Experts Explain

Trading Tips

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PHILLIP KONCHAR EXPLAINS

Every trader needs a broker and there are plenty to choose from. However, this isn’t a decision to be taken lightly. Your broker impacts virtually every aspect of your trading experience so you don’t want to waste time and money by committing to the wrong one.


In this edition of Experts Explain, Phillip Konchar, Head Tutor at My Trading Skills, unpacks the importance of selecting the right broker and explains how to find one that meets your needs as a trader.

What is a broker & why should traders care?

Traders talk about brokers a lot, but what exactly are they?

Basically, brokers are financial service businesses which traders have to use in order to access the markets and place trades. There are many different kinds of brokers, but private traders typically use execution-only brokers that provide the tools to place the trade but aren’t allowed to offer advice.

Execution-only brokers tend to offer their services through an online platform, either one developed in-house or by licensing a third-party trading platform like MT4. They may offer a number of platforms so their customers can choose their favourite interface.

There is no one-size-fits-all when it comes to choosing a broker. New traders will have very different needs from experienced traders, for example. This is a big, competitive industry with lots of brokers to choose from.

So, as a trader, why should you care so much about your broker? Well, because for successful trading, you need the best-value services.

Here’s how to choose the right broker for you.

TIP 1

Make sure they’re regulated

Over-the-counter (OTC) markets — such as spread trading, CFD and forex trading — are decentralised financial marketplaces, which means the transaction happens between the trader and their broker. Usually, there is no other entity involved. As there is no central exchange, regulation is incredibly important.


In short, a regulator exercises some due diligence on the trader’s behalf to ensure brokers are following best practices. Areas that will be assessed include marketing materials, capitalisation, market pricing and practices, leverage, and client money segregation. You can check whether a broker is regulated by looking at their website — normally there is a notice in the footer. If not, that probably tells you all you need to know.

TIP 2

Compare trading costs

What you pay to trade is pretty important, and the main cost to review is the spread — the difference between the buy and sell prices. The narrower the spread, the lower the trading costs.

Compare the spreads from each of the brokers you are reviewing over an extended period of time, like a month or even a year. Experienced traders will already know the markets and volumes they trade, but new ones could look at the spread when trading £1 per point in popular markets like the Wall Street 30, UK 100, Germany 30, Gold, EUR/USD, GBP/USD and USD/JPY. The spreads will be published on the broker’s website.

For example, say you trade £10 per point on the UK 100 15 times a month.

BROKER X HAS A SPREAD OF 0.8

Broker X’s spread is

15 trades x £10 per point x 0.8 spread

= £120 per month

BROKER Y HAS A SPREAD OF 1.5

Broker Y’s spread is

15 trades x 10 per point x 1.5 spread

= £225 per month

BROKER X HAS A SPREAD OF 0.8

BROKER Y HAS A SPREAD OF 1.5

Broker X’s spread is

15 trades x £10 per point x 0.8 spread

= £120 per month

Broker Y’s spread is

15 trades x 10 per point x 1.5 spread

= £225 per month

  • Over a month that is £105 difference for the same trades, and £1,260 over a year.

The cost of Spread quickly stacks up, which is why you need to compare trading costs and see whether each broker is worth the money in terms of the value they offer.

Fixed or variable spreads

A fixed spreads broker means you can be assured your trading costs will stay the same regardless of any market volatility. Just don’t pay too much for this privilege — a broker offering low fixed spreads is the goal.

Fixed spread brokers will publish the spreads you will trade at in market hours. Variable spread brokers can be a little less clear. For example, they might publish ‘spreads from...’ which is the lowest possible spread you can trade at. However, that doesn’t mean this is the spread you will trade at. Other variable spreads brokers publish average spreads instead, but you still can’t be sure that this will be the spread you receive when you place a trade.

TIP 3

Check the products & markets offered

From forex and spread trades to options and futures, there are a lot of products to trade. Does the broker provide what you’re interested in? If you want to place spread trades, look for a spread trade broker. If you want to trade options then don’t settle for a CFDs provider.

