Choosing ECN Forex Brokers -3-Step Analysis
Online Forex trading has grown dramatically during the past decade. As the demand for currency brokerage services is still growing, new Forex firms (mainly white labels) are popping up. The increased competition in the Forex industry works in favor of the public by improving the quality of services and by shrinking trading costs. Unfortunately, this does not mean that every Forex broker is good for trading. There are many Forex scams in the market that traders must avoid.
Here is a three-step analysis in order to choose the ideal Forex Broker.
STEP-1: Define your Profile
Defining your trading profile is crucial in order to pick the right Forex partner. In step-1 you must answer questions such as:
(1) How many hours can I devote to trading, daily?
If the answer is a lot of hours per day then you can look for a day-trading style (for example news trading or scalping). If the answer is a few hours per week then seek Swing or Long-Term trading styles (for example Macro Trader or Carry Trader).
(2) How much risk exposure can I handle without problems?
If the answer is Low-Risk exposure then seek Long-Term trading styles (for example carry trading) and use low capital leverage (1:1 and maximum 10:1). If the answer is Medium-Risk then seek for Swing Trading styles by using medium capital leverage (10:1 and maximum 30:1). If the answer is High-Risk exposure then you can choose day-trading styles.
(3) What are my goals as concerns my annual-based returns?
It is recommended to adjust your expectations according to the risk you are willing to accept. For example, if your risk acceptance is very low (10-20%) you can’t expect returns of more than 40% on an annual basis.
STEP-2: Defining your Trading Strategy
After completing step-1 you now know your trading profile (Day-Trader, Swing-Trader, or Long-Term Trader). In step-2, you must find a suitable trading strategy that can serve your profile. Two questions must be answered:
- Which trading strategy suits best my profile?
- What do I need to implement this strategy effectively?
Here are some popular trading strategies:
4.1 Scalping Forex (Day-Trade, using Expert Advisors)
4.2 News-Trading (Day-Trade, trading the Daily Calendar)
4.3 Arbitrageur (Day-Trade, using sophisticated software)
4.4 Swing-Trader (Trading mid-term trending or ranging markets)
4.5 Macro Trader (Trading the new Macroeconomic conditions)
4.6 Carry Trader (Trading the interest rates differential)
4.7 Long-Term Trader (Trading Long-Term Trends)
STEP-3: Choosing the Right Forex Broker
The right Forex broker is determined by the requirements of each trading style (step-2). Some features are needed by every trading style (for example safety of money) while others differ. Here are some important issues for consideration when choosing a Forex Broker:
3.1 Safety of Funds –Regulation and Funds Segregation
- Importance: Great
- Required by: all Trading Styles
First of all, you should always choose among regulated Forex Companies. Whatever a broker promises, consider it useless, if this broker is not regulated by a reliable government body (for example FCA UK, ASIC, FINMA, etc.). Moreover, a good ECN broker should also provide full client funds segregation. That means the corporate funds are segregated from the client funds.
3.2 Safety of Funds –Capitalization / Years in the Market
- Importance: Great
- Required by: all Trading Styles
Choosing large and well-capitalized Forex brokers is wise. There have been Forex brokers in the past who have had problems with their capital, and that means risk. Traders can find out the capitalization of a Forex brokerage firm by checking the regulatory body's website.
Furthermore, the years of existence in the market and the location (country) of the headquarters are also important. Avoid new brokers and brokers situated in offshore countries.
3.3 Account Types / Options
- Importance: Great
- Required by: all Trading Styles
The account types differ as concern many parameters, for example, the lot sizes. If you are a beginner you need a micro-lot, if you are an experienced trader you prefer standard-lot accounts. Furthermore, some account types offer Real ECN, while others do not. Note that Real ECN accounts require a minimum deposit of $1,000.
Supported funding methods are also very important. If the funding methods available do not suit you there is no point in reviewing further any Forex Broker. Just make sure that the depositing methods are the same as the withdrawal methods. Furthermore, ask about any funding fees using the live chat or email.
