If you fret about the volatility and risk associated with stocks, then forex trading is likely not your cup of tea. There are a plethora of risks involved, including leverage, transaction, country and interest rate risks, to name a few.
Quicklook – Our Favorite Forex Brokers
- TD Ameritrade – Best overall
- optionsXpress by Charles Schwab – Best for beginners
- E-Trade – Best for experienced traders
- Forex.com – Best for low cost
The choice becomes further complicated for two reasons:
- There are hundreds of brokers who offer a multitude of platforms for trading currencies.
- There are no hard-and-fast rules for forex trading.
With so much at stake, it’s imperative that you zero in on the right broker. Benzinga has done your forex homework for you, so breathe easy and check out a few of our suggestions:
- What Is forex trading?
- Characteristics of the forex market
- Understanding the risks involved in forex trading
- Best overall
- Best for research
- Best forex broker platform and tools
- Best forex broker for beginners
- Best forex broker for experienced traders
- Best low-cost forex broker
- Best forex broker for currency pairs offered
What Is forex trading?
Forex trading is a global, decentralized, over-the-counter market for trading global currencies. The market participants in a forex market include traders, investors, governments, banks, businesses, etc.
The market is open 24 hours, five days a week. Although there is no physical marketplace for the forex markets, important world trading centers for currencies are located in Sydney, Tokyo, Hong Kong, Singapore, Frankfurt, Zurich, Paris, London and New York.
Forex quotes are offered by central banks and what our broker quotes is the average of all the quotes received from the banks. Essentially, the broker acts as a market maker and sells the currency pair to you and not another trader.
Characteristics of the forex market
- The forex market is characterized by high liquidity, with roughly $3 trillion worth of transactions handled each day, allowing easy entry and exit. That said, the forex market is not regulated and therefore, lacks transparency.
- The number of currency pairs traded are limited, making research and asset picking easy. This is unlike the equity market, where a plethora of stocks are trading.
- The currency market allows anywhere, anytime trading.
- High volatility associated with the currency market offers sizeable profitable trading opportunities. On the contrary, high volatility also exposes one to high risk. Given that most of the factors driving forex trading such as geopolitical and macroeconomic factors, a trader/investors stand to lose a lot, especially because of the lack of regulation.
- The tight spread in terms of pips facilitates trading even with low capital.
Understanding the risks involved in forex trading
Conventional wisdom states that high returns are always associated with high risks. There is no dearth of risks in the forex market. Here is brief on a few major risks one should be wary of while trading currency pairs.
Exchange Rate Risk
Exchange rate risk or currency risk arises when an investor needs to close out a long or short position at a loss due to adverse movement in the exchange rate of the currency pair he is trading.
Risk Associated With Leverage Trading
Once an investor decides to take a plunge in the forex market, he does by opening a margin account in a brokerage, which provides him with leverage or loan for trading. The leverage provided could be in the ratio of 50:1, 100:1 or 200:1 depending on several factors. A 50:1 leverage means the trader has to maintain at least $1 for every $50 worth of trade he makes.
This is substantially higher than the 2:1 leverage allowed in stock trading and 15:1 for futures trading. This exposes a forex trader to enormous leverage risk if his bet goes wrong. When his position loses value to the extent of him not meeting the margin requirement, the broker will begin to liquidate his assets just so that the account complies with the margin requirement.
Volatility refers to the change in the value of the currency pair held as an investment, annualized and expressed as a percentage. The volatility associated with a currency pair also poses a risk to currency traders.
Interest Rate Risk
With the direct relation interest rates share with the value of a nation’s currency, the prevalent benchmark interest rates or a change thereof can introduce risk in currency trading.
Sovereign risk refers to a nation failing to meet its interest payments or principal repayments, which in turn can impact the value of the nation’s currency. Devaluation of a nation’s currency also engenders sovereign risk.
Since the currency market is not regulated in both the trading and clearing, a forex trader may be exposed to counterparty risk, which arises if the forex broker defaults or does not keep up his end of the bargain. If this happens, a currency trader will be straddled with huge losses.
The best way to go about trading safely in the forex market is to choose well-regulated brokers. It is best to do a background check on the agency under whose regulatory jurisdiction the broker falls.