You also need to make sure a broker offers the markets you care about. Experienced traders will already know exactly what these are, but new traders are best off starting with the most popular ones. Be aware that brokers offering an extensive range of markets (some offer over 10,000) may not be in your best interest. They typically charge wider spreads to deliver all this choice. Know what you’re trading and find a broker giving you what you want for the best value.

TIP 4

Explore the trading platform

You’ve got to find your trading platform easy to use. Most brokers offer practice accounts (aka demo accounts) which enable traders to place trades on the platform using virtual money. This is entirely risk-free as none of the profits and losses are real. It’s important to note that practice accounts won’t necessarily 100% mirror the live platforms. For example, account fees may not be debited in a practice environment. Nevertheless, using a practice account is a great way to test strategies, gain experience, and make sure you’re totally happy with the platform.

Be honest about how good the experience really is. Is the platform easy to use? Can you find the markets you want? Is it easy to place a trade? Is it clear what your account balance is? Are there charts that are easy to navigate and include all the technical indicators you want? Also make sure you can engage with your trading account from your phone if you need to (most platforms offer an app).

It’s equally important to check whether the broker has a dedicated customer service team to help if you run into any difficulties on the platform. This is normally the last thing traders think about but it is really important. The first thing to do is see if you can speak to someone on the phone. If you’re reviewing a broker, give its sales team a ring — are they only interested in converting you into an account or are they genuinely keen to help?

TIP 5

Don’t be seduced by high leverage levels

Many traders think they won’t make any mistakes and seek out more and more leverage to amplify the profits they believe will accumulate. Unfortunately, they often end up amplifying losses.

Avoid falling into this trap by starting off with low levels of leverage and realistic rates of return. Only when you can demonstrate consistent returns and a clear strategy should you think about leveraging up.

A new trader should be trading well below the maximum leverage levels allowed in the EU:

FINANCIAL MARKET

Major fx markets

Minor fx, gold and major indices

Commodities and non-major indices

Individual equities

Cryptocurrencies

MAXIMUM EU LEVERAGE LEVEL

30:1

20:1

20:1

20:1

20:1

FINANCIAL MARKET

MAXIMUM EU LEVERAGE LEVEL

Major fx markets

30:1

Minor fx, gold and major indices

20:1

Commodities and non-major indices

20:1

Individual equities

20:1

Cryptocurrencies

20:1

TIP 6

Question the value of extra perks

Brokers often offer useful extras like analysis, news, education, events, VIP programmes and so on. These might be nice to have but ask yourself if you really need them. Even if they appear to be free add-ons, you’ll be paying for them somehow.

Remember traders need different services at different points in their development.

Traders need different services at different points in their development. There is nothing stopping you from having multiple brokers. For example, if you only trade two markets, you might want the two brokers – all other things being equal – offering the best spreads in each market.

As you develop as a trader you will learn what is and isn’t important to you.

Key points

  • Take responsibility and do your own research when it comes to choosing a broker.
  • Maximum leverage levels aren't a priority, especially for new traders.
  • Make sure you are getting value for what you are paying (normally in the spread).
  • You can have multiple trading accounts and remember your needs will change as you develop as a trader.

ALL TRADERS NEED A BROKER: THEY ARE THE BRIDGE TO THE FINANCIAL MARKETS.

New traders have lots of big decisions to make when they first start out, and the broker they choose is up there as one of the most important.

Too many often sign up with a broker because of a catchy advert, but the chances of this being the right one for them is very slim. From the outset, take responsibility, do your research, and find the right broker for you!

Phillip Konchar
mytradingskills.com

My Trading Skills offers courses on a variety of subjects and the ‘Trading for Beginners’ course is free for all Trade Nation users

Just call our customer service team on +44 (0)203 180 5952 for the course access details.

Financial spread trading comes with a high risk of losing money rapidly due to leverage. You should consider whether you understand how spread trading works and whether you can afford to take the high risk of losing your money.