How to choose a broker
Lesson 4 of 31 in the course “Forex”. Free, with animations and a quiz.
The broker sits between you and the market
Forex is not traded on a single exchange. It is an over-the-counter market: banks trade with each other directly. You cannot get in there yourself, so you send your order through a broker, a company that gives you access to trading. The broker decides the spread, the execution (at what price and how fast your order goes through) and, most importantly, whether you can withdraw your money later.
How you pay the broker
A broker earns from you in three ways. The spread: the gap between the buy price (ask) and the sell price (bid); in the picture 1.1246 − 1.1244 = 0.0002, which is 2 pips (a pip on EUR/USD = 0.0001). The commission: a fixed fee per trade, common on accounts with tight spreads. The swap: a fee for holding a trade overnight. Compare brokers by the total of all three, not by one shiny number from an ad.
The licence decides
A licence is permission from a regulator, a government body that supervises brokers. Strong regulators in the picture: FCA (UK), ASIC (Australia), CySEC (Cyprus, EU), DFSA (Dubai). They require client money to be kept separate from the company's money and they cap leverage, meaning how many times bigger your trade can be than your own money. An offshore licence, from a country with soft rules, allows 1:500 leverage or more but protects you less.
Market maker or ECN
A market maker takes the other side of your trade itself: you buy, it sells. That is convenient and fast, but your loss can be its income. An ECN/STP broker passes your order on to the market, to banks and other players, and charges a commission for it; spreads there are usually tighter. Spoiler: both types can be honest or shady, so look at the licence and at how people's withdrawals go.
Checks before you deposit
Quick checklist. 1. Find the licence number on the broker's site. 2. Open the register, the official list on the regulator's website, and match the number, the company name and the web address: scammers build clone sites with someone else's number. 3. Check which exact company opens your account: one brand can have both a strong and an offshore licence. 4. Start with a small amount and make a test withdrawal.
Check yourself
- Where do you check a broker's licence?
Correct answer: In the register on the regulator's website. Anyone can write a broker's site or reviews. The regulator's register is official: it shows whether a licence exists and for which company and website. - A broker offers 1:1000 leverage and a 100% deposit bonus. What does it mean?
Correct answer: Most likely offshore: read the bonus terms. FCA, ASIC and CySEC cap leverage for retail traders at 1:30 on major currency pairs and ban such bonuses. A bonus often blocks withdrawals until you trade a huge volume. - A market maker is...
Correct answer: A broker that takes the other side itself. You buy, the market maker sells to you itself. That is why its licence and fair execution matter. Passing the order on is what an ECN/STP broker does.
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