What criteria is crucial while choosing a broker?
If you decided to get involved in foreign exchange market trading, one of the major decisions which you need to accept is the broker's choice. You shouldn't approach this task thoughtlessly: working with the unfair broker you will lose money even if you are the guru of the trading analysis.
Now in the market, there is as plenty of companies giving to the clients opportunity of independent trading and for the unprepared person, it is quite difficult to understand which one to choose.
Today I want to talk about how to choose the correct broker from all varieties of brokers.
So, 10 main things to which it is necessary paying attention while choosing a broker.
1. The “legit” broker is not a “scam”
Essentially all brokers can be divided into two categories: “legit” and “scam”. “Legit” broker earns on the commissions which clients pay for each transaction. Thus, he is interested in clients' success — the more money they make, the more transactions would be made, and respectively, the higher would be commissions received by the broker.
“Scam” brokers work by the opposite principle: they are interested not in the commissions, and in your deposit. Similar brokers, as a rule, work with the zero commissions and are generous with various bonuses in case of account depositing.
It is possible to allocate two main schemes of scam brokers work. First, is by provoking the clients to make risk transactions: it can be and unfairly huge leverage, and various commissions for inactivity, and, on the contrary, any bonuses for activity. The idea consists in the fastest possible loss of client's deposit.
The second scheme of work consists in substitution of real quotes those values are profitable to the broker, but not to you. Most likely, in the contract with the broker somehow will be mentioned this scheme, like “during the periods of high volatility, the quotes can differ/be late”. The broker will create the illusion of trading, but actually the trader won't see the real market. He will see an only certain simulation on the market and will lose the deposit for the broker's benefit.
2. Serious regulation
One of the main rules is to pay attention to jurisdiction in which the broker (and in which regulation its activities are performed) works. People for some reason often neglect this rule, though the availability of the serious regulator will protect you from counter-party risks if not completely, then considerably will lower them. At the moment, there are three good jurisdictions: US, UK and MiFID (The Markets in Financial Instruments Directive) and most of the high-quality brokers work in one of them, but not in offshore zones.
The serious license is a guarantee of trader's means safety.
3. Wide choice of tools
The beginning trader, as a rule, pays not enough attention to the set of financial instruments offered by the broker. Really, for beginners a wide variety of available assets can seem something frightening or simply not basic, however here it is necessary to consider two important points:
- As a rule, a large number of the financial instruments testifies to the quality of the broker.
- It is necessary to think about the future: perhaps, today you don't need a similar variety of tools, but what will be tomorrow when you will become a professional market player?
4. Multiple currency accounts
Availability of the multiple currencies accounts for trading in various assets will become one of the important benefits to the beginning traders. Modern brokers have an automatic converting of means and the opportunity to work along with several accounts in different currencies.
5. Convenient terminal
The trading terminal is the program through which you can trade at the exchange market. There are many various terminals which considerably differ both by the opportunities and by the convenience of the interface.
Most of the brokers provide to the clients a demo account, and I recommend trying some different terminals.
6. Transparent commissions
Study very thoroughly the structure of broker's commissions — some unfair participants of the market like to advertise the low commissions, “forgetting” to tell clients about various hidden payments: for the lease of the terminal, for account management etc.
The ideal option is the payment only for the transaction. It is convenient, clear, transparent and allows planning the actions in the market much better: you don't need to touch convulsively one million papers in which the small print painted all commissions precisely to count your costs for this or that transaction.
7. Commission structure shall correspond to your trading strategy
Choosing the broker, it is necessary to imagine at least approximately how frequently are you planning to enter the market. At some brokers, the structure of the commissions is constructed so that with them it is profitable to make a set of transactions, at others — the opposite. Respectively, at least approximately estimate the planned activity level in the markets and you look at the broker commissions through a prism of your own approach to the trade.
8. Serious infrastructure
With the development of technologies the infrastructure of the broker becomes one of the main competitive advantages — the servers located at the largest exchanges (or next to them), allow executing exchange requests with the minimum delays.
9. Lack of proprietary trading
Proprietary or prop trading represents an independent trade of the trader on his own means. It creates serious risks for client means.
If you address to any large western broker from giants of the market, with a probability of 99% he is engaged in prop trading. I don't want to tell that prop-trading is a sign of unfair broker. Absolutely optionally, but it is an additional risk anyway. Choose the broker who isn't engaged in the independent trade.
10. The matter of size
This most important rule while choosing any partner. Your size and the size of your partner shall be comparable, otherwise requirements won't be satisfied.
If you work with a small broker, in some cases you can expect personal service, up to the addition of separate trading instruments according to your desire — it is absolutely impossible in the case of large players.
In general, here are the main things to which it is necessary to pay attention while choosing a broker. Do not forget the choice strongly depends on your specific trading strategy and your personal requirements.