How to compare forex brokers with one another

Foreign exchange has been around for a long time. In fact in the renaissance, many of the city-states in Italy had their own money. It became necessary for somebody moving goods from the port to an inland city to change currencies several times in order to conduct business. As a result, money exchange houses blossomed in the Renaissance. Throughout the world, there are many countries and jurisdictions that have their own money and that is why foreign exchange is as old as money itself. Whenever you have two differing currencies, you need foreign exchange.

What determines a currencies exchange value

The value of currency is determined by many different factors-economic trends, political stability, resources, and a whole host of other factors. The bottom line is it is all a question of confidence. If a particular currency is in high demand in a particular country, the price in terms of the local currency for that foreign currency is higher. If that foreign currency is deemed to have a lower value or is in less demand, naturally the price in terms of the local currency for the foreign currency is lower. That is pretty basic stuff. However, seeing it all play out online can be quite confusing.

Each forex broker is different-pay attention to the difference

There are many forex brokers you can go with online. Just like with investors, each broker is different because the types of investors that they cater to are also different. Different markets require different solutions. Instead of dictating to you which forex broker to go with, ereviewguide.com instead steps you through the key questions and considerations you should have in mind when trying to pick out one forex broker over another. We strongly believe that by helping you pick out a broker based on your particular situations and wants, the chances are higher that you would pick a solution that better fits your particular situation. Many review sites straight up recommend certain buyers and that carries with it a certain degree of conflict of interest because many review sites are also affiliates of such forex brokers. They may not be recommending the best forex broker for your particular situation and needs. The primary consideration is that they are getting a commission out of the recommendation. Ereviewguide.com steps away from such a recommendation model and instead focuses on helping you find the right solution for your situation.

The Problem with Fraud

As we have mentioned earlier, $4 trillion a day flows through the forex market. With that volume of money, there are always going to be some shady operators that will look at that amount of cash flow as an invitation to commit fraud or to manipulate their customers so they can make more money or in particularly exceptional cases, to outright steal money. Be very careful as to the possibilities and opportunities for fraud in the forex market.

The problem with Conflict of Interest and the Market Maker model

To avoid a fraudulent situation, you should avoid market makers. This is a type of forex broker where they are basically competing with you. Market makers make money in the gap between the currency's selling and buying price. The honest market makers use standard market buying and selling spreads whereas unscrupulous market makers resort to manipulation to boost the gap difference artificially and pushes you in a situation where you buy from them. A market maker model essentially makes you compete against the market maker. While they may not technically be breaking the law or in fact they might be honest, because of the built-in conflict of interest, it is best to avoid market makers. You can easily find out if a forex provider is a market maker just by looking through their terms and conditions. By law they have to fully disclose what kind of business model they have, whether they operate a market maker business model or another kind of program.

Straight-Through Processing

This type of forex broker uses a quote system that is more correlated to actual quotes that are issued by interbank systems. Keep in mind that in the forex market, the actual price you could buy or sell currency for depends on the interbank system that you are tapping into. While there may be official prices, the actual price that you buy or sell currency for depends on the forex system that you are linked to. Straight-through processing broker's numbers and quotes are closer to interbank quotes. However, it is not an exact match.

Independent Traders versus Market Maker Model or Hybrid

They have a choice of how they are going to process your transaction. They can go to stand alone traders like you or they can act as a market maker. If the latter situation holds through, then as we have discussed in our earlier discussion with market maker brokers, a conflict of interest dynamic is present and you might be put in a position where you are not making as much money as you could. In a truly independent broker situation or intermarket situation, there is still an opportunity to manipulate in a straight-through processing brokerage model. While it is much lower and the chances are lower in a pure market maker foreign exchange situation, the risk is still there. Given the high stakes involved, which is your financial security and also your peace of mind, it is probably a good idea to avoid brokers that use a straight-through processing business model. Once again look at their terms and conditions and require disclosures to figure out what model they are working with. Pay careful attention to the phrase market maker or straight-through processing. Sometimes they do not use these specific terms, but look at the model on how it operates and see if it is more of a market maker model or a straight-through processing model. In either case, you are probably better off skipping that broker.

