While most traders focus on finding the one forex broker that will offer them the best pricing for their orders or the highest leverage ratios, there’s a case to be made about the importance of sacrificing lower transaction costs for better security, reliability and support.
After all, the price you see when you look at your forex charts and feeds isn’t unequivocally guaranteed and by the time your order is executed, the market might have moved considerably – leaving you to pay the difference.
What you should take away from this is that it’s all about balance and most of the time it’s worth it to take a small hit in fees in order to save money in the long run and avoid further headaches and dodgy practices from untrustworthy brokers.
First thing’s first: What is a forex broker?
It’s quite simple really, your forex broker is your gateway into forex trading as well as a variety of other financial markets. The market is highly competitive which pushes brokers to offer even more attractive opportunities to clients including access to cryptocurrencies, CFDs, commodities and stocks or indices.
To trade forex, you need a broker who will give you access to the market and most importantly access to the live prices or exchange rates between the currency pairs or instruments that are available for trading in the broker’s offering.
The broker is the one who will provide you with the platform and the one who will act as an intermediary for all your trades. In order to make any meaningful profit from trading you need to be able to trade thousands of units of currency in a single trade and that’s only made possible through the vast liquidity your forex broker can afford.
However, a broker can also be much more than that and this is why you need to ensure that you are trading with the one that provides you with the most favorable conditions as well as the best trading experience.
The nitty gritty: regulation
Since the forex market is as vast as it is fragmented and decentralized, it’s incredibly hard to oversee and regulate. This is why there are hundreds of financial regulators in multiple jurisdictions that set the operating standards for forex brokers and other investment firms. If a broker aims to acquire the coveted license from a prestigious financial regulatory authority in the region, it needs to operate within the regulator’s requirements which mandate that the broker always acts in its clients’ best interests, that trades are executed swiftly and accurately to the best of its abilities and most importantly that clients funds are segregated from the broker’s operational funds and are safe regardless if the broker defaults.
Therefore, it makes sense that traders should always make sure that they are trading with a regulated or licensed forex broker.
Pricing and hidden trading costs
As we already mentioned, unlicensed brokers may sometimes provide better upfront fees with much tighter spreads than a regulated broker, but the live price feed may be misleading. Exchange rates between two currencies may change due to a variety of reasons like market sentiment, uncertainty due to an economic or political announcement or even because it’s that time of day.
If the broker doesn’t meet the minimum liquidity requirements imposed by a regulatory authority, you may find that the spreads or the fees you pay to execute a trade have increased exponentially to the point where your trade is automatically closed by the broker because you don’t have enough free margin to cover the position open. And this can happen in milliseconds without any notice and even regulated brokers that meet all the necessary requirements can be unable to cover such fast-moving markets.
Then you have requotes and slippage. Two huge pain points for traders as when you see a requote or slippage, it means you didn’t get the price you requested and instead your order got filled at the next best available price. Admittedly, while both regulated and unregulated broker fall victims to requotes and slippage, a regulated broker will definitely provide a leaps-and-bounds more consistent trading experience with fewer requotes and slippage that sometimes even provides you with a better price than the one you were initially quoted with.
From onboarding to your first withdrawal
Another important aspect of having a reputable broker on your side is the smooth and speedy onboarding process and of course a hassle-free withdrawal experience.
Regulators require that all brokers under their license comply with strict KYC (know your customer) procedures which means you will have to provide your broker with some means of properly identifying your person. This may include a copy of your ID or drivers license and a proof of address record. Don’t worry though because this guarantees that your broker is actually legit and operates with the regulator’s mandates that aim to combat money laundering and other malicious activities which ultimately serves to protect the customers themselves.
However, usually, there are automated systems in place that make this process as painless as possible and you shouldn’t wait long before your account is activated and ready for trading. In the meantime, you will probably be eligible to trade on your broker’s demo account which simulates real market conditions on the same forex charts you would get if you were trading for real. Demo trading is of course highly recommended traders especially if you are still unfamiliar with the trading platform.
It goes without saying that when you do eventually get approved and your account is finally activated, you can make your first deposit in your trading account and trade normally. A less-than-honest broker, however, will try and make your life difficult when it comes time to withdraw your funds back to your trading account. If the broker isn’t regulated, then you won’t have anyone to turn to in order to complain either and you may have a hard time getting your money out.
On the other hand, a licensed broker will have multiple payment methods available so you can withdraw your money without issues and your withdrawals will be processed within a few business days at the latest.
Customer service is make or break for the relationship between client and broker because the broker is dealing with client’s money which is quite a sensitive issue and since the market is inherently volatile and unpredictable, disappointment is bound to happen. There are brokers though that go above and beyond to provide clients with timely assistance and proactive advice to eliminate any unforeseen events and their consequences.
The bottom line
There are several criteria you should take into account when considering a forex broker including pricing, licensing, order execution practices and customer service. Spreads and pricing in general do play an important role in trading forex, especially depending on the strategy you are using, but it’s important that you factor in all the other aspects of the trading experience before selecting a broker. Otherwise you will soon come to find that the money you save on a few transactions are not worth the issues that will inevitably come after.
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HIGH RISK WARNING:
Trading Foreign Exchange (Forex) and Contracts for Differences (CFD’s) is highly speculative, carries a high level of risk and may not be suitable for all investors. You may sustain a loss of some or all of your invested capital, therefore, you should not speculate with capital that you cannot afford to lose. You should be aware of all the risks associated with trading on margin.
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