Another issue here might be the allowance of Scalping and Automated Trading which are essential for Day-Trading styles.
3.4 Asset Index
- Importance: Medium to Great
- Required by: Mainly by Swing and Long-term trading styles
Day-Trading Styles are usually focusing on low spread pairs such is EURUSD, USDJPY, USDCHF, and GBPUSD. These 4 pairs are available by all Forex brokers. On the contrary, Swing and Long-Term trading styles require a wider asset index including Forex crosses or even Exotic Forex pairs.
3.5 Trading Cost
- Importance: Great
- Required by: Day-Trading Styles are sensitive to spreads, Long-Term Styles are sensitive to Rollovers
The cost of trading is a factor highly determining your trading success, especially as concerns Day-Traders (Forex Scalpers, etc.) Make sure you have reviewed the spreads and commissions charged on the specific account type you are about to open and not to another account type. Account types may differ significantly as concerns the trading conditions. The spread and trading commissions charged are very important for day-traders. Rollovers (Swap rates) are important only for Swing and Long-Term traders.
3.6 Trading Platforms
- Importance: Medium to Great
- Required by: Mainly by Day-Trading Styles
There are tens of different platforms to trade the Foreign Exchange. Beginners usually prefer to trade using a Web-Platform that is easy to learn and to use. The Forex industry’s standard is MetaTrader-4. MT4 offers to trade on charts, Expert Advisors, historical back-tests, hundreds of free technical analysis indicators, and much more. MT4 is used by about 85% of all retail traders and it is offered by almost all ECN Forex Brokers in the market. Some Forex brokers have developed their own platforms and offer MT4 only via software bridge (i.e. Dukascopy). An MT4 demo account can assist traders to test the technological efficiency of any Forex broker before opening a Real Account.
3.7 Available Technology
- Importance: Medium to Great
- Required by: Mainly by Day-Trading Styles
Technology is always important when trading online. A good ECN broker must offer low slippage, no re-quotes, and no delays. This is especially important for Day-Trading styles.
3.8 Customer Service
- Importance: Medium
- Required by: All Trading Styles
The quality of the customer service can tell you a lot about how Forex brokers see their clients. Professional Forex brokers will provide responsive customer support and several different contracting methods (via phone, email, live chat, etc.). A reliable Forex customer service must be available at least 24/5 and provide a response in less than 30 minutes (via email). Furthermore, the existence of a personal account manager makes things always easier.
3.9 Additional Services
- Importance: Low
- Required by: Mainly by Day-Trading Styles
Additional services may include daily trading signals, free education, SMS alerts, extended charting capabilities, and much more.
3.10 Trading Promotions
- Importance: Medium
- Required by: Mainly by Day-Trading Styles
Rebates are very useful for large-volume traders such as scalpers and news traders. Find free Forex rebate plans at Forex-Rebates.com.
Conclusions –Summarizing Requirements
According to each and different trading style, there are a lot of parameters to be considered before choosing a Forex broker. Day-trading styles are more complicated as concerns the required setups. Here is a summary of all the requirements concerning day trading and longer-term trading styles.
(i) Needed by all Trading Styles:
- Safety of Money / Regulation
- Suitable Account Types (ECN, Lot Size)
- Suitable Funding Methods
- Responsive Customer Service
(ii) Needed by Day-Trading Styles:
- Cost of Trading (Tight Spreads)
- Suitable Trading Platforms
- Fast and Reliable Technology (Low Slippage, No Re-Quotes)
- Allowance of Scalping / Automated Trading
- Available Promotions (Trading Rebates, Trading Contests, Free VPS, etc.)
(iii) Needed by Swing and Long-Term Trading Styles:
- Cost of Trading (Rollovers)
- Wide Asset Index
- No Maintenance / Inactive Fees
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■ Choosing ECN Forex Brokers -3-Step Analysis
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