Best Forex Broker For Beginners
How to Choose Best Forex Broker for Beginners – A Complete Guide
The forex market is one of the largest financial markets with a trading volume of approximately over 6.6 trillion US dollars per day and this number is much larger than the stock or bond market. The forex market being the largest financial market among all the markets, it offers the highest liquidity. The forex market is highly lucrative and is volatile at the same time which makes it difficult for traders to anticipate the future price movement. The forex market operates 24 hrs five days a week, and therefore attracts a number of traders – both beginners and experienced.
What is Forex Trading?
Forex trading involves the speculation of currency prices to make potential profits. The currencies in the forex market are traded in pairs and the traders speculate whether one currency will fall or rise against the other. Traders make their trading decisions to either sell or buy the currency pair to make profits from the currency price change. In forex trading, when a trader buys a currency pair he buys the base currency and sells the quoted currency with a hope that the value of base currency might rise. Conversely, when a trader sells a currency pair, he sells the base currency and buys the quoted currency with the hope that the value of base currency might fall and the value of quoted currency might rise. These anticipations are made based on technical and fundamental analysis conducted by the trader.
Traders take long or short positions on a currency pair. Going short in forex is referred to as selling the base currency and buying the quoted currency. Alternatively, going long is referred to as buying the base currency and selling the quoted currency.
Currency Pairs Traded in Forex Market:
There are over hundred currency pairs that can be traded in the forex market. The format in which the currencies are written in a currency pair remain the same and cannot be changed. For eg. “EUR/USD”- EUR is the base currency and USD is the quoted currency, there is no pair like “USD/EUR.”
The currency pairs in the forex market are classified into three types, based on their volatility and liquidity.
1. Major Currency
The currencies included in the major currency pairs belong to the countries that have stable economies. These currency are – Euro, US dollar, Australian dollar, Canadian dollar, Japanese Yen, Pound Sterling, and Franc Swiss. All the currency pairs in major currency pairs include US dollar as one of its currency in the pair. These currency pairs are comparatively more stable than other currency pairs. The pairs offer the highest liquidity and tightest spreads. Major currency pairs are: EUR/USD, USD/JPY, GBP/USD, AUD/USD, USD/CHF and USD/CAD.
2. Minor Currency
Minor currency pairs are also known as cross currency pairs. These currency pairs do not include the US dollar as any of the currencies. They are more volatile, offer less liquidity and have relatively wider spreads than the major currency pairs. The minor currency pairs are – EUR/GBP, EUR/JPY, GBP/JPY, GBP/CAD, CHF/JPY, EUR/AUD, NZD/JPY.
3. Exotic Currency
Exotic currency pairs are formed by combining the major currency pairs and the minor currency pairs. They are the most volatile currency pairs and are very difficult to anticipate. Exotic currency pairs offer very little liquidity and generally have the widest spreads. Exotic currency pairs are: EUR/HUF, EUR/PLN, EUR/TRY, USD/ZAR, USD/SEK, USD/RUB, USD/NOK, USD/MXN
Where Can the Forex Market Be Traded?
The forex market can’t be traded directly so the traders require a platform that acts as a mediator between the trader and the forex market. These mediators are known as forex brokers, that give traders access to the forex market for trading. There are a number of brokers that a trader can opt to choose to trade the market. However, choosing the right broker is crucial to trade the market profitably.
Who is a Forex Broker?
The forex market can not be accessed and traded directly so an intermediary is required in order to connect the traders to the forex market. In this case these intermediaries are known as brokers. They offer their services and allow traders to trade the forex market and charge certain commission or fees for each trading position opened and closed.
There are many brokers that are available online but not all the brokers are reliable. It is important for beginners to do their own due diligence in order to find their best online forex broker.
Prerequisite to Choosing the Best Forex Broker for Beginners:
Before new traders begin their search for the best online brokerage platform, they must identify their trading style. Trading style refers to a particular manner in which a trader trades, which is determined by the preferred time-frame, timing and frequency of the trades of the trader. While analysing these factors, also consider your financial goals and risk appetite.
1. Preferred Time Frame
This means whether the trader wants to trade in smaller time-frames that vary from a few minutes or to a few hours, or keep their positions open for many days together. Scalping or day trading strategies are considered to be traded in such short time- frames and require their online forex trading platforms to execute their trades efficiently without any slippage. In cases where traders hold their positions for a few days, they are more concerned about the rollover fees that are charged.
2. Frequency of Trading
Scalpers or day traders place a number of trades per day that require a good execution speed with no slippage. These traders prefer brokers that offer ECN platforms for fast execution of trades with tight spreads.
Types of Brokers in the Forex Market:
There are two types of forex brokers:
1. Dealing-Desk (DD) Brokers
Dealing desk brokers are the one where the market makers execute and trade the market. The dealers facilitate trading on the behalf of their clients.
2. Non-Dealing Desk (NDD) Brokers
No Dealing desk broker provides unfiltered access to the liquidity pool offering them interbank rates. No dealing desk brokers offer two types of execution – ECN and STP.
3. ECN Brokers
ECN brokers route trading orders directly to the interbank market and the orders are filled with best market prices without any involvement of dealers. The orders are executed over ECN for potential traders that makes the execution speed of the trade faster. The ECN broker charges small commissions as the spreads are always variable.
