💸 How to Evaluate and Choose a European Forex Broker

This is an ideal read for the European investor who is looking for growing his/her wealth fast and is ready to assume more risk.

There are very few, if any, get-rich-quick schemes that work long-term in the world, however, it is true that some investing and trading strategies can get you on the path to greater wealth much faster when compared to traditional, passive and low-risk investments such as savings accounts or index funds. Not to mention that things like term deposits and savings accounts have become useless for investment purposes, as banks offer rates of close to 0% or even negative interest in some cases.

Therefore, investors are forced to look at alternatives for growing their net worth. I’ve written many articles on such alternatives, such as P2P lending, real estate developments, precious metals, and even cryptocurrencies like Bitcoin and Ethereum.

In this article specifically, we are going to focus on market trading using forex and CFDs. These are not for the beginner with a low-risk appetite, as they come with considerable volatility and the possibility of losing your entire investment. As always, the flip side is the possibility of growing your pot relatively quickly. So if you already have investment experience and want to learn about some new possibilities, read on.

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Have you ever read Rich Dad’s Cashflow Quadrant: Guide to Financial Freedom authored by Robert Kiyosaki?

If your answer is yes, then I am sure that you know that investments are the ultimate way to financial freedom. In other words, securing yourself with a passive income from investments will make and keep you financially independent.

In this methodology, investing means purchasing assets and letting them generate income on a regular and passive basis.

There are many forms of investments such as saving your money in a bank or purchasing real estate. Nevertheless, these conventional investments always require significant capital to generate considerable income. As you might have understood, the conventional process of investing pushes your dreams of wealth further out of your reach.

Fortunately, in recent years, Forex & CFD trading has become an affordable investment, as well as a potentially very profitable one. Financial investments are not something new, instead, they have a long history. With the dawn of the internet era Forex & CFD trading has become accessible to hundreds of millions of people around the world. There are many brokerage companies connecting traders to various financial markets and providing them the necessary tools to achieve success.

The Broker’s Role in Financial Investments

Investing in currency pairs, gold or goods has been conducted for a very long time. The concept is simple, we predict the price movement of an underlying asset, buy them, wait for its value to go up, resell, and gain the profits.

You will, however, need a lot of capital to make considerable gains from your investment. For instance, you buy 1000 EUR at a EUR/USD rate of 1.1250 USD; if the price goes up to 1.2000 USD, you will get 75 USD. The time it takes to get that rise can be months, considering that the price goes up and down all the time. Therefore, you need a bigger fund to gain bigger and faster profits, say 100,000 USD per trade.

Secondly, as you are a retail investor, it’s hard for you to exchange hundreds of thousands of dollars for euros. That is where the brokers come in; they are middlemen who gather the money of many retail investors and exchange it on their behalf. Moreover, brokers also lend investors money to increase their buying power, which is called margin trading or leverage trading.

With the development of network infrastructures, brokers can offer their services easily via online platforms. On the other side, traders just need a device like laptops or smartphones and an internet connection to access the platforms and start trading.

The question now is which broker we can join to trade and by which criteria we are to evaluate said brokers. As mentioned, we will focus specifically on how to evaluate European brokers.

Regulation – Your Broker Must Be Regulated

Trading with a broker means you have to deposit your money to their accounts and perform trades via their platforms. As such, the reputation of the broker is vital for the safety of your trades and finances.

Regulators are financial administrators that can be governmental or independent. Either way, regulators have to fulfill the following tasks:

• License the brokers: The administration gives brokers registration numbers and regulates their services.
• Build a regulatory framework that brokers have to comply with: It regulates the obligations based on which brokers build their policies regarding clients’ fund allocation,  conflict of interest, privacy, compensation and more.
• Supervise the operation of brokers and be the arbitrator between client and broker.

Several important policies that your broker must have are:

• Segregation of funds: The broker must keep their client’s money in a different bank account from its own. This makes sure the broker cannot use your money for their operation or any other purpose. Furthermore, the financial situation of the broker cannot affect the client’s investing fund.
• Negative balance protection: From a margin trading standpoint, the potential loss can be higher than your capital amount, which can make you in debt with your creditor aka the broker. A robotized negative balance protection will shut down all of your trades if your balance hits zero.
• Compensation policy: Your broker is a company and its business result can either be positive or negative. What happens with the money you deposit if the broker goes bankrupt? To hedge your investment, the administrations regulate the brokers to contribute to compensation funds. These funds will be distributed to clients as insurance if the brokers cannot fulfill their financial duties.

The above are monetary policies, there are privacy and security policies such as what information that brokers can keep and what they cannot, what they have to do to secure the trading environment. All of them should be published on the broker’s website and stated in the Terms & Conditions.

