Forex Brokers 101 - The Ultimate Guide to Forex Brokers
Forex brokers can be a controversial subject...
Join me as I explain the basics, debunk the myths, define the challenges, and dispel the misconceptions...
Welcome to The Ultimate Guide to Forex Brokers!
"A Forex broker grants you (and me) access to financial markets. We cannot trade without them... In theory, using a broker should be very simple - we fund an account, place a trade, and the broker charges us a commission... The reality can be very different though... Let me explain why..."
An Introduction into Forex Brokers
Becoming a successful trader is not easy! One of challenges newer traders face is the steepness of the learning curve... There is just so much to learn!
To make things even more complicated, to become a profitable trader you will need to understand Forex brokers; how they operate, how and when they charge fees, times they widen spreads, leverage they offer, and regulation advantages... Just to name a few essential points.
The good thing is, I am here to help you! This page will teach you everything you need to know about Forex brokers, including some expert tips and pointers from myself - a professional Forex trader since 2008.
So, let's start with the basics...
What is a Forex broker?
A broker bridges the gap between a financial market and a trader - they provide traders with access to financial markets.
A Forex broker provides access to the foreign exchange (currency) market. If you want to trade Forex, you need a trading account with a Forex broker.
Why do you need a broker?
Without a broker, you cannot access financial markets. Without access, you cannot trade.
Many years ago, you could buy or hire a "seat" on a financial exchange (such as the London Stock Exchange), meaning you had personal, physical, and direct access to the exchange and the markets listed on that exchange. Nowadays, markets are usually accessed online. Using a broker is the only way to access financial markets.
How do you use a broker?
Gone are the days that you would phone your broker to place a trade. With the rise of the internet, almost all brokers offer online trading services - all trades are executed online using a trading platform offered by the broker.
A brokers trading platform is usually free of charge.
Trading platforms allow traders to view current and historical prices, view and analyse price charts, deposit and withdraw funds, place/open trades, manage current trades, and close trades.
In the Forex industry, the most popular trading platform is MetaTrader 4 (MT4), which is offered by most Forex brokers.
How do brokers make money?
There are three ways that Forex brokers make money. The two main ways are spreads and commissions, but all three are covered below...
Commissions - a broker may charge a commission each time you open a trade. A broker may also charge a commission when you close a trade but this is very uncommon amongst Forex brokers. Commissions are generally a percentage of the trade size you open, so a large trade would incur a larger commission cost than a small trade.
Spreads - the spread is the difference between current market price of a financial asset and the price the broker is willing to buy or sell the financial asset for. For example, the market price of EURUSD could be 1.1458. The broker may quote 1.1457 to sell and 1.1459 to buy. This difference is the spread.
Fees - brokers can charge a variety of fees, which may include...
Inactivity fees - a fee for having a trading account with the broker but not actually trading. Generally, not placing a trade within a 3 month period could incur an inactivity fee. Inactivity fees are not common for Forex brokers.
Withdrawal and depositing fees - sometimes an admin fee is charged for processing a withdrawal or a deposit.
Overnight/financing fees - most brokers charge a fee for keeping financed (leveraged) positions open overnight. More about leverage later on...
Brokers generally specialise in specific markets. Stock brokers offer access to stock markets, futures brokers offer access to the futures market, Forex brokers offer access to the Forex market, etc, etc.
Often though, Forex brokers will not just offer access to Forex markets. It is very common for a Forex broker to also offer access to stock indices (such as the FTSE and Dow Jones) and commodities (such as Gold and Oil). In more recent years, Forex brokers now also offer access to Cryptocurrency markets, and some Forex brokers now also offer equities (stocks and shares). This allows Forex traders to trade a range of markets and diversify, if desired.
So, why do Forex brokers offer so many markets? It's because Forex brokers are generally market makers...
The Market Maker - a broker that makes a market
Gaining access to the actual Forex market is very difficult and very expensive. It is generally out of reach for most independent traders, especially new traders. Because of this, Forex brokers make their own Forex markets that match and follow the real Forex market - historical price, current price, and future price will be the same as the actual Forex market, which is often referred to as the underlying asset.
Just as the Forex broker tracks the real Forex market and offers replica market to it's clients, it can do the same with other financial markets; stocks, commodities, indices, crypto's, etc, etc. Hence why Forex brokers usually offer multiple financial markets - they are extremely adept at making markets for their clients.
A Forex broker usually offers these replica markets in two main ways...
Contract for Difference (CFD) - a contract between the trader and the broker stating that the trader will pay the loss on the contract to the broker and that the broker will pay the profit of the contract to the trader. Don't get too concerned about all of this - a lot of this is just technical jargon - it will make very little difference to how you trade and your trading experience.
