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3 Ways to Test your Forex Broker
Written by: PaxForex analytics dept - Thursday, 21 September 2017 0 comments
Once a new traders makes the decision to enter the forex market, the first step is to find a forex broker through which an account can be managed. Without one, the traders has no access to the largest financial market available. A lot of new traders tend to focus more on their investment or trading strategy and ignore the importance a good broker will have on their overall performance. Selecting the right place for your portfolio will greatly improve the effectiveness of any strategy and result in a good partnership while the wrong selection can turn into an unnecessary nightmare. Therefore it is very important to invest enough time into finding a great broker in order to build a long-lasting, mutually beneficent partnership.
There are three different types of brokers; a market maker often abbreviated with the acronym MM. Many agree that this type of broker, which can profit from your losses and often take the opposite side of your trade, is the least effective choice for traders. It is smart to avoid MM brokers, as you don’t want to trade in an environment which is highly profitable for only one side. Many MM brokers are known to hunt stop loss orders and to manipulate prices just enough for traders to be forced out of a trade for the broker’s own gain. Stay clear of MM brokers and your overall trading experience will greatly improve, and so will your results.
The other two types of brokerages are the ones traders should seek out. One is called straight-through processing or STP and the other one is the electronic communication network or ECN. Many brokers operate a combination of both. If the volume of the trade is big enough to warrant an ECN execution, the broker will push the order through the electronic communication network and for smaller orders it may be more efficient to use straight-through processing which means your order is relayed directly to the market without any broker meddling. Make sure to look for a STP or ECN broker, or a combination of both, which will give you and your hard researched strategy the best trading environment.
After a forex broker has been selected. It is wise to put the broker through a series of tests in order to make sure the selection was the correct one and in order to prevent potential negative surprises down the road. The first test should be with the support, especially for new traders as there will be likely many questions. A good broker will take the time to answer every question without copy-pasting articles or past responses. An individual approach means the broker cares to address the issues and takes the time
to do the job right. The only dumb question is the one not asked, so don’t hesitate to ask any question which remains unanswered. A patient and friendly support staff can go a long way.
The majority of bad reviews about brokers either deal with stop loss hunting as practiced by MM brokers or the unwillingness to honor withdrawal requests. Making a deposit is very simple as every broker welcomes your money, but only legit brokers will let you withdraw it without questions asked or problems caused. A very simple test is to make a deposit and shortly after that request a withdrawal. A solid broker will ensure both transaction will go swiftly. One thing to keep in mind is that while a deposit may be instantly credited to your account, it may take a few hours for the withdrawal request to be processed. It depends in the time of day when you make the request.
Execution time is another very important aspect of trading and a good broker will have fast execution times, typically less than 2 seconds after entering the trade. Often it can take only mini seconds for the order to be filled. Fast execution time serves two purposes. The first one is it displays deep liquidity of the broker which is very important for the safety of your portfolio. A liquid broker will always fill orders fast, so keep this in mind when you place trades. Re-quotes, partial fills and cancelled orders should be something extremely rare and virtually non-existent. The second purpose is that some trading strategies depend on capturing small price moves, in many cases less than 10 pips, and since markets may move rather fast it is important that the traders gets the best price possible for the entered trade.
Once a broker passes the above three tests, forex traders should feel a lot more comfortable with the choice made. Conduct those test with a smaller amount just in case something may go wrong. $100 to $200 is enough for the test phase which can be conducted in less than two weeks. After that feel more secure to make a bigger deposit or a series of deposits as growing your account most effectively is a combination of smaller monthly deposits together with a solid trading strategy. As the portfolio grows the monthly deposits can be cancelled and after some time they can result in monthly withdrawals. Don’t forget to test your broker, make sure all tests are passed with satisfaction and then focus on enjoying the positives of forex trading.