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How To Select The Right Broker For Your Trading or Investment Account

How To Select The Right Broker For Your Trading or Investment Account

This is perhaps one of the most important aspects of trading and it is also the least talked about. There are a few factors need to be considered before selecting a broker.

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Online Access
The broker should offer you a stable online platform with minimum system outage for trading. The trading system should be user friendly and have some charting capability and provision of daily market news. In addition, a good broker would offer you online tracking of portfolio performance.

The bigger the better. When you trade FX, the broker is the counterparty. Therefore, the bigger the counterparty the more liquidity they have and this would translate into better pricing. Furthermore, the bigger brokers are expected to have better coverage in term of different currency pairs and trade support in different time zone.

A dollar saved is a dollar earned. Spread is the difference between bid and offer prices. You always buy at offer price and sell at a bid price. This means buy high and sell low. Every time you enter a trade you are already losing money even if the market doesn’t move. This is because the spread the brokers take. Therefore a lower spread would help you to save money in long term. Spread varies between currency to currency, time of the day and the size of the trade. Major currencies are expected to have lower spread than minor currencies.  Spread is lower during normal business hours than out of office hours. Therefore, it is important to choose a broker which has international operation and it covers different time zones. As for size of the trade, it can be a bit tricky. Spread can be low for small trade, however with big trade it can shoot up sometimes. This is because your counterparty want to protect themselves from sudden price jumps against them. Interestingly, if you trade at a high volume, spread is expected to go lower. However, you may need to pre-negotiate this with the broker. This works similarly to bulk buying discount.

What is a competitive spread? A competitive spread is around 1 to 2 pips (1 pip equals to 0.0001) for major currencies such as USD, EUR, JPY, GBP and AUD etc. It is expected to be higher for minor currencies.

Financial Strength
Whenever there is a currency crisis ( a sudden and sharp drop in the value of a currency), there would be some brokers which are affected and forced to go bankrupt. If this happens, it could affect the money that you deposit in your trading account with the broker. The most recent event was the un-peg of Swiss Franc (CHF) in 2015. Therefore, it is important to choose a broker which is financially sound and have strong balance sheet. Ideally one which is affiliated with a bank. Banks are subject to under tighter regulations and closer supervisions in general.

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Apart from the factors discussed above, there are also other factors that people may place emphasis on when engaging a broker. For example, research reports, seminars and innovative products offered.

Research Reports
Sometimes brokers like to differentiate themselves from the research reports and trade ideas they provide. Please bear in mind that most reports and ideas are generated by sell side analysts and their main objectives are to generate trade volumes. Sometimes they get it right and other times they may be wrong. The bottom line is that they create transactions and hence revenues for the firm. Buy side reports usually have more credibility as they tend to be more in-depth. The best research and trade ideas are the ones people actually put their own money into it. Unfortunately these are far and few out there for free. If you want to be a successful trader in the long run, it would be helpful if you start formulating your own trade ideas and learn from it rather than consistently relying on someone else’s.

Free seminars, it is often another sales pitch from brokers. In the world of trading and investment, there is no free meal. Free seminars are usually offered to people with a view to persuade them to sign up the relevant services and / or doing more trades after the seminars. It is good for beginners to participate such seminars to stay relevant and updated. However, you may not want to be overly excited with these seminars.

Innovative Products
Another sales gimmick which try to get you to either do more trades or/and charges a higher embedded fees from these innovative new products. The single most important factor when it comes to making money in FX is to get the direction right (whether you are long or short). The level of sophistication of the product only changes the embedded level of leverage (risk). If you get the direction right and use more leverage, you would make more money and vice versa. Leverage is like water, it can carry a ship and it can also sink a ship. Furthermore, leverage is not free and often it comes with a cost. The spot price of any currency pair is rather transparent and you can compare it easily between different brokers or simply looking at bid and offer spread. However, when it comes to innovative and broker specific products, it is extremely hard to compare the pricing competitiveness against its peers in the market. This enables the relevant stakeholders to make more fees / commissions on these premium products. Fees can be embedded in the pricing and often times they are not labelled as “fees”. For example, change of implied volatilities and decay factor can affect the pricing of options. These conceptions are more for academic discussion which are beyond the scope of this article.



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