For independent (retail) traders, CFD trading is the most common way to trade Forex.
Spread Betting - a bet placed with the broker against the future movement of the underlying asset. Spread betting markets are usually priced in points and markets are traded by betting an agreed monetary value per point, which is a little different to CFD's.
Not all brokers are market makers, but in the Forex trading industry, most are.
Market maker can also be a term used to describe a broker that trades against it's clients. It's important to not get confused between the two different types, as brokers that trade against their clients usually have a negative reputation.
In summary, a broker that is a market maker is what the term suggests, a broker that makes markets.
Is it bad to have a market marker as your broker?
The short answer is 'no'. If a Forex broker is well regulated and has an established business, there should be nothing to be concerned about.
If your broker is actively trading against you and it's other clients though, this could be a cause for concern. At the date of writing, Oanda is a broker that currently fits the mould of a market maker that trades against it's clients. I suggest you stay clear of brokers like this.
Do all market makers trade against their clients?
A market maker is constantly balancing it's buyers and sellers of the markets it makes. The goal of the broker is to match buyers and sellers, so that the broker has no imbalance. If there is an imbalance, let's say lot's of buyers and very few sellers, or vice versa, then a broker must take action to reduce it's financial exposure caused by the imbalance. This can be done in a few ways...
Purchasing the underlying asset at market - to minimise the brokers risk to the potential profits made by it's clients, a broker may choose to purchase the underlying asset at market. Meaning, they will simply follow the trade along with it's client, which hedges against any risk - if the clients lose money, the brokers losses too but is compensated through the clients losses, if the clients make a profit, the broker does too.
Increasing spreads - a broker may decide to increase spreads, which can help reduce it's risk created by the imbalance. On the flip side, if a broker has lot's of client transactions and a very balanced financial market, the broker may choose to tighten it's spreads.
Taking the opposite side of the trades - a broker may decide to trade against it's clients positions. This may seem like it creates a conflict of interest but strong regulation and a reputable brokers should dispel any fears or concerns. Please keep in mind that no one is watching your trades from the brokerage office and wanting you to lose, so they can win! Most brokerages are fully automated and want their clients to make money - the more money a trader has and the more they trade, the more commissions and fees the broker receives!
"Beware of online reviews that claim that brokers are evil and are actively trading against their clients. Most challenges with brokers are down to traders lacking experience or being completely naive... If traders took the time to educate themselves properly, there would be less frustrations with, and less negativism toward, Forex brokers"
After explaining market makers, it seems very appropriate to move onto regulation.
In a lot of ways, your experience with a Forex broker has a lot to do with who regulates the broker - the stronger the regulation, the safer your trading funds could be and the better your trading experience should be.
Some brokers are not regulated at all. Avoid these brokers at all costs. Most of these brokers are scams, any money given to them will not be seen again!
Some brokers are regulated by financial regulators that are based in developing countries. Others are regulated by financial regulators based in developed countries.
The first important thing to note is... Ensure that your broker is regulated.
The second important thing to note is... The stronger the regulation, the better.
A Forex brokers regulator should be listed on the Forex brokers website. Usually at the bottom (footer) of the website or on the brokers 'about us' page.
Here are some details about the most trusted regulatory bodies that regulate Forex brokers...
The Financial Conduct Authority (FCA) - The FCA is the financial regulator for the UK. They are considered one of the best regulators available. Brokers that are regulated by the FCA should appear on their register (click here).
The Australian Securities & Investments Commission (ASIC) - The ASIC is the financial regulator for Australia. They are also considered a reputable financial regulator. Brokers that are regulated by the ASIC should appear on their register (click here).
The Commodity Futures Trading Commission (CFTC) and the National Futures Association (NFA) - The CFTC and the NFA are financial regulators based in the US. You can learn more about them here and here.
Please note, some brokers state that they are registered with particular financial bodies, not regulated. When choosing a Forex broker, it's important to understand the difference. You want a broker that is regulated by a strong financial regulator, not just registered.
Other trusted regulators can include...
Cyprus Securities and Exchange Commission (CySec) - https://www.cysec.gov.cy
Japan Financial Services Authority (JFSA) - https://www.fsa.go.jp
Swiss Financial Market Supervisory Authority (FINMA) - https://www.finma.ch
It's important to note that the above list is not exclusive. You can have a great trading experience with brokers that are regulated by other bodies (Seychelles and Malaysia, as an example). I am just trying to help you avoid any trading scams and to ensure you have a pleasant trading experience.
Spreads & Commissions
There are two main ways a Forex broker makes money; spreads and commissions.
A spread is the difference between the market price of a financial product and the price that the broker is quoting to buy or sell the financial product for.
