This section of our website is dedicated to forex brokers. Here we will share valuable information from our vast experience in the forex industry and will present the way forex brokers operate. Unlike other websites that will just show you a fancy list of forex brokers with logos and bonuses just waiting for you to register with the brokers that sponsor them, we will try to first explain how forex brokers work and what to look for when choosing your broker.
If you reached this page searching for the best forex brokers, you should keep reading because this is probably the first website that will tell you the truth instead of just flashing their sponsors in front of your eyes.
Sorry for using this trick to grab your attention, but it's really worth reading this
If you want to trade forex it is very important to understand what you’re dealing with and how the industry works. The forex market is the largest market in the world by the volume of daily transactions and there is money to be made here, and this is why a huge industry developed around forex trading.
A forex broker can make a lot of money from a single client (I will explain how later in this article) and this is why it is willing to pay a lot of money for advertising on websites dedicated to forex trading. This greatly distorts the reviews and the rankings you will see on such websites, as the website owners will promote the brokers who sponsor their websites. You will notice that most websites that talk about forex display banners and other marketing material from the brokers and also use the brokers’ logos in order to boost their brand image. This is because they get paid to do this. If you just want to share some useful information on a topic you know very well, you will not fill it with banners and logos of the companies you talk about (unless you promote them).
So, the first thing you should know about the forex industry is that brokers pay a lot of money to be displayed on reviews websites and this is why the information you will see there is not objective.
Theoretically, forex brokers make their money from the ‘spread’, which is the difference between the bid and ask price of currency pairs. Or at least, this is what they all say on their websites... But is this actually true?
As with most things, there is some truth in this statement, but things are not exactly the way they are presented. There are actually three different business models that forex brokers use in order to make money. Below, I will present the three of them.
1) Market Maker Model – The brokers using this business model are just waiting for their clients to lose their money, since they are the counterparty of the trades. They are very similar to bookmakers as they make money when the client loses. Of course, the spread plays a role in this business model as well, because the spread gives the broker an edge against the trader and will cause the novice traders to lose money in the long run. Brokers using this model know that most traders are beginners and will end up losing money, and they prefer to just wait for this to happen instead of actually processing their trades to a third party and incur additional costs for executing the trades. All brokers use the market maker model when it comes to micro and mini accounts, because banks (liquidity providers) use the standard lot when providing market liquidity.
2) ECN/STP Model with Markup – The brokers using this model to monetize their business will process the trades directly to their liquidity providers using their connected electronic platform and will add a ‘markup’ to the interbank spread. This is the closest model to “making money from the spread” since the brokers get their money from the spread markup. For example, if the liquidity providers have a 0.5 spread on a specific pair and the broker adds 1 pip as markup, your platform will display a spread of 1.5 pips. The broker’s profit will be 1 pip regardless of the outcome of the trade. It doesn’t matter if you win or lose, the broker will always earn based on the volume you trade.
3) ECN/STP Model with Commission – This business model is very similar to the one described above, as the broker will execute your trades directly to the liquidity providers giving you direct market access. The difference between the two is that in this case, the broker will charge a commission for every trade you place but will not add a markup to the spread. This means that you will trade directly against the liquidity providers at interbank spreads. If we’d take the same example given for the markup model, the broker charging commission will let you trade directly with the 0.5 spread but will charge you a commission proportional to the size of the trade (for example a 10$ commission for one round lot traded). In this case the broker earns its revenue from the commissions. It doesn’t earn anything from the spread, and it doesn’t matter if you win or lose.
Both ECN/STP models are based on executing the trades directly to liquidity providers, and they are more or less the same from the trader’s perspective, since the markup and the commission are usually equivalent in terms of cost. Brokers are able to provide a STP model only for accounts with the standard lot size of 100,000 units for major pairs. For mini and micro accounts all brokers will have to work as market makers.
As you probably noticed, there is a huge difference between market makers and STP brokers in the way they make money. What model is more profitable for the broker? This greatly depends on the type of traders they have. A broker with novice clients will make more money being a market maker. I will explain you why. A novice trader (and believe me, most retail traders are beginners with very little experience) will have a 50%-50% chance of winning and losing pips when he trades. If such trader executes many trades, the ‘luck factor’ will become negligible as the total results of his trades will tend to average around zero pips won or lost. This means that the spread will eat from the bankroll until it is depleted. In the end, such traders will lose all their money to the spread. A market maker will make the most money out of such trader since it doesn’t have to split the spread with the liquidity providers. On top of that, it will also save on costs because having a high speed ECN (Electronic Communication Network) requires some investments and some very qualified technicians to maintain it. This is why many brokers prefer to act as market makers instead of choosing the ECN/STP model.