Electronic Communications Network Brokers

This category of brokers does not make their money on the spread between bid and ask prices for currency. Because of this, they really have no incentive to manipulate the bid and ask gap or spread. They do not have a built-in conflict of interest. They just simply make their money off of the volume of your trades. The standard commission is usually less than a dollar for every ten thousand dollars that you trade. An ECN broker simply enables independent traders like you to trade on the international network of banks for foreign exchange. There is no mark up that they charge you unlike a bank. If you do forex through a foreign exchange trading through a bank, there is a mark up and several fees. The great thing with the ECN broker is that their commission is calculated based on the volume of your trade. You can actually save quite a lot of money especially if you trade in heavy volumes. For these reasons, it is a good idea to use ECN broker instead of straight-through processing broker or a broker that uses a market maker model.

How to Find the Right Broker

As the internet entered the forex market's space, more and more people have begun to trade foreign exchange using the internet. This is a big reason for the huge growth in the retail foreign exchange market. Keep in mind that bank foreign exchange or commercial foreign exchange has been around for a long time, as mentioned earlier, since the time money was invented. However, retail foreign exchange really only started exploding with the rise of easy internet access. The internet truly has democratized the foreign exchange market. Another factor that has led to the rapid increase of retail foreign exchange trading online is that forex brokers lend money to its customers. This allows you to borrow at a 50:1 rate if you are in the USA. Alternatively, you can borrow up to 700:1 if you are outside the US. This huge inflation of credit allows traders to make a large amount of money in a short amount of time. On the flip side of this is that it also exposes you to a huge amount of risk. You have to keep in mind also the amount of risk you are undertaking when doing foreign exchange trades.

Don't focus on the terms – focus on the meaning

When it comes to evaluating forex brokers, it is easy to get confused because many often described the same feature using different terms or they use the same terms, but it is actually a different feature. There is also a wide range of forex brokers because a lot of online businesses are moving into this space due to the lucrative nature of the business. It is not uncommon to see forex trading positioned almost as gambling or as a video game. Be very careful when you come across such forex brokers because while the interface may be entertaining and may be easy to understand, you might be dealing with a market maker or a straight-through processor as described above. Take a hard look at their terms and conditions and their required government disclosures to correctly filter out forex brokers. In terms of considerations for which forex broker to go with, there are three key areas to evaluate: trading, brokerage and payment operations and available trading platforms.

Demo Trading

The majority of forex brokers operate using a demonstration account to slowly break in new customers. This demo account is actually a great way to learn how forex trading works without you losing your shirt at your first get-go. The demo account is preloaded with fake money. This is money that you just use with that broker while you are learning how the system works. Of course, it has no monetary value and its only purpose is to help train you to use the broker's forex trading system. The play money that you are given initially can range from $10,000 to $500,000. You play and practice with this money in a simulated environment. The forex figures and exchange rates that you are given are real. However, the money that you are making or losing is fake.

What to look for

When you are evaluating a trading system, pay attention to how easy it is to use and how much play money you are given and how much real foreign exchange trading information you are given so you can quickly evaluate if the forex broker is the one that you can go with. Ideally you would want to go with a forex broker that gives you a lot of play money and also gives you a real time trading information. You use this information to be able to quickly learn and transition to a real time and real trading environment. Other broker's trading system gives you a mini or a standard account system that has minimum amounts that control the size of the transactions you engage in. This is a good idea if you want a systemic way to avoid substantial losses.

Limiting your losses through caps

In essence, by setting a minimum or setting caps, it allows you to play with less money and this helps keep the amount of money you lose when you make a bad trade at a minimum. The downside to this is if you make really good trades and you are racking up a lot of gains, your money does not increase as quickly as when these control amounts are taken out. Sometimes some traders do better when there is a higher minimum of required because the return on investment is larger, but once again you are the only person that knows yourself, your appetite for risk and your willingness to roll over investments. For practical purposes and also for training purposes, you should start with accounts that have no minimum requirements. This way, you can start with the bare minimum and then ramp up your investment from there depending on how quickly you think you are learning. It is also worth remembering that you should expect to lose some money in the beginning when you are learning forex. That is why it is very important to keep those losses at a minimum. Once you start getting the system down and anticipating market movements in a fairly predictable manner that the market would move at certain way or a trade would end up a certain way, then you can start putting in more money. The surest way to lose money is to bet a lot in the beginning while you are still learning.