You should take note of the following prestigious European regulators as they are your guardian angels during your trading journey:

• Malta Financial Services Authority (MFSA): The single governmental administration in Malta. It takes over the supervising mission of the Central Bank of Malta, Malta Stock Exchange and Malta Financial Services Center.
• UK Financial Conduct Authority (FCA): This is an independent regulator in the UK that is financed by the financial services industry.
• German Federal Financial Supervisory Authority (BaFin): BaFin is an independent federal administration that regulates approximately 2,700 banks, 800 financial services institutions, and over 700 insurance undertakings.
• French Prudential Supervisory Authority (ACP): The ACP is sponsored by the French national bank to supervise banks and insurance agencies in France.
• Spanish National Securities Market Commission (CNMV): CNMV aims to oversee Spanish Stock Markets and other entities operating in the financial sector.

A broker can be licensed and regulated by more than one administration. In fact, it assures that you are under the protection of many bodies in many jurisdictions.

Market Offerings – A Wide Range Of Financial Markets

Forex is no doubt the biggest market in the financial industry with a daily trading volume of around 6.6 trillion USD. However, there are other exciting markets, some of which are even older than currencies. When choosing a broker, you may want to trade with one that can offer various markets and as many assets as possible. It helps you diversify and creates more opportunities to reap profits.

When trading contracts of difference (CFD) on financial markets, you don’t purchase the underlying assets but instead speculate on the difference in their values instead. To be specific, when trading a CFD, you open a contract that details the buying/selling of an asset at a certain price, and after a while, you close that contract by selling/buying the asset at a new price. The difference between the prices you open and close the contract at will be your profit or loss. The advantage of this form of trading is that you can place your order in both directions regardless of whether the market goes up or down.

Here are the financial markets and assets that brokers can offer you:

• Forex market

Forex is the main market that every broker offers. Its advantage is the popularity presented by trading volume, liquidity and news coverage, making it easier to approach than other markets. Digging deeper, we will see there are 3 currency groups:

Major pairs: These pairs are formed by USD and a currency from another major economy. There are 7 major currency pairs: EUR/USD, USD/JPY, GBP/USD, AUD/USD, USD/CAD, USD/CHF and NZD/USD. Because major pairs are frequently traded with big volume, liquidity is maintained and you can easily find your matches when trading these pairs.

Minor or cross pairs: These pairs don’t contain USD but other currencies of the rest of the major economies like GBP/EUR or AUD/JPY. These pairs have a bit higher volatility but in general, they are still liquid and easy to trade.

Exotic pairs: Apart from both groups above, exotic pairs consist of a currency from the major group and a currency from an emerging economy or a developed one but having a smaller scale. Some examples of exotic pairs are EUR/TRY, USD/THB or GBP/ZAR. These pairs are traded in much smaller volumes compared to major or minor pairs. As a result, it has lower liquidity but higher volatility, making it harder to trade but more profitable at the same time.

• Stocks

You can buy/sell CFD on shares of companies like Apple or Google. You should keep in mind that CFD does not grant you the ownership right of the companies like when you buy the shares directly from the stock exchanges. However, it still gives you several advantages like earning dividends.

• Indices

Indices represent the sum of a group of companies’ shares. It measures the performance of group members in a weighted manner. Big companies with higher trading volume and capitalized value have higher weights. Some popular indices are JPN225, AUS200 or UK100.

Some traders consider trading indices easier than trading stocks because they just need to read the overall information to predict the movements, rather than studying the financial report of each company to assess its potential.

• Commodities

Commodities are the oldest markets with a variety of goods. Among them, the most traded subgroup is precious metals of which the typical one is gold. Symbolised as XAU, gold is viewed as a haven for such an uncertain period as the present. In 2020 rose from around $1500 per ounce in the beginning of the year to around $1900.

Gold price is highly sensitive to macroeconomic news and geopolitical issues. Therefore, you should have adequate experience before playing with this market.

• Energy Carriers

The energy market was created in the past century but it quickly got a lot of attention. The oil and gas industries play an essential role in the development of any country. Therefore, crude oil and natural gas are also affected by political matters just like gold.

Two commonly traded crude oils that are used as standards for the oil prices are Brent and WTI oil.

• Cryptocurrencies

The newest market is crypto. This market is special in that its assets do not have physical forms. You can read about cryptocurrencies in my previous article on the subject.

Because of their unique nature and limited amount, these digital coins are extremely volatile. They can make you rich after one night but can also wipe out all of your investment in the same period.

Type of Brokers

There are different types of brokers that you need to be aware of. Brokers are intermediaries between you and the interbank market but the way they carry out your trades varies.

• Dealing-desk brokers (Market makers)

These dealing desk (DD) brokers act as the counterpart on each trade of investors. For instance, you want to sell USD for EUR, they are the ones who buy your USD and sell you EUR. NDD brokers make money from spreads which are the difference between the price you buy and sell the asset.