Advantages of ECN Broker
- Trading with low bid and ask spreads, direct access to the interbank market, minimal re- quotes or slippage
- The spreads can potentially reach zero at times
- Price quoted are highly volatile and can be advantageous for scalping
Disadvantage of ECN Broker
- There is mostly a commission charged
The orders are routed to the counter- party that can be an interbank market, another STP broker, market maker, or even an ECN broker. The execution speed depends on the exact route taken by the order. The STP brokers might charge commissions as well as spreads as STP brokers can offer both variable or fixed spreads.
Advantages of STP Broker
- Trade with low bid-ask spread
- Prices quoted are volatile, best for scalping
- Direct access to the interbank market
Disadvantages of STP Broker
- STP bridge is created by small brokers to the larger broker and these large brokers can choose to either connect the trader directly with the market or can even absorb their trades.
- Reduced transparency on how the trade is being routed
How Much Capital is Required to Start Forex Trading?
The specific amount needed to start trading forex depends on various factors like – the trader’s personal financial situation, trading goals and risk appetite. As the forex market is highly risky, beginners might want to start with as little as $100. Starting with a low amount helps beginners to determine whether forex trading is suitable for them or not without risking much.
Traders must decide their trading budget which must not be more than what they can not afford to lose.
Dealing With Risks in Forex Trading:
Forex trading is a highly risky endeavour and requires traders to imply proper risk management strategy and techniques to mitigate the risk associated with the trades.
Some of the risk management tools that can limit the risks in the trade are:
- Stop-loss Order – Stop loss is a predefined level at which the position gets closed once the market hits the predefined level.
- Trailing Stop-loss Order – It is a stop-loss order in which the profits are trailed till they start moving in the opposite direction. If the price starts moving in the unfavourable direction, the position is automatically closed.
Limit Orders – Limit orders are the orders to buy or sell with restriction on maximum price to be paid or minimum price to be received.
Types of Limit Order
Buy Limit – It is an order that is placed to buy the currency pair at a specific predefined price. Once the price reaches the predefined level, the trade gets executed. The price must be placed appropriately to ensure the trade is placed correctly.
Sell Limit – Sell limit is an order that is placed to sell the currency pair at a specific predefined price. The sell order gets executed once the price reaches the predefined level.
Buy Stop – A stop order is converted into buy order when the predefined price level is hit.
Sell Stop – A stop order is converted into sell order when the predefined price level is hit.
Risk Management Techniques
- Calculating Risk to Reward Ratio – Traders should always calculate their risk to reward ratio before opening a position. Calculating r/r helps in analysing the potential risks and potential profits associated with the trade.
- 2% Thumb Rule – 2% thumb rule states that traders should not risk more than 2% of their total trading capital.
Things to Consider While Choosing the Best Forex Broker for Beginners:
Most of the best forex trading platforms are regulated by the regulatory authorities around the world. These brokers comply with the terms and conditions of the regulatory authorities that ensure the reliability of the broker. For eg. brokers in the US are regulated by National Futures Association (NFA) and Commodity Future Trading Commission (CFTC), in the UK the brokers are regulated by FCA and by CySEC in Cyprus. The forex brokers that operate in the European Union comply with the Markets in Financial Instruments Directive (MiFID).
2. Account Features Offered by the Broker
Each broker has different account features that may suit the trading needs of one trader but not the other trader. While looking for the account features, the first thing is to look for the account types offered by the broker. Then look for the features that are offered by those trading accounts. The features to consider are- Commissions, spreads, leverage offered, margin required, execution model, margin call/ stop-out, and trading platforms that can be used to trade that account.
Commissions and Spreads: Commission is basically the fees that is charged by the broker for carrying out the trades and spread is the difference between the ask and the bid price of the currency pair. Brokers charge a specific percentage of spreads and charge some commission on the trade. Some of the brokers do not charge any commissions, instead they make money from the wide spreads.
Leverage and Margin: Depending on the broker, traders get access to a certain amount of leverage that allows them to trade a larger position with a relatively lesser amount of capital. However, leverage can also lead to heavy losses if not handled carefully.
Initial Deposit: Initial deposit is also known as minimum deposit which is the amount required to open an account with a particular broker. Brokers offer different types of accounts and the minimum deposit may vary accordingly.
Easy Deposit and Withdrawals: Each broker has various deposit and withdrawal options for eg- VISA and credit card, wallets, and wire transfers. Traders should look into the policies brokers have for depositing and withdrawing funds.
3. Trading Platform
The brokers offer different trading platforms like MT4, MT5, ctrader, etc and some of the brokers even have their own proprietary trading platform. Trading platforms are crucial as they help in conducting technical and fundamental analysis for anticipating the future currency price movement. Look into the features offered by the trading platform of the broker. It is important to look for the trading platform that complies with your trading strategy and ease-of-use of its interface. Look for a trading platform that is clean, and offers an intuitive trading interface.
4. Currency Pairs Offered
The brokers offer a great deal of currency pairs but it is not necessary that the broker is also offering the currency pair in which the trader is interested. So it’s important that the trader checks beforehand whether the currency pair he is interested in is offered by the broker.
5. Customer Service
Forex trading is conducted 24 hours five days a week, therefore it is important that the broker is offering responsive customer service. Any technical issue while trading if not corrected can result in losses. A quick call or message on live chat can help in getting a clearer idea about the responsiveness of the customer service provided by the broker.
6. Demo Account
Almost all the brokers offer demo accounts. Traders must preferably trade on the demo account of the shortlisted brokers to get a clearer idea of the trading environment offered by the broker before committing to the broker.
Choosing the right broker can be a tedious job. However, it is crucial to pick the right and genuine broker in order to have a good trading experience. You can consider the aforementioned points while shortlisting your brokers. Do not forget to consider your trading style while choosing the broker.