For example, if USDJPY has a market price of 112.58, a Forex broker may offer a buy price of 112.59 and a sell price of 112.57, meaning a 1 pip spread - there is 1 pip difference between the market price and the buy price and a 1 pip difference between the market price and the sell price.
Spreads can be very competitive between brokers. Usually, the better brokers have tighter spreads, as they rely on commissions for their income, rather than spreads. Tighter spreads mean better prices, which can be essential for very active traders or day traders.
Some brokers offer zero spreads on the most traded currency pairs (EURUSD, USDJPY, etc). I will recommend some brokers later on in this article that have some of the tightest spreads in the industry - some as low as zero!
Something important to note here is spread widening. Spreads are generally not fixed, they are variable, meaning they are constantly changing.
There are two main times that spreads widen...
During major news events - major economic news generally increases market volatility, which in turn can widen spreads. This is very common amongst brokers that offer commission-free trading. More about this later.
At market close - during the week, the Forex market doesn't actually close, but it does have an official end to the day, which is 1700 EST. Around this time of the day, spreads can widen drastically due to lower liquidity - the Europeans are no longer trading and those in the Eastern United States have finished for the day. Spreads soon return to normal though, usually within 60 minutes of the official market close time.
Inexperienced traders love to complain about spread widening. Being stopped-out by widened spreads and being triggered into trades at bad prices are common frustrations and complaints. These traders love to blame their losses and bad trading experience on their broker. The reality is, they just don't know what they are doing. They don't understand spread widening and when it happens.
Commissions are usually charged when a trade is opened (executed). Commissions are usually very similar between brokers but you can shop around, if you are keen on getting the best price. I personally don't believe the brokers commission rate should be part of your decision making process when choosing a Forex broker though.
Beware of brokers that offer commission-free trading. It may sound like you are getting a bargain, but usually spreads are very wide to compensate the trading being commission-free. In the long-run, commission-free trading can be more expensive, as you are paying premium spread prices. Nothing is free in life, there is always some sort of catch or gimmick. Commission-free Forex brokers are no different.
Your trading experience will also likely be much worse with commission-free brokers, as the widening of spreads is very common practice and spreads can widen twentyfold.
READY FOR BREAK?
If you're ready to open a trading account and get started, I highly recommend the brokers below...
These are brokers that I personally trade with, I trust, and that offer unlimited demo trading accounts...
Types of Forex Brokers
There are a number of ways that brokers can provide their services and market prices to their clients. These are detailed below...
Dealing Desk (DD) Brokers - these brokers usually offer commission-free trading with wide spreads. They are the furthest thing away from the real Forex market and a genuine trading experience. These brokers are common amongst inexperienced traders that don't know what they are doing - they are usually attracted through commission-free trading and/or marketing strategies that promote quick and easy profits.
No Dealing Desk (NDD) Brokers - these brokers offer a more genuine trading experience. They generally have tighter spreads but charge a commission on each trade taken. No dealing desk brokers have access to the interbank market, meaning they can provide very liquid markets and a smoother trading experience.
Electric Communications Network (ECN) & Straight Through Processing (STP) - ECN and STP brokers provide the best prices, the tightest spreads, and the most genuine Forex trading experience. These are the most professional and best brokers, by far.
There are a number of misunderstandings about Forex brokers.
As already mentioned, inexperienced and naïve traders are those that usually get burnt when trading. They are also usually the ones to post negative reviews about brokers and share horrific trading stories. The truth is these traders are uneducated and don't understand how brokers operate. Obviously, there are genuine complaints and errors that brokers make, but these are not that common.
Below are some common misconceptions about Forex brokers...
My broker is trading against me - first of all, there is no one on the other side of the screen watching your positions and selling when you buy or buying when you sell.
Trades are all processed electronically. To believe that your Forex broker is personally against you is just paranoia. Saying this, if you are trading with an unregulated or low regulated broker, the trading experience may be so bad, that it feels that the broker is against you.
Stick with a well regulated broker that has been in the industry for a while. Some suggestions will follow at the end of this article.
As mentioned previously, a professional Forex broker rarely actively trades against it's clients. Instead, it looks to match client positions or execute orders on the actual Forex market and profit from the spread or commission.
My broker won't let me withdraw my funds - is your broker a scam? If so, you are not going to get your money back. There is more about this later.
Once again, the key is to trade using a well regulated and established broker.
Most professional Forex brokers do require you to provide a bank statement or proof of identity before allowing you to withdraw trading funds. Inexperienced traders that don't know this get upset that their funds have not been received and post their unjustified frustrations all over the internet. All they need to do is verify themselves, the withdrawal will then be processed.
My broker freezes their trading platform to stop me trading - here comes that inexperienced trader paranoia again... No one is watching your account and purposefully flipping the trading platform "on and off switch". This is just crazy.
