The FOREX market, or FOReign EXchange market, has a daily turnover of more than $3 trillion USD. That figure makes it the biggest and most liquid market on a cash basis. With the exception of the ‘weekend lull’, the FOREX market is open 24/7 and trading all the time.
Many people are attracted to the FOREX market because they think it is possible to make a lot of money very quickly, and to some degree, this is true. The amount of ‘leverage’ that FOREX brokers will let their clients use is unmatched, but using huge amounts of borrowed money is a double-edged sword.
While there are FOREX brokers that are well regulated, there are also an enormous number that aren’t located in developed nations, and operate outside of any regulation or law. Before you start trading FOREX, or give away your personal information to a ‘broker’, it is a good idea to learn a little bit more about the industry.
We have put together this guide to help you find the best forex broker for you, there are a lot of different variables and options to consider and here at Blockonomi we have spent the last year reviewing and rating many brokers, this post is a break-down of what we learned and an aim to provide the most useful list available.
We have researched most brokers on the market currently, conducting in-depth reviews of over 20 different brokers and written 100,000 words on the subject
- 1 Top Forex Brokers
- 2 What is FOREX Trading?
- 3 How Does FOREX Trading Work?
- 4 Welcome to the Wonderful World of Pips
- 5 FOREX Market Regulations
- 6 Every Class of Broker is Different
- 7 Best Copy Trading Brokers
- 8 Risks Involved in FOREX Trading
- 9 Understanding How Leverage Works
- 10 The Manic Macro Environment
- 11 Common Trading Platforms & Software
- 12 How Brokers Make Money
- 13 What to Look For in a Broker
- 14 Account Types / Demo Accounts
- 15 Order Types and Execution
- 16 Customer Service
- 17 Conclusion
Top Forex Brokers
We have reviewed all the major Forex brokers and have picked the following companies as our top recommendations. These brokers are all well established, regulated in major jurisdictions around the world, provide good asset coverage and top rate trading platforms.
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What is FOREX Trading?
At its most basic level, FOREX trading is speculating on the value of global currencies.
The biggest players in the FOREX market are money center banks and central banks, like the Federal Reserve in the USA, or banks like Barclays. For bigger financial entities, the FOREX market is a way to move money from one country to another.
A bank also may need to hedge their exposure to a foreign currency or help one of their clients do the same thing. While this is part of what the FOREX markets do, there is also a lot of speculation by major investors and trading desks at big banks and hedge funds.
Unlike equity or debt markets, FOREX markets operate via contracts that rely on the price difference between two currencies to have value. These derivative contracts are how FOREX trading happens, no matter how big or small.
For example, a trader may want to gain exposure to the US Dollar, but that must happen as a result of the US Dollar appreciating against another currency. The most liquid currency pair on the planet is the US Dollar/Euro, which is abbreviated with the currencies’ ISO codes as ‘USDEUR’.
Major banks and hedge funds often buy FOREX contracts that will deliver the currency to their account. Most retail FOREX brokers don’t offer this kind of derivative contract and are designed for currency speculating.
How Does FOREX Trading Work?
For the individual FOREX speculator, trading usually involves the use of borrowed money, or ‘leverage’. Depending on what FOREX broker you choose to use, the amount of leverage can range from 2 or 3 times (2x or 3x) the money you have deposited, up to 500x depending on the regulations.
Regardless of the leverage, a FOREX trade starts by either buying or selling a currency pair. The currency pair will be quoted with a selling and buying price, for example:
The selling price is almost always given before the buying price, but it is a good idea to make sure.
In any event, the selling price will always be lower than the buying price. Once you decide which way you are going to trade the currency pair, you will either buy or sell it at the prevailing market price (assuming you don’t use a limit order, but more on that later).
In this example will assume that you decided to buy the pair at 1.3418.
Welcome to the Wonderful World of Pips
The classic lot size in the world of FOREX trading is 100,000 units for most major currencies. That means that when you opened the trade described above, you bought a contract that will track the performance of 100,000 Euros against the market value of the US Dollar.
Today, there are many brokers that use smaller lot sizes. However, for this example, we will use the classic lot size of 100,000.
Instead of being denominated in currency units, like shares, or an interest rate, like bonds, FOREX contracts are denominated in ‘Pips’.
For the 100,000 Euros that are the basis of our example trade, one pip would be equal to 0.0001/1.3418, or 0.00007452675. That tiny number is then multiplied by 100,000 (the lot size) to arrive at 7.45 Euros, which is the value of a pip in this example.