Forex trading is regulated by bodies such as the Commodity Futures Trading Commission, or CFTC, which regulates leveraged trading offered to retail traders. The CFTC requires that all online forex dealers be registered and meet strict financial standards enforced by the National Futures Association, or NFA.
TD Ameritrade and Oanda are among the best among the U.S. forex brokers; each individually offers unique advantages. TD Ameritrade wins because of is technological prowess through platform, tools, and research, although it is slightly disadvantaged because of higher commissions and fees.
The firm’s mobile platform is the best and one-of-a-kind, making TD Ameritrade a preferred choice for the on-the-go traders.
Meanwhile, Oanda reigns when it comes to cost, the currency pair option it allows and its overall platform simplicity.
For a comprehensive overview of TD Ameritrade, check out Benzinga’s TD Ameritrade review.
Best for research
Best forex broker platform and tools
TD Ameritrade owns the forex trading space when technology is concerned. TD Ameritrade’s thinkorswim is a powerful trading platform which allows traders to monitor the forex market, devise trading strategy and implement it in one easy-to-use, convenient location. It also garners the added advantage of a good mobile trading platform.
thinkorswim's platform is an industry standard, including for those who trade forex.
Best forex broker for beginners
To appeal to a beginner, a broker should offer:
- Services at an affordable pricing and margin requirement,
- Simplicity of trading and
- A treasure trove of information and resources pertaining to trading.
optionsXpress, which provides a practice account and requires no minimum deposit, wins hands down on this count. It also provides webinars, live trading, blogs and newsletters, which serve as rich educational tools for a greenhorn.
Oanda also butts in as a top contender, with its practice account that spans for an unlimited time frame and zero minimum balance. It also provides a rich haul of educational resources in the form of webinars, scheduled learning events, video on demand, etc.
Best forex broker for experienced traders
- Mobile traders
- Traders looking for research and data
- Investors looking for retirement planning guidance
E-Trade’s platform comes packed with features perfect for the investor who knows what they want. If you’re into data, research, and actionable information, look no further. You’ll find live streaming market data, commentary, screeners, analyst research, and much more.
And, there’s E-Trade Pro which was made for professional traders. In order to access Pro, you’ll need to be a fairly active trader – 30 trades per quarter – and have $250,000 in assets in their accounts. If you qualify, E-Trade grants you access to their Strategy Scanner, customizable charting, and options screening.
Best low-cost forex broker
Forex traders charge commissions as a fixed spread, or variable spread, or a commission based on a percentage of spread. Spread is the difference between the price at which a forex trader is willing to buy you the currency pair and the price at which he is willing to sell you the currency pair. In other words, it is the difference between the bid price and ask price.
Oanda and Forex.com charge merely the spread markup and therefore, ranks as top forex brokers for low-cost trading. TD Ameritrade charges a $1 minimum, $0.10/1,000 units per side and also the spread mark up as commission.
Best forex broker for currency pairs offered
The selection a forex broker offers is also important, as it offers traders an opportunity to trade currency pairs.
Without question, TD Ameritrade is the leader on this metric, with Oanda closely breathing down its neck.
|Broker||Best For||Commissions||Account Minimum||Choose your platform|
Get started securely through TD Ameritrade's website
1 Minute Review
This publicly listed discount broker, which is in existence for over four decades, is service-intensive, offering intuitive and powerful investment tools. Especially, with equity investing, a flat fee is charged, with the firm claiming that it charges no trade minimum, no data fees, and no platform fees. Though it is pricier than many other discount brokers, what tilts the scales in its favor is its well-rounded service offerings and the quality and value it offers its clients.
Trade commission–free for 90 days & get up to $2500
||$4.95||$200 minimum equity balance required to maintain an IRA.||
Get started securely through OptionsXpress's website
1 Minute Review
optionsXpress is a great tool yourself on stock options trading. The Virtual Practive Trader gives the customer 25,000 virtual trading account to test trading strategies and gain experience without putting any money on the line. With customer support from Charles Schwab optionsXpress offers broker assisted trades and a pleathora or educational tools when a trader is ready to enter the stock market.
Customers who open a new account and transfer at least $5,000 from another brokerage earn 50 commission-free trades.
||$0.005 per share minimum $1 and maximum 