Choosing a Forex broker for demo-trading is not a big issue. As you don’t trade with real money, nothing really bad can happen.
But that’s a different story for live trading. Now your hard-earned money is at risk. And so you have to do some more research to find a good and trustworthy broker.
That looks difficult, as there are 1000’s of them and not a few are scams. But if you use a simple method it becomes very easy.
In this blog post I give you a simply 3-step strategy to easily filter out the best live broker. Let’s start.
About brokers & their specifics
Before getting into the 3 step methodology, we first need to know what’s important to know about brokers.
Some foreign brokers do not accept clients from specific countries. So you can’t trade with them if your country is on their NO-list.
Regulated or not
Some brokers are regulated by financial authorities while others are not. If you are going to transfer money to your broker account then – of course – you want your money to be safe there. Regulated brokers are less likely scams, because they are checked by financial authorities So they are safer to trade with than unregulated brokers.
Also, regulated brokers often keep their clients’ accounts segregated. This means that in case of a bankruptcy the clients’ money is not affected by it, and the clients will get their money back. The best regulated brokers are from countries with a good financial reputation such as the USA, UK, Japan or Australia.
There are also not-so-well-regulated brokers. These brokers are regulated by financially liberal authorities from countries like Malta or Cyprus. These authorities are so liberal in their regulation, that there basically is hardly any meaningful regulation at all. It is recommended to avoid these brokers.
A-Book vs B-Book
Another important issue is the broker’s business model. Basically there are 2 types of brokers: No-Dealing-Desk brokers and Market Maker brokers. They are also called ‘A-book’ and ‘B-book’-brokers.
A-Book brokers or No Dealing Desk brokers act as a middleman. If you place a buy order, then the No-Dealing-Desk broker puts that order through to one of the major banks, that will take the sell of the trade. The broker acts like an independent middleman and ensures that your order will be filled by the bank that offers the best price.
B-Book brokers or Market Makers don’t act as a middle man. They keep the order in-house. If you place a buy order, then the Market Maker broker does not put that through to the banks, but tries to find another trader within its books to take the sell of the trade. And if there is no such trader, then the broker itself takes the other side.
Trading against you
The reason why Market Maker brokers choose to take the other side of their clients’ trades, is simply because of the principle ‘for every loser there is a winner’.
It takes 2 for every trade, a buyer and a seller, otherwise there can never be a transaction. One of them will win, and the other will lose. So due to the fact that 60%-95% of Forex traders lose the majority of trades, the brokers will win these trades. This way Market Makers make money off of their losing clients. They operate like a casino. If less than 50% of traders would lose, they all market makers would go bankrupt.
The fact that Market Maker brokers are able to exist, is the proof that the majority of Forex traders lose money.
Market makers use algorithms to filter out and separate their losing clients from their profitable clients. They, of course, prefer to pick their losing clients to trade against, as their profitable clients may win from them.
MT4 Virtual Dealer Plugin
Market Maker Brokers are able to control the prices on your trading platform. (Google “MT4 Virtual Dealer Plugin” and read the results). No-Dealing-Desk brokers are also able to do that, but it is unlikely that they will do that, as they don’t benefit from it (they just act as a middleman). Many professional traders don’t want to trade with a Market Maker broker because of the risk of price manipulation.
No-Dealing Desk or ECN?
Some No-Dealing Desk brokers call themselves ECN brokers, but in fact they are not. ECN stands for Electronic Communication Network, a Network that connects all banks of the InterBank Market. ECN brokers are middlemen that put your orders through to one of the banks that offers the best price.
Most No-Dealing Desk brokers only put you through to a selected group of banks, based on an agreement between them. You will get a good price, but it is not the best price. Real ECN brokers are only for those with major account sizes.
Trading is done with trading software or a trading platform. Some brokers let you choose between various platforms, other brokers offer a single platform. For beginners it is recommended to trade with a broker that offers the Metatrader 4 platform (MT4).
The reason being is that the MT4 trading platform is the biggest and most popular trading platform to date. It is free of charge as well. As a result of its popularity an enormous amount of tutorials that teach you how to use it can be found online, all for free.
If you want to know how to place a trailing stop in MT4 for example, just search it in YouTube and you will get what you are looking for. This is much harder to do for a less used platform like Ctrader.
Mind the minimum deposit
Most brokers require a minimum deposit on a live account. This can be as little as $50, but it can also be as huge as $50,000. A good amount to start trading with is $200 dollar, even if your real trading capital amounts $20,000 or more. Not all brokers allow this low amount as a minimum deposit. So mind the broker’s minimum deposit requirements.
The 3-step strategy to find the best live broker explained
Once you know what broker you are looking for, it won’t be difficult to select the best one from the many. It can be done in 3 easy steps.
Step 1: Select 10 brokers with the best scores
Whatever kind of broker you want to choose, it should definitely be a one with a good and trustworthy reputation, as you don’t want to trade with a poor performing broker or a scam.
A good measure for being good and trustworthy is the amount of good customer reviews the broker has. Therefore the first step is to go to an independent broker reviews website to get reviews. One such a website is ForexPeaceArmy.com.