Brokerage and Payment System

Not all brokers take all payment models. Some require wire transfers and others accept credit cards. These are very important details because the broker that you want to go with might have all the favorable factors discussed above, but if they only accept a certain payment model not available to you, this could be a serious problem. Make sure that you look at a broker that accepts a wide range of payment models. For example, if you receive remittances or you have accounts payable that is paid through a specific and you plan to play the forex market, you may want to check if your forex broker accommodates that channel. Maybe it is easier to route money to the broker this way instead of having to go through different loops and different conversions because for each step your funds go through, you are losing money through fees.

Make sure fees don't creep up on you

Prevent any unpleasant surprises with payment fees. A broker that accommodates different payment methods is better than one broker that just accommodates one payment method because the fees for those payment methods may differ.

Pay attention to interest rates

Another key payment detail you have to keep in mind is that if you are holding your position over several days, you will be charged interest. While most traders like you are day traders, meaning they square out their accounts on a day-to-day basis, whether they make a loss or not, they exit the market at the end of the day, many other traders are long traders. This means they hold on to their position for several days. If you are a long trader, keep in mind that you will be charged interest for the position you hold. Again differing forex brokers charge differing interest rates. Make sure that this information is clear to you before you select your forex broker. You might be dinged an unpleasant surprise if the interest rate is quite high. There are also variable interest rates.

Know which conditions trigger different rates

Pay careful attention to what conditions trigger differing rate schedules or what amounts trigger differing rates. You might get a discount if you reach a certain level or you might pay more. Pay careful attention to interest rates. Finally, in terms of brokerage details, it is worth to consider what kind of regulating entity covers your forex broker. Not all forex brokers abide by the same regulations. Forex brokers in the United States have operated under different regulations than forex brokers located in other countries. The amount of stringency in regulations may be a source of comfort for you. If you are looking to increase your chances of picking a forex broker that is above board, pick a forex broker that has to deal with very strict restrictions. However, if you want a forex broker that can give you more freedom, then you are probably better off picking a forex broker that is operating under more lax regulations. We will not state the obvious risks that you are undertaking by dealing with such a broker.

Forex Trading Platform

After considering the factors above, the final consideration you should keep in mind is the type of trading platform your forex broker uses. A trading platform is just simple software that allows you to track the pair of currencies that you are trading and of course to execute the trade. Not all trading platforms are the same.

The different kinds of forex trading platforms

Some forex brokers require that you download specific software that you install on your computer. The problem with this is what if you are not using your computer and you need to make a trade? This can mean the difference between making a lot of money and losing a lot of money. For this reason, you might want to opt for a web-based trading platform. The great thing about web-based forex brokers is that you can log on from anywhere in the world and make trades from anywhere in the world. This is very important when time is of the essence. As you are probably well aware, foreign exchange market moves dramatically in a short amount of time. Trading can be quite volatile. While the spread may seem small, with the huge amounts of money being invested, even a small movement in a short amount of time can translate into a lot of money made or a lot of money lost.

Pick a versatile platform

Keep in mind the versatility of the trading platforms your forex broker offers. The most versatile brokers offer trading platforms in the following ways: Downloadable platform that you have to install on your computer plus a web interface to access that information through the web. The best would be forex brokers that allow for multi-platform and multi-device access, which means that regardless of whether you are on a Linux computer, a Mac or a tablet, or your iPhone, you are able to track trades and execute trades. Also keep in mind that other trading platforms also factor in information inputs. For example, if there are certain news events regarding the countries that you are doing foreign exchange swaps on, that would be a better platform than just a simple tracking mechanism. The more information pumped into the platform and the more intuitive it is, the better the platform. Keep this in mind when weighing which forex broker to go with.

The Bottom Line

It is easy to make a lot of money and easy to lose a lot of money in forex trading. It takes a huge amount of research, much patience and constant experimentation to consistently make money in the forex market. Choose your broker carefully because your broker should be the least of your worries when you are making forex trades. Pick the right kind of broker that uses the right business model that does not have a conflict of interest that might harm you. As discussed above, use the three criterions analyzed to select which broker has the right features for your situation. Only you are aware and fully know your appetite for risk and your level of technical proficiency. Use forex broker accordingly.