website, Axi's FCA reference number (509746) is listed in the footer. Traders can then head to the FCA website and enter the reference number in their registry: https://register.fca.org.uk. By clicking on the search button, users will be able to find Axi's listing in the registry.
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This information is not to be construed as a recommendation; or an offer to buy or sell; or the solicitation of an offer to buy or sell any security, financial product, or instrument; or to participate in any trading strategy. It has been prepared without taking your objectives, financial situation, or needs into account. Any references to past performance and forecasts are not reliable indicators of future results. Axi makes no representation and assumes no liability regarding the accuracy and completeness of the content in this publication. Readers should seek their own advice.
FAQ
Are forex brokers reliable?
The retail forex industry has evolved a lot since its early days. There is now a lot of competition amongst brokers, resulting in better trading conditions for clients, enhanced product and service offerings, and continued investment in new technology.
If traders choose a broker that is regulated in a reputable jurisdiction and has a good reputation online, there’s less to worry about when it comes to starting to trade. Of course, things can still go wrong, or traders might find that the broker's services don't meet their specific requirements. However, a reputable broker will have procedures in place to deal with clients´ concerns and complaints and address them properly. Dealing with a regulated and reputable broker should also give traders some assurance that they will have fair trading conditions and that the platform will perform as promised.
For additional peace of mind, traders can open an account with a broker where client funds are protected – whether it’s all or just up to a certain amount – or where Client Money Insurance is part of the service. Traders can also ask the broker where client funds are held – if it is in a reputable financial centre or offshore.
Overall, if traders conduct some basic checks, they should be able to find a reliable broker without much effort.
Is $100 enough to start trading forex?
Yes, it is possible to open an account and start trading with only $100. However, be aware that the options available will be limited, and unless you trade recklessly or with high risk (which is not recommended, not least because it could help set bad habits), trader's returns will be limited. While a return of 2% on a single trade might sound like a great result, it may be less motivating once realised it only resulted in a $2 gain.
While starting small can be a good way to learn the ropes without risking too much capital, there is always the danger that – unless traders are very disciplined – they'll get carried away and start risking a larger percentage of their capital to maximise those returns.
Of course, the solution to this is not to deposit more funds if:
- Not ready for it
- Cannot afford to lose them. Instead, consider going back to your demo account to keep testing your strategy until you feel comfortable.