On the broker review page of Forex Peace Army you will find reviews of over 1300 Forex brokers. To get the 10 best reviewed ones on this page, sort the list by the number of reviews per broker. (In below image is shown how: press the two tabs in the red circles)
Do not sort the list by star rating. You will get all 5 stars reviews on top, but a 5-star based on only 5 reviews means nothing.
When sorted go over the list from top to bottom and just pick the first 10 brokers that satisfy both of the following criteria:
- The broker should have over 200 reviews.
- The broker should have a star rating of 3 or better.
Using this set of criteria I quickly filtered out the following list of 10 brokers:
My country’s regulation allows me to trade with foreign brokers. If you live in a country in which this is not allowed, then you may have to widen the criteria a bit, to get enough brokers on the list.
Step 2: Reduce the list step by step
The next step is reduce the broker list from step 1. This is done by filtering away all brokers that do not meet the desired specifics. For the example I am using below list of specifics.
- accept traders from your country
- no-Dealing Desk broker (or ECN)
- offers MT4 trading platform
- minimum deposit of $200
If you go back to the brokers list on ForexPeaceArmy.com and click on a broker name, then a page with detailed information about the broker will open. If you click on the ‘information‘ tab you will get a concise overview of the broker’s specifics.
Let’s check this broker:
- the broker accepts traders from my country: CHECK.
- the broker is regulated by ASIC, an Australian authority: CHECK.
- the broker is a No-Dealing Desk or ECN broker: CHECK.
- the broker offers MT4: CHECK.
- the broker allows a minimum deposit of $200: CHECK.
This broker remains on the list. Next go through all the other brokers and check them one by one.
Unfortunately, these easy overviews on Forex Peace Army are not available for all brokers. Also, the overviews may not be up-to-date, they may lack info, or they may even be incorrect. So it is still better to go to the broker’s homepages to gather the info there. This may take some time, as not all information is easy to find on their sites unfortunately.
The following brokers remained on the example list. They are all from Australia.
Step 3: Pick the best live broker
Before choosing the best Forex broker, there are 2 more important things to take into account: the Know You Customer obligations (KYC) and the extra fees for funding your account and withdrawing money from it.
Opening a demo account is very easy, in most cases you only need to provide an email address. But if you want to open a live account to trade with real money then you need to send the broker more private documents.
Almost all regulated brokers ask for sensitive personal information, because they are obligated to do so, due to Know Your Customer obligations. Most brokers ask the following:
- a photocopy of your passport or driving licence
- a proof of address, such as a copy of an utility bill.
This all is unfortunate, not only because of privacy reasons, but also because of the increased risk of becoming a victim of identity theft. Therefore it is recommended to go for the broker with the least strict KYC requirements.
Tip: You can also cover parts of your ID card in the photocopy.
Yes, there are also brokers that don’t ask for these KYC info, so you can trade with them anonymously. But these brokers are generally unregulated, and possibly even scams, so better to avoid.
The profit you will get with Forex trading is not the profit you will eventually get on your bank account. This is because of the additional broker fees for withdrawing money from your account (sometimes even for funding your account).
On top of that there are additional fees that banks charge for money transfer. This amount depends on the method of money transfer you choose, BankWire Tranfer, Credit Card, Paypal, etc.
Some brokers also charge an inactivity fee. This means that if you don’t trade for a longer period of time they will charge a fee. This way they can suck out entire accounts that have been forgotten by their owners.
Things to ignore to make it easier
Some topics are left outside the selection process. These are leverage, spreads & commissions and bonuses. Below I will explain why.
As explained in this blog post, trading Forex is trading with borrowed money. The amount of money you are allowed to borrow depends on the broker’s leverage. Brokers offer leverages of up to 1:500 and sometimes even more. The higher the leverage of your account, the more ‘lots’ you can trade with, and the more money you can make (or lose!).
The recommended way to learn to trade is on a small account, not on a large account. And if you are only going to trade micro lots your account’s leverage is not very relevant. A 1:100 leverage is good enough.
The first goal in learning to trade is to get profitable. It is not the spread that will make or break you as a trader, but your strategy and trading mind set. Dealing with a good and trustworthy broker is much more important than with one offering the lowest spreads. There are numerous brokers operating online, and the competition is fierce. So you can be sure that your broker’s spreads/commissions are just OK.
There are brokers that offer bonuses to new clients. They may promise a doubling of your trading capital after funding for the first time, or after you have traded an X amount of trades, or something like that.
If a broker offers these kind of bonuses, then you can be certain that you are dealing with a Market Maker broker. Market maker brokers offer bonuses to motivate you to trade a lot, so that you will lose a lot, and they will win. Recommended to skip.
The 3 step strategy to choose the best broker goes in 3 steps:
- Step 1: Make a list of 10 good and trustworthy brokers, based on customer reviews.
- Step 2: Reduce this list using the following (recommended) criteria:
- Traders from your country accepted?
- Is the broker well regulation?
- Is it a No-Dealing Desk broker?
- Does if offer Metatrader 4 platform?
- What is the minimum deposit?
- Step 3: Select the best live broker and use below tips:
- Ignore maximum account leverage.
- Ignore bonuses.
- Ignore spreads & commissions.
- Check the broker’s funding and withdrawing fees.