It's true that brokers do sometimes have platform issues. I have been trading for over a decade and face platform issues once or twice a year, so it does happen.
I always ensure that I have my brokers platform on my phone as well as my desktop. Generally, if the desktop is down for an hour, the phone app is working fine. An easy solution for inevitable software and platform issues.
My broker stops me out and causes me to lose trades - this is generally due to spread widening.
A trader that understands spread widening and when it is likely to happen can avoid this.
Stop losses triggered by spread widening is not the broker trying to make you lose. The widening is simply due to a lack of liquidity and is common amongst even the best Forex brokers.
"I hope that you are reading all the content on this page and are seeking to understand and apply it... Educating yourself about Forex brokers is going to help you have a much more enjoyable trading experience and can ultimately make you a more profitable trader"
Almost all Forex brokers offer MetaTrader 4 (MT4) as their main trading platform, which is the most popular Forex trading platform in the industry.
Some brokers offer MT4 along with other trading platform choices, which can include...
In-house platforms created by the broker
In-house platforms are usually reliable and user-friendly.
Trading with leverage allows a trader to hold large trading positions with just a small amount of capital. This can also be called trading on margin.
A leverage of 1:50 allows a trader to hold a position fifty times greater than the funds used to open the position. In other words, trading on a margin of 2%, as only 2% of the overall position needs to be funded, the broker finances the rest.
A leverage of 1:100 equates to 1% margin and allows a trader to hold a position worth a hundred times bigger than the funds used to open the position.
Trading on margin allows a trader to make large profits with a small amount of capital, which is the main appeal of trading with leverage. There is a warning here though... Trading on margin also allows a trader to make large losses with a small amount of capital, sometimes more than you actually have in your trading account! If this happens, you will owe the broker money!
Sensible leverage should be between 1:10-1:100. Some of the top financial regulators prohibit brokers offering more than 1:30 leverage.
If you are trading with leverage, you may have to pay an overnight financing fee. This fees are very small, usually 0.1-2.0 pips a night.
Avoiding Broker Scams
Unfortunately, there are scam Forex brokers. These scammers will rob you of as much money as possible.
I have received countless messages and emails from people who have taken financial losses due to these scams. If my advice can prevent at least a few of you from falling into a trading scam, then my efforts will not have been in vain...
The scams are usually very straightforward... The scammers act as a Forex broker, ask you to deposit with them, and never give back your money.
Some scam brokers will pretend to trade with your capital and show huge profits, encouraging you to deposit more with them. The more you deposit with them, the more you will lose, as you will never see those funds again!
Do not be fooled into a Forex trading scam. Use my tips below...
Top Tips for Avoiding Forex Scams - How to Know if a Broker is Legit
Check the "brokers" website - most of the time, a scam broker will have a very unprofessional website. It may look dated, glitchy or contain spelling errors. Check their website against the websites of real Forex brokers such as IC Markets, Darwinex and IG. Do you see a big difference? If you do, then your "broker" may not be a broker after all!
Regulation - any broker that is not well regulated should be avoided at all costs. The most trustworthy regulators are based in developed countries and include the regulators already mentioned on this page (the FCA, the ASIC, CySEC, the NFA, etc).
Forex broker that trades on your behalf? - this should be the biggest warning sign. Brokers do not trade on behalf of clients... I repeat... BROKERS DO NOT TRADE ON BEHALF OF CLIENTS! If a broker is offering you this service, they are a scam! End of.
Forex broker asking you to deposit? - some brokers do have a hard sales team, meaning that they will phone you and try to get you to deposit into an account, but this is less and less common in the industry. If a broker is nagging you to deposit, especially by phoning you, then they could be a scam.
Download my FREE Forex Broker PDF...
Which Forex Broker should you use?
So, which broker should you use? Which brokers do I trade with?
To summarise the points on this page, your broker should meet most of the following criteria...
1. Be well regulated. Ideally, FCA, ASIC, CFTC, NFA or CySEC regulated.
2. Offer a real Forex trading experience. Ideally, offer a true ECN or STP brokerage service.
3. Provide tight spreads and be commission based
4. Offer a reliable trading platform
I have been trading for well over a decade, let me share with you the best Forex brokers in the industry...
Comparison of the Best Forex Brokers
IC Markets - open a FREE unlimited demo account here
ASIC, CySEC, and FSA Seychelles regulated
True ECN trading experience
Tight spreads (some as low as zero)
MT4, MT5 and cTrader trading platforms
High leverage, if desired (1:1-1:500)
Darwinex - open a FREE unlimited demo account here
No Dealing Desk trading experience
MT4 trading platform
Sensible leverage (1:30)
Still got questions? Watch the video below to learn more about Forex brokers...