You may ask yourself, isn’t it riskier for the broker to act as a market maker? What if there is a very good trader that wins a lot of money? While it is true that market makers are at risk of losing money to very good traders, they have some hedging solutions for such situations. The risk management team of the broker will rate every trader based on his/her performance. If a trader proves to be a constant winner that trades large amounts, the dealing desk may decide to execute his trades to their liquidity providers (even market makers have their liquidity providers for situations requiring hedging). While in this case the broker will no longer make money on the client’s loses, there are still some issues that can affect the trader. The dealing desk is unable to instantly execute trades like an ECN and this is why it will not allow scalping for winning traders. Also, during news time it may give requotes or have large slippage because of the delay caused by the dealing desk compared to a 100% electronic processing system. This is why many news traders and scalpers end up complaining about their brokers on discussion forums. However, if your trading style is not based on day trading and it doesn’t require ultra-fast and precise execution, you will have no problem with market makers. Of course, here I’m talking about real market maker brokers, not about shady brokers without any regulation that have no liquidity providers and are trading against their clients even when their clients make money (which results in a conflict of interest that will force the shady brokers to resort to ugly tricks in order to block the traders from winnings).
Anyway, my personal opinion is that you should always use an ECN/STP broker if you have enough capital to trade using a standard account, because such brokers have better execution and no limitations when it comes to your trading style and strategy. ECN/STP brokers will always allow scalping Expert Advisers as well as news trading.
Now that I have explained how forex brokers make their money, you are probably asking yourself what forex brokers do I recommend. I will split my recommendations in two categories: forex brokers for beginners with low capital (this means traders that don’t have enough capital to use a STP broker and are only starting to learn) and forex brokers for advanced traders.
If you are a beginner that is not willing to invest a significant amount into a forex trading account (you plan to invest less than 1,000 USD) you will probably want to have a mini account, or a micro account. This means you will trade with a market maker regardless of the broker you choose. Considering this, what is important is that your broker is a large one, it is well regulated and has a user friendly and easy to use trading platform. One such broker is Ava Trade. If you are into ‘social trading’ and are more interested in enjoying your trading experience with fellow traders than trading professionally, you can also check Markets.com or Etoro as they are the most beginner oriented brokers.
However, if you prefer to use a broker that uses the Metatrader 4 platform and plan to move to a ECN/STP account later, you should just ignore the beginners recommendation and read further.
I strongly recommend to use a ECN/STP broker if you are serious about trading forex. This means you should choose an account that uses the standard lot size with an ECN broker. One of the best options for this is the broker XM.com. They have three account types (Micro, Standard and Zero). The micro account is a good option for beginners because they can upgrade to a standard account when they are ready to trade larger amounts. The standard account is the one I recommend for advanced traders because it is a true ECN/STP account. XM uses the ‘markup’ model for their standard account so you will not be charged any commission for trading. While even small traders can start directly with the standard account because of the high leverage allowed by XM, I cannot recommend using very high leverage even if the broker allows you to, because the risks of busting your account quickly are higher. The Zero account is also a very good ECN account with even lower spreads, as XM doesn't have any spread markup on this account, but instead it charges a commision for every trade.
Another good option for an ECN/STP account is Direct FX. This is an Australian broker that offers the Metatrader 4 platform as well as an institutional-like platform named CQG. Direct FX has an outstanding pool of tier 1 liquidity providers that include banks such as Deutsche Bank, JP Morgan and Goldman Sachs.
My third recommendation for advanced traders is Hot Forex. You should make sure you choose one of the premium account types such as the VIP account if you want to trade in an ECN environment. Hot Forex has many account types so you should compare well before you decide which one is best for you.
All three brokers described above are very good ones. I have accounts with all of them and I am satisfied with the way they work, as I never had issues with them. As someone who uses Scalping Expert Advisers on a regular basis I put a lot of emphasis on execution and spreads, and I can say all three brokers are doing a very good job so far.
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1. CQG Platform
2. Metatrader 4
3. DMA (Direct Market Access)