The number of brokers that focus on day traders and traders of CFD and forex products has strongly increased in recent years. Especially the so-called online brokers are strongly represented. So for the active trader there is a lot of choice. A larger offer also means more competition between brokers in terms of price and conditions.
It’s important to determine in advance which products and how often you want to trade. If you trade a lot, then of course costs are important. When you trade less frequently or when you hold positions for a longer period of time, then costs are a bit less important. Traders who want to trade CFDs or forex should take a good look at the costs of opening and holding positions. Almost all good brokers will have an overview on their website with all relevant rates and costs.
In the overview below you’ll find the 5 most important points to pay attention to when choosing a suitable online broker.
For a trader it is important to look at the costs of using a trading platform, as these have an impact on the return. Depending on the type of product, there may be the following types of costs:
- Fixed or recurring charges for maintaining a trading account
- Transaction costs for opening and closing positions. For CFDs and forex these are mainly spreads and commissions
- Costs for the implementation of changes in positions
- Costs for unexecuted limit orders
- Costs for live prices
- Financing costs for leveraged products such as CFDs and forex
- Other costs such as costs for additional chart packages and the like
2. Margin requirements and leverage
When trading leverage products, such as CFDs and forex, the so-called margin requirement is important. The margin requirement is the amount you need to open a position. In the case of leveraged products, you don’t have to invest the total value of your exposure to trade. The margin requirement is expressed as a percentage of the trading volume and is also called the initial margin requirement. The level of leverage is based on the margin requirement.
You can easily calculate the leverage of a CFD or forex product yourself by dividing 100 by the margin requirement in percent. For European brokers the margin requirement for large indices, like the German DAX30 for example, is 5 percent of the trading volume. If we divide 100 by 5, the outcome is a lever of 1:20. The maximum leverage can vary per broker and per country.
3. Trading platforms and apps on offer
Most major brokers offer their own web-based trading platform. An advantage of this is that the trading platform can be accessed wherever an internet connection is available. First look at the functionality of the platform and whether it meets your way of trading. Good trading platforms are logically arranged and work somewhat intuitively. Also look at the display of charts and the possibility to set charts to your own liking. Also look at the available indicators. Are the standard charts and indicators good enough to be able to carry out a good technical analysis, or do we need to look at external or additional charts packages?
Besides a good representation of the products you want to trade via an online trading platform, you’ll also need to look at the so-called order ticket, deal ticket or trading ticket. In the order ticket, we fill in all relevant data about the order online, such as the direction in which the trade is taking place (buy or sell), the contract size or the trading volume, a stop-loss and a limit. Furthermore, in the order ticket we can normally choose from different order types.
Another interesting point is the language in which the trading platform is available. Most brokers offer the trading platform as standard in English, German or French. However, the larger brokers will also facilitate other languages, such as Dutch or Spanish.
Mobile trading platform
In addition to a web-based trading platform, many brokers now also offer good mobile apps, which can be used to trade via a smartphone. With some brokers, the number of mobile users even exceeds the number of users trading on a PC or laptop. Mobile trading is likely to grow in the future.
When using mobile apps, pay particular attention to user-friendliness. In practice there are still some shortcomings in the use of mobile apps for online trading. For example, it can be difficult to do an extensive technical analysis via a mobile phone. On the other hand, a mobile application is ideal for keeping track of prices and entering orders.
Many brokers offer their own platform as well as the possibility to link external trading platforms to their software, such as MT4. MetaTrader 4 is an electronic trading platform, which is often used for trading currencies and indices. The Major Markets Trading forex algorithm also runs on MT4.
Traders can now choose from a wide range of brokers. The certainty that our money is safely placed with a broker is very important in this respect. After all, we all remember the last financial crisis. Fortunately, it is possible to investigate the registration of brokers and the laws and regulations that brokers have to abide by.
