Learn How to Choose a Broker

How to Choose a Broker - Learn about Brokers

What can help when choosing a broker ?

The features and offerings of a broker can be a way to get a sense of whether the broker may be a fit with the way the trader does or will trade.

For example, does a trader want to trade a few products or many. Does a trader want to try different types of trading. Does a trader require fast trade execution and low spreads, or is this not so important. Does a trader want to trade by themselves, or access a network of other traders.

Trading itself can be a tough experience, especially at the beginning. The problem with an initial choice of broker is that it may not be clear what way or with what products the trader will trade. Since this may be something which becomes clearer with practice, then this initial choice may be problematic, even if it clearly known and understood what these features are.

However, since thinking through situations like this, where there is a lack of certainty, is part of trading, working this out to the extent this is possible at the beginning, can be a good initial step.

Putting it in practical terms, one can understand what the features actually mean, work out what features are wanted or, if possible, what features will be wanted, then find out what the features offered are, matching desired features to offered features.

It is the case though that most brokers these days offer a wide range of instruments and even types of trading. With continuous risk management, setting stop-losses and using a regulated broker, then there is at least some foundation for trading.

Are there important factors to consider when choosing a broker ?

Over time, with experience of trading, what is important may change. The initial concern may be with reliability, but the best assurance of reliability, may be with whom the brokers are regulated.

Price and order execution may become important. However the relative important of trade execution is to some extent perhaps a subjective thing though, as it depends on the style of trading.

For example, if one trades the news and makes short term trades, very efficient execution is required. But if one takes longer term trades then this is not so important. This is because if a trade will take even a few hours, it is not so crucial if the order goes though immediately or slightly longer than immediately.

If one is trading into the news, then trade execution does matter. Also for very short term trades and news trades, the spread may become important. This is because the direction may be correctly guessed, but the trade may not work simply because the cost of the spread, takes away from the increment made before the market turns against the position taken.

Some brokers may offer fixed, some variable spreads. However low variable spreads may have this issue: at moments of higher market volatility, they may widen considerably and it needs to be considered that a fixed spread may not stay fixed in volatile market conditions.

What can be important factors in choosing a broker ?

These factors could be seen to be important to varying degrees: reliability, order execution in particular and features. By features can be meant the depth of the offering, that is how many markets of each type are available, for example the number and type of Forex pairs available to trade; the range of markets, for example, offering Forex, Metals and Commodities and types of trading offered, such as Options, social trading and ECN. Many brokers have quite a wide offering for retail traders, especially where CFDs (or Spread Betting) are available, as this allows for trading with higher leverage on a wide range of assets.

By features can also be meant a news feed, which can be important for gathering fundamental information about the market, and in news trading (but the prevalence of social media in this regard can be noted as well). One of the most useful features may be something quite simple, which is a list of upcoming events which may affect the market. It can be helpful checking this when entering the market. This helps deal with surprises, such as a pair suddenly moving in a trade, because a Central Bank has made a decision.

Features such as analysis and education can be useful, especially at the beginning, as it may be hard to read analysis or understand news and events about the market without knowing about trading markets and about technical and fundamental analysis. The broker normally has these available, but it can be instructive at the beginning to read as much as possible. This could include books on financial analysis, to understand financial statements; technical and fundamental analysis and Forex and options trading. These can be found online, but may be found at the library as well.

What are MT4, ECN, CFDs and Social Trading ?

  • MT4, offered by some brokers, is a platform which can be used to trade Forex and CFDs and which offers trading automation and signals, among other features. It features a marketplace, where books, magazines, robots and indicators can be downloaded.
  • ECN (Electronic Communications Network) trading aims to bypass the broker dealing desk by letting the trader access prices on the network of liquidity providers to which brokers connect. This can result in low spreads, but a commission can be charged by the broker. It can also allow for trading styles which may not be supported in dealing desk formats, for example scalping, robots and news trading.
  • In addition to ECN is Direct Market Access (DMA) trading where traders are connected directly to the primary exchange order books. Straight Through Processing (STP) can be a more limited kind of No Dealing Desk model, where the broker may determine which liquidity provider's orders are displayed.
  • If the dealing desk is being bypassed then there should be no re-quotes. Re-quotes happen when the dealing desk cannot fill an order and sends a new price for acceptance. In fast news trading, a re-quote or an inability to fill an order can stop a trade from happening.
  • In both Contract for Difference (CFD) trading and Spread Betting the trader does not own the underlying asset. These products are both based around the movement of an asset's price. CFD trading is based around contracts to exchange the difference between the price of an asset at the beginning of the trade and its close.
  • In Spread Betting, the trader bets a certain sum on price movement, the amount of movement being the difference between the price of an asset at beginning of the trade and close, expressed in points or sometimes pips in Forex. These products allow for higher leverage, but increasing leverage increases risk.

A significant feature these days is social trading, where joining a broker can include joining a network of other traders. The idea is the trades of high performing traders can be copied and insights from the network can enhance the trading experience. Social trading can be combined with trading automation and signals. One drawback to doing this is that relying on automated trading can result in a lack of understanding of the market.

What are options ?

Options are traded contracts giving the option to buy or sell an underlying product at a future date, or during a certain time period, at a specified price (known as exercising the option). The cost of an option is called its premium. An option to buy is a 'call', an option to sell is a 'put'. The specified price is called the strike price.

  • An option expires after a certain amount of time. Some types of options allow the trader to exercise the option before its expiration date (American style) others can only be exercised at the expiration date (European style).
  • As the option has a cost, it is possible to make or lose money even if the option is not exercised. The intrinsic value of an option is the difference between the price of the underlying in the market and the option's strike price. If the underlying has less value than the option's strike price, then the option has an intrinsic value of zero.
  • An option which has a positive intrinsic value is called 'in the money' and one with a zero intrinsic value is called 'out of the money'. There can be a difference between intrinsic value and the premium because an option will have time to increase or decrease its underlying value, before it expires.
  • As an option gets closer to expiry, this time value decreases. The way it decreases is related to the change in potential for volatility as time decreases. The potential for the underlying to change its value is related to the potential for volatility.

Potential profit or loss in options trading can be limited or open ended, depending on the kind of trades made, as the underlying can rise or fall in value. Options can have more complex features in which case they are known as Exotic Options, rather than Vanilla Options.

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