• Non-dealing-desk brokers  

These NDD brokers are pure middlemen. They quote prices from the interbank market, receive and send the orders that the investors make. As a result, the prices and spreads are raw without any mark-ups. In return, NDD may charge commission fees on trading volume or by a specific amount.

Regardless of the broker types, they have to provide fast order execution and a stable trading environment. Poor quality brokers with delayed execution or having a platform with many bugs induce trades to go against you. Worse, many scam brokers even defraud their clients and steal their hard-earned money by staging “incidents” during trading time. In particular, it can create slippages that make your entry go far away from your desired point. Another example is the broker which widens the spreads and pushes your orders closer to the loss level.

Competitive Trading Conditions

The next criterion is the trading conditions that the broker offers.

• Spreads

In the previous section, we understand that while DD brokers ask for higher spreads, NDD brokers require lower ones but with additional commission fees. But it’s just the floating part of the iceberg since spreads are heavily affected by the liquidity of the market.

All traders want lower spreads to cut down their trading fees, besides, they also want the spreads to be stable to avoid unexpected costs. The only way for brokers to meet these demands is by partnering with liquidity providers, not just the normal but the major ones and as many as possible.

• Commissions

The commission is another fee you may have to pay to perform your trade. Unlike the spreads which can float, commission fees are often fixed or proportional to the trading size. The most important thing when it comes to commission fees is that they must be clear with no hidden ones.

• Leverages 

Last but not least, you need to pick the right leverage. Leverage is indeed the tool that makes Forex and CFD trading much easier to approach than other investments. It allows investors to borrow money from their brokers to magnify the buying power. With the leverage ratio of 1:100, you just need to deposit $1 to open a position worth $100.

Leverage thus increases the potential profit but also increases the potential loss. Therefore, you need to take it carefully in considering your capital amount. Besides, leverage also varies by the asset you trade. Common assets like major pairs always have higher leverage while trading bitcoin can have a way lower leverage.

Trading Education

Traders usually neglect this section but trust me it is worth your time, especially if you are a freshman. To be successful in trading, you need to have many qualities including knowledge, experience and luck. Experience can only be gained over time and luck is something that you can never control, thus, knowledge is the only thing you can improve beforehand.

Tricking traders is easy but guiding them the right way to thrive is a real victory for a broker. Therefore, a reliable broker always dedicates a section for training, which can be called the education center, trading academy, etc. In this section, you can find various materials like ebooks or video lessons to learn how to trade. Furthermore, your broker should also host regular webinars where experts share their experience and answer the questions of the new traders. 1-on-1 courses are also recommended if you want to learn faster.

Apart from these basic materials and courses, you should look for a broker which regularly updates new strategies and posts market review articles. The market never sleeps and constantly changes so you need to stay updated by all means.

Client Support

The funny thing about brokers is that they always seem enthusiastic at first to attract investors to use their services. But the honeymoon soon ends as clients start losing money and the broker’s support also fades.

Besides, you can encounter some technical issues when using the trading platform of your broker. Therefore, the support team must be easy to contact. Visiting a broker’s website, you should look for its communication mediums such as email, live chat or hotlines. After that, you should ask them several questions to see how quickly they respond and the details they give you. A broker avoiding questions relating to monetary policies is never a trustworthy one.

Trading Platforms

Your broker may use the trading platforms of a third party or develop their signature ones. Most brokers offer MetaTrader 4 or MetaTrader 5 as the main platform for all versions because of its popularity. MetaTrader creates an outstanding trading terminal with many advanced tools that help you analyse the markets like charts, indicators, expert advisors, etc. Furthermore, all of these tools are presented within an intuitive interface, making MetaTrader easy to navigate, even for new users.

Normally, your broker should offer 3 trading platforms:

• Desktop PC: This version needs to be downloaded. It is connected to the broker’s server.
• WebTrader: The same version as the Desktop but it does not need to be downloaded. Instead, you access your broker’s website by logging in.
• Mobile application: You can download this version on the App Store or Google Play.

Deposit and Withdrawal

The last factor defining a good broker is how it processes your money. Every broker requires you to give your identity documents as a part of the Know Your Client (KYC) procedure so do not feel uncomfortable if your broker asks for them. The moment of truth is when you deposit or withdraw your money, how fast does your broker execute that?

A slow deposit can ruin your trading opportunity and a slow withdrawal can give you the anxiety of losing money. In general, the deposit should be instant or no more than 2 days while withdrawal could take up to 5 business days. Besides, you should choose a broker that covers fees for these transactions to preserve all of your money.

Conclusion

After this article, I hope you can understand the nature of the trading industry and know how to find a reliable broker in Europe. If your broker can meet all of these above criteria, it is definitely the right place to start your trading journey.