In order to determine which legislation applies, we first need to look at a broker’s head office. It is important to determine with which party we actually enter into an agreement and in which country this party is established. If a broker is based in a country within the European Union, it will also need a license to offer its products within the countries that belong to the EU. It is possible that a broker is licensed in each individual country. It is also possible that a broker makes use of a so-called European passport, as a result of which the broker may offer its products in several countries within the EU. The legislation of the country in which the broker is established then applies. In this respect, it is important to look at the national guarantee system that applies in the country concerned.
Most countries have their own financial market regulators. In the United Kingdom, for example, this is the FCA, the Financial Conduct Authority. In Germany, the BaFin (Bundesanstalt für Finanzdiensleistungsaufsicht) is the supervisor. Nearly all regulators provide access to an online register on their website, in which providers of financial services can be found.
Regulation also says something about the reliability of a broker. In general, we prefer brokers who are registered in the countries in which they offer their products. A special point of attention here are so-called offshore brokers. These are brokers who have their headquarters in mostly exotic places, where laws and regulations are minimal. The possibility to do research on brokers via the internet offers a solution. When a broker is hard to find via the internet or there is little information available, this usually says enough. In any case, it pays off to adopt a healthy skeptical attitude.
5. Product range
The choice of a suitable broker is directly related to the available product range. Although this may seem very logical, there are a number of things to take into account.
First of all look at the presence of the products you’d like to trade. In practice it’s important to look at how the products are offered by a broker. Many brokers offer the same markets, but in different contract sizes or as different products. This means, for example, that the German DAX30 can be available as a CFD, but also as an option or as an ETF.
The product range can differ from broker to broker. For example, there are brokers who specialize in offering forex trading, the so-called forex brokers. The larger brokers in the retail market for leverage products will offer both CFDs and forex products. In addition, there are also the more traditional online brokers, which offer leverage products in the form of turbos, sprinters, speeders or a limited form of CFDs.
Once we have determined the products that we would like to trade, we look at the support that a broker offers via the trading platform. Many brokers now offer market information about the markets they offer. This information can include live streams, signals, automatic chart analyses, market updates, webinars, news feeds and more.
A particular point is the pricing of the products to be traded. Many brokers act as so-called market-makers. This means that the broker partly sets his own prices, for the tradable markets. When trading, we base ourselves on the price that the broker makes available and not on the market itself. Of course, the underlying market will serve as a reference for pricing. The deviations are then minimal in practice.
Especially in the case of leverage products, differences can arise between the prices that the broker offers and the prices of the underlying market. This occurs especially in case of rapid and large price changes. It can happen that a broker can only offer delayed prices or in the worst case no price at all.
When a broker’s spreads are low and stable, there is usually a fair price for the trader. In short, the spread is the difference between the available buying and selling price.
Not all brokers offer live quotes for their products. These are normally available for a small fee. For every market you’d like to trade, first check if there are live quotes on offer and if you actually need them. A day trader, or a trader who trades on short periods of time, is more likely to need live quotes than a trader who stays in a position for a longer period of time.
The points mentioned above, and for example the speed of execution of orders, can easily be tested with most online brokers by means of a so-called demo account.
In addition to the above 5 points that we used to compare online brokers with each other, there are of course more points to consider.
For example, we can look at the customer service of online brokers. Is there a phone number we can call? Is the customer service available in the local language? In addition to telephone accessibility, we can also look at the accessibility of brokers via email or via a chat program. In practice we see big differences in customer service at brokers. There are brokers who, for example, cannot be reached by telephone at all and who handle all customer service purely through online channels.
Does a broker offer technical support when setting up a trading platform or support when entering orders? In practice, this is quite an important point. Think of a situation in which, for example, you’re not able to close a position yourself via a web-based trading platform.
Does a broker use the trading platform or website to offer further education or extra information that is important to make good use of the trading platform? Many brokers nowadays offer extra information in the form of webinars and seminars, for example, or via an available education platform.
Once we have assessed all the above points, we will be able to make a choice for a suitable and good broker. Opening a trading account with an online broker is often easy. Keep in mind that a broker needs certain additional information from you, such as information about income and assets, for example. Furthermore you’ll probably be asked for a copy of your passport or ID-certificate, and a so-called proof of address. This procedure is meant to prevent another person from being able to apply for an account in your name.