Different traders have their good reasons for choosing the CFD and forex market. The truth is that trading online has plenty to offer, but you need to consider several factors before choosing a CFD and forex broker. Commissions, regulations, account minimums and fees, and platforms are just a couple of factors you need to consider before registering with a broker.
While this is a huge market, it fails to provide a central exchange for traders. Therefore, traders have to do their trading activities using the CFD and forex broker. This shows you how important the brokers are in the trading process. To help you make an informed decision, this page will discuss how you can choose the best CFD and forex broker.
From the onset, you should always find out if the CFD and forex broker is regulated by a reliable regulatory authority. By trading through a regulated broker, you can have the peace of mind because there is an assurance that the broker meets the standards set out by a competent regulatory body.
Many of these regulatory bodies require the broker to meet certain standard requirements. These requirements include maintaining separate accounts and having enough capitalization to protect customers’ funds.
Even better, regulation provides fund protection in case the broker becomes insolvent and makes sure that the broker abides to the rigorous standards required of any financial service provider. Some of the countries that have financial regulatory bodies include the USA which has CFTC and SEC regulatory agencies and the UK has the FCA.
A trading platform is one of your major gateway to get to the market, so you need to make sure that the trading platform is reliable. Many CFD and forex brokers offer a wide range of trading platforms that you can choose from. Most of the time, third-party trading service providers provide these platforms.
You can also find other brokers who have their proprietary trading platforms to ensure that they stand out from the competition. Often, these proprietary platforms are the great ones to trade on because they are designed to meet the specific needs of their clients.
Regardless of the type of a platform you decide to use, the best broker should provide a flexible platform. In this way, you can choose to trade from your desktop computer, smartphone, or any other device. Take a look at Reviews of Etoro to understand how the best trading platform should look like.
Additional features can make a huge difference when trading with CFDs and forex. You should always look out for the features which a trading platform has to offer. These features include a range of technical indicators, a good charting package, one-click trading, and risk management tools like the trailing stops and stop-loss order.
While all these features may seem insignificant at first, they can later play a crucial role in ensuring that you have productive and seamless trading experience. However, platform choice can also depend on your preference. You see, most of the platforms have the same standard features.
Hence, you should find out which platform is best for you by trying them out through the demo account offered by the broker. Brokers that don’t provide a demo account are not worth considering because it can be difficult for you to make the right decision.
Commissions and spreads
CFD and forex markets differ from the other trade markets as they don’t mostly rely on commissions, rather operate on spreads. No wonder, most brokers usually advertise their services to be commission-free. Now, you may be wondering how these brokers make their money. Well, brokers earn their money by charging you a spread.
The spread refers to the difference that comes between the buying and selling price. When you start trading forex, you will encounter 3 types of trading cost structure that a broker charges you. These are a fixed spread, floating spread, and commission fee.
Firstly, a fixed spread is when there is no charging on the spread and you can see the spread amount before you begin trading. A floating spread is variable and it always moves depending on the volatility of the market. Lastly, a commission fee is a calculated percentage for the forex brokers spread.
Any trader who wants to be certain of their trading costs can go for the fixed spreads. On the other hand, traders who desire to pay a smaller spread can opt for floating spreads. Ultimately, the best option will depend on your treading needs.
The business model
The type of spreads that you can get depends to a certain extent on the type of
business model that a broker is operating on. You may have come across various terms while searching for a broker, such as ECN, STP, Market Maker, and NDD. All these terms describe the type of a business model a broker is using to operate their business.
Before you understand these terms, you should note that there are two key types of brokers, which are non-dealing desk and dealing desk. With a dealing desk, the Market Maker or forex dealer can process your trading instructions using a dealing desk that is within their company. The broker handles the other side of trading for you, meaning once you create an account with them, they will handle the trade and let themselves get exposed to that trade.
But this is different with the non-dealing desk broker also known as NDD broker. With a non-dealing desk, a broker takes the trade to a third-party organization. You will find two types of NDD broker, which are STP and ECN. Both of them are the passageway between you and the market maker.
With the Electronic Communications Network (ECN), when you press on the Buy button on your trading platform, the broker’s computer will process your trade orders and automatically send them through the ECN without using a dealing desk.
However, it’s pretty different when it comes to the Straight Through Processing (STP). With this broker, when they receive your trading orders, they pass them to another party so that their market maker’s dealing desk can execute them.
To sum it up, the ECN or the STP doesn’t execute your trade. Instead, they act as the gateway for transmitting the trade orders from you to the dealing desk where you took the price from.
It’s important for you to know this because the broker’s business model can have an impact on the type of spreads that you can get and whether the spread can be variable or fixed.