A Guide to Choosing a Forex Broker

There are so many retail Forex brokers to choose from and there are many horror stories from past clients suggesting to stay away from particular brokers, that choosing the right broker can be a daunting task. To make things easier for you, I have compiled a short guide to Forex brokers. I have had accounts with numerous Forex and CFD brokers over the years and have personal experience with each broker discussed in this post - I feel that I am in a strong, unbiased position to shed some light on Forex brokers and what to look for when considering a broker to trade with...

What types of Forex brokers are there?

To make Forex trading more confusing, there are a number of different types of Forex brokers. These types of broker include market makers, STP brokers and ECN brokers.

Market Makers - Market Makers are brokers that hold onto client positions in order to offset positions against each other. For example, a client may buy 2 lots of EURUSD. The market maker will then seek for opportunities to sell 2 lots to another client, matching the client positions and eliminating the risk of being exposed to client positions. Due to the risk of brokers holding onto positions before they can hedge against a client, spreads are usually wider with market maker brokers.

Outside of the US, market makers can often take the other side of client positions. This can potentially create a conflict of interest. For this reason, market makers are usually viewed with concern and are seen as a broker not to do business with. A market maker that is well-regulated and well-established should be trusted though - there is no one on the other 'side' of your account trying to stop you out of positions or wishing you to lose.

Spreads are usually wider with market makers but there is no commission to pay when opening and closing positions. Trading through a market maker can be beneficial to newer traders as the trading experience is usually simplified. Some market makers also offer tax-free profit incentives. Spread betting providers and CFD brokers are popular types of market makers.

In layman terms, a market maker is a broker that makes a market and manages all positions within that market.

A highly regulated and widely-used market maker is Oanda. I personally trade with them and recommend them.

ECN Brokers - ECN brokers provide direct market access (DMA) to the Forex markets. They profit purely from commissions charged on positions. Due to this, there should be no conflict of interest between client profits and broker profits. Because the broker provides access to a much wider range of market participants than a market maker, spreads are generally non-existent or very tight.

Due to the nature of providing direct market access and trading with market participants such as banks, hedge funds and institutions, true ECN brokers require their clients to usually have an account size of at least $50,000 and trade in multiple standard lot size.

My recommended ECN broker is Think Forex.

STP Brokers - STP (straight through processing) brokers are a mix between market makers and ECN brokers. STP brokers should not trade against client positions but the option is open to them. The aim of an STP broker is to provide market access to their clients and profit through commissions. They provide very tight spreads and are a commonly used by the majority of professional retail many traders and investors. The difference between an STP broker and an ECN broker is that ECN (or true ECN) brokers only provide direct market access and profit through commission only. STP brokers have market maker options and are more suited to smaller retail clients.

I like STP brokers. My favourite broker is an STP broker! My recommend STP broker is Darwinex.

What does it mean if a broker has a dealing desk or no dealing desk?

If a broker has a dealing desk, this usually means that there is a physical dealer (a person) seeing and reviewing client orders and positions. This can raise some concern amongst traders and investors as the fear of brokers trading against them seems more likely. Brokers that have dealing desks are usually market makers.

If a broker has a non-dealing desk, this usually means that client orders and positions are automated through an electronic system. STP and ECN brokers usually have a no dealing desk trading model.

Darwinex are an STP broker that have no dealing desk.

Core Spreads are a market maker that have a dealing desk.

Oanda are a market maker that have no dealing desk.

What about regulation?

Forex brokers that are regulated by UK or US financial bodies are generally the most sought for. Beware of brokers that are regulated by financial bodies that are based in non-financial capitals. The financial capitals of the world include Singapore, Sydney, London and New York.

I have a short list of FCA regulated Forex brokers (UK regulation), this is available here.

Should I be concerned about negative reviews and Forum posts?

In short, no. Most brokerage clients that have a very negative experience will rush to share their review. Most clients that have a very positive experience will not rush to share their review. This makes on-line reviews very biased. If a broker is well-regulated and well-established, they are highly likely to be fine to trade with and are not wanting you to lose money.

How about New York close charts?

The New York close is the "official" time alignment for the Forex markets. Most professional traders use this time alignment for their charts. If you plan on trading on 4 hourly or daily charts, it is strongly suggested that you use New York close charts.

I have a short list of New York close Forex brokers, this is available here.

Anything else?

If you have any other questions about Forex brokers or Forex trading in general, please drop me an email - samuel@love-the-pips.com.

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