In plain English, for every digit up or down in the fourth position from the decimal point moves (0.000X), the value of the contract will change by 7.45 Euros. It isn’t hard to see how loads of money could be made or lost in the FOREX markets, and why there are so many brokers out there!
FOREX Market Regulations
The Financial Conduct Authority (FCA) is responsible for regulating FOREX brokers, and it is a very good idea to limit your choice of brokers to firms that are fully regulated here in the UK.
There are some brokers that are regulated in other responsible jurisdictions (like the US or Australia), though every country will have some variances when it comes to the rules and how they are enforced. Using an unregulated broker is generally legal, but it can be dangerous, as the broker will be operating with little, if any, oversight.
The FCA has an extensive set of rules for FOREX brokers. Any FOREX broker in the UK must be fully licensed by the FCA, and will fall into one of three categories:
- Dealer License Any broker that holds a Dealer License from the FCA can engage in market making activities, and can also hold client funds along the regulations set forth by the FCA. It can also run a ‘B-book’, which allows the broker to act as its client’s counterparty, instead of brokering the trade on the open market.
- Intermediary License An intermediary license from the FCA will allow a broker to operate a ‘matched-principle’ model brokerage that is limited to Straight-Through-Processing (STP) of orders. The difference between a market-making and STP of orders will be covered below.
- Restricted Broker License A broker with this license can act as an marketer for FOREX brokers, but can’t hold client funds. This class of broker is more like an intermediary between retail clients and brokers that handle trades, more than a ‘broker’ in the normal sense of the word.
Every Class of Broker is Different
Any broker that holds a Dealer License or Intermediary License could also issue and trade in Contracts for Difference (CFDs), whereas a broker with a Restricted Broker License could market the services of a broker who has a wider range of trading instruments.
The capital requirements for all three classes of dealers are also different and may change in a post BREXIT world. For now, to hold a dealer license the minimum capital requirement is EUR 730,000. An Intermediary License holder will need EUR 125,000, and a Restricted Broker License, requires EUR 50,000.
FOREX brokers that are regulated by the FCA will have have to demonstrate that their “mind and control” is in the UK, and this means a physical presence and staff on the ground. The Compliance Officer and Chief Executive Officer have to be in the UK, and both will have to pass tests to ensure their competency.
The process for becoming an FCA regulated FOREX broker is no walk-in-the-park, which is why it is worth shortlisting brokers who are willing to comply with FCA regulations.
Best Copy Trading Brokers
Some brokers offer a featured called copy trading or social trading, which allows you to “copy” another member’s trades. Thanks to the progression of trading platforms and the spread of social media, more and more brokers are now building this feature into their sites.
The idea is simple and quite brilliant, you can sign up to follow or copy a certain trader and your trades will mirror theirs. The stand out broker who pioneered this concept is eToro.
Read our guide to Copy Trading here.
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Risks Involved in FOREX Trading
Highly-leveraged retail FOREX trading isn’t inherently risky in the same way that driving F1 cars professionally isn’t inherently risky. Regulated FOREX brokerages are required to report how many of their clients lose money on their platform, and most are well above 75%!
There are a few reasons why retail FOREX trading can be extremely dangerous for your fiscal health. Using high amounts of leverage is probably the most prominent reason, but the difficulties connected with trading macroeconomics directly are also pretty substantial.
Don’t go into the FOREX market blind, do your homework and learn as much as you can!
Understanding How Leverage Works
Let’s go back to the example trade of a standard lot of 100,000 EURUSD bought at 1.3418. If the position was bought in cash, there would be no leverage, and you could theoretically hold the position for as long as you would like.
For that matter, you could just buy 100,000 Euros and park them in a German bank account, and wait for the US Dollar to fall (then send the cash back to the US). This approach is seldom the case with retail FOREX trading. Instead, traders use borrowed money to buy a contract.
In this example, let’s say that you used 100x leverage to buy the contract. That means that you used 1,000 Euros to buy a contract that is worth 100,000 Euros. As we established above, one pip would be worth 7.45 Euros, which means that a movement from the purchase level of 1.3418 to 1.3315 would result of a loss of 748 Euros (or more than 70% of the money you started with).
In some cases, brokers will allow the use of 500x leverage, which would mean that the loss in the above example would be 5x higher, or 3,725 Euros (or more than 3.7x the money you started with). In most cases, a broker would force you to sell your position if your losses exceed the value of the account.
Depending on how the market is trading, you may end up owing your broker money, because it had to sell the position at a lower level to close it out as soon as possible.
The Manic Macro Environment
There is no shortage of factors that can move exchange rates on a daily basis. Depending on the strategy that a FOREX trader uses, data could make a huge impact on how the market trades. If something unexpected happens in the geopolitical environment, that can also make exchange rates jump in unknown directions.
Ultra short-term FOREX traders (scalpers) are more or less immune from the macro factors that affect medium-term traders. In fact, some scalpers use the release of market data to make their trades.
The takeaway from all this should be that using loads of leverage to trade in a market that is extremely unpredictable is very risky. Not only can you lose all the money in your brokerage account, but you can also end up owing your broker loads of money you may not have.
Common Trading Platforms & Software
There are a few industry standard trading platforms for the FOREX market, and some brokers have also created their own platforms that get great reviews. The vast majority of platforms will look and feel like Meta Trader 4 (MT4), which was the go-to platform for decades.
- MT4 Meta Trader 4 was released back in 2005 by Metaquotes Software, and has become the most widely used (or copied) FOREX trading platform there is. As a result of its popularity, there are countless programs that have been designed to work with MT4. Some create trading signals, and others are trading bots that make trades based on algorithmic models.
- MT5 Meta Trader 5 was created to be the successor to MT4, but it hasn’t been the knock-down success that many thought it would be. While MT5 does offer some features that MT4 lacks, many of the third-party programs made for MT4 won’t work with MT5. Most major FOREX brokers will allow you to choose which platform you want, and there really isn’t a one-size-fits-all solution.
- Currenex Currenex isn’t going to be a good fit for smaller retail traders. Instead of dealing with your broker, Currenex connects you with market liquidity providers (full ECN), and usually requires $20,000 USD to start using the platform. On the plus side, you will be getting the actual market rates for currency pairs, which is attractive for bigger traders.
- Proprietary Platforms Many of the larger FOREX brokers have created their own trading platforms or advanced options that work with MT4. Each one of these platforms will be different, and your broker will be able to explain the different trading platform options you can use.
How Brokers Make Money
Every single FOREX broker is going to have a different way of doing business. Some may offer zero fee trading and make their money from the spreads (more info below), while others will charge a flat fee per trade, and offer tighter spreads.
It is a very good idea to learn about which kind of FOREX trading strategy fits your goals before you decide on a broker. Some brokers have special account types for scalpers, while others ban the practice outright!.
- Fees & Spreads There is no way to give a comprehensive description of all the ways that brokers apply fees to FOREX trading. We will concentrate on some of the most important terms, so you can sort through a broker’s fee structure before choosing to give them your business.
- Spread The spread refers to the difference between the bid and ask price for a FOREX contract. In the example used earlier, the price was quoted as: EURUSD 1.3415/1.3418 The spread between the two prices is 3 pips, which would have a value of EUR 22.35 on a standard lot of 100,000 Euros. In a practical sense, the spread determines the value of your contract, which is important to keep an eye on. If the spread widens substantially, it could force a margin call from your broker. Every broker will have different policies on how margin calls work, but it is important to understand that when spreads widen, you could be in for some trouble. Low market liquidity or major events can cause spreads to widen, and the only way to protect yourself is to use smaller amounts of leverage.
- Broker Fees Every FOREX broker will have a fee structure, and it may vary based on the account type you select to use. There are four main ways that FOREX brokers make their money:
- Trading Fees Much in the same way that a stockbroker will charge a client when they buy or sell a share, a FOREX broker can charge you when you open or close a position. Some may have trading fees that are based on the lot size, while others may offer flat fees regardless of how much you buy.
- Spread Markups One of the ways that FOREX brokers offer ‘zero fee’ accounts is by using larger than normal spreads to make money. If the broker is able to buy the EURUSD contract at 1.3417 and sell it to you at 1.3418, they will make money. Many brokers offer accounts for new FOREX traders that use this system, as it is far more simple.
- Financing If you plan to hold on to a leveraged position for more than a single trading day, your broker will charge you interest on the money that you are borrowing to keep the position open. The amount a broker will charge varies, but it is generally in the single digits on an annual basis.
- Commissions Instead of charging a flat fee for FOREX trades, some brokers use a commission-based model to make money. The client will pay a small percentage of their trades, usually measured in basis points, to the broker. Be sure to talk to your broker before you start trading so you understand all the additional fees that you will have to pay!
What to Look For in a Broker
Every FOREX trader will have different needs from their broker. One of the most important things to do is decide on how you want to trade the FOREX market and base your choice in broker on your trading habits.
Clearly, you will also need to know that you are doing business with a reputable broker that will treat you fairly, and pay you when you ask to withdrawal money. Some brokers will charge you when you deposit or withdrawal money, and this is important to consider.
If you plan on making weekly contributions to your trading account, a broker that makes you pay to deposit funds isn’t going to be a good fit!
It is also worth mentioning that there are many unscrupulous operators in the online FOREX industry. Some will refuse to allow you to withdraw money, and other operations are designed to steal your identity and financial information outright.
Dealing with a broker who is regulated by the FSA basically removes these risks. That is why regulation is so important, especially in an industry which has seen an influx of bad actors over the last decade.
Account Types / Demo Accounts
Today, major FOREX brokers will have some sort of multi-tiered system for client accounts. There is generally an account that is aimed at smaller traders, or people who are just starting out in FOREX trading. These lower-level accounts generally have ‘zero-fee’ models which make money from marking up the spread or dealing directly with the broker.
There are two different ways to trade in FOREX. One is called ECN (Electronic Communication Network) trading, and this means that you are actually dealing with a counterparty that isn’t your broker.
The other form is called ‘market-maker’ trading, and this means that you are trading directly with your broker. In other words, if you make money, your broker loses it. There is a substantial debate about how honest market-makers really are. If you are dealing with a regulated broker, and there is an issue, you have some legal recourse.
In any event, every broker listed below will allow you to open up a demo account before you start trading with your real money. Some brokers will let you demo its platform for months, while others will give you as little as a week.
Even if you have loads of experience trading FOREX, it is a good idea to use the demo account for a little while, and make sure you understand how everything works!
Order Types and Execution
When you are ready to trade, you will have a few different options in how you buy or sell a FOREX contract. The simplest way to trade is to use market orders, which the broker will fill at the current market prices.
Keep in mind that the market prices may change before the broker can fill your order and that the price you pay can change.
If you need to be sure your order is being filled at a certain price, you can use limit orders to try and buy or sell a contract at a given level. All you have to do is tell the broker what level you would like to buy or sell the contract at, and if the market moves to that level, it will be executed.
One of the most important orders there is in FOREX trading is the STOP LOSS order.
A stop loss order allows you to set a predetermined level at which your trade will be closed. This will make sure you don’t lose more money than you can afford to do without, or get caught pumping money into margin calls for a trade that will end up eating you alive.
The TAKE PROFIT order is the positive opposite of the STOP LOSS order, and lets you sell your winning position at a given level of your choosing.
FOREX firms have mixed reputations in the area of customer service.
Many FOREX brokers have only been around for a few years, and their turnover of clients is generally high. Once someone loses all their money in a single trade, they rarely come back for more.
Some of the bigger firms tend to deliver great service to their larger clients, while smaller accounts will struggle with getting their complaints heard. There are numerous things that can affect the FOREX market, and the broker may not be able to control all of them.
For example, if you are using an ECN broker, and the spreads widen after an economic announcement was made, the market action is beyond the control of the broker. It is important to get a feel for what a FOREX broker can and can’t do, before reading the huge number of FOREX broker reviews online.
Again, we highly recommend you limit your choices to brokers that are regulated by the FCA, or a similar authority in an established jurisdiction.
Statistically speaking, the vast majority of FOREX traders will lose money in the market. Part of this has to do with what actually drives FOREX market movements, and part of it is the eye-watering amount of leverage that retail investors are offered by many FOREX brokers.
Over the last two decades, there have been numerous new FOREX brokers entering the marketplace, which has democratized FOREX trading to a much greater degree than ever before. Some brokers will allow you to start trading with as little as $50 USD in your account, which can then be leveraged up to as much as $25,000 if 500x leverage is permitted by the regulator.
The 20% (approximately) of the FOREX traders that make money probably aren’t using huge amounts of leverage, and also have years of experience in both macroeconomics and how FOREX markets actually work. The good news is that with smaller account sizes on offer, younger people can get into the market and start learning with far less money than ever before.
If you decide to start trading FOREX, use this article as a starting point for your learning. If you go into the FOREX market with little knowledge, and big expectations for profit, you will probably be unsuccessful.
However, it is worth noting that when FOREX trading strategies are combined with a high level of geopolitical and economic knowledge, the potential for profit is enormous. That is how George Soros made more than a billion US Dollars in one day when he ‘Broke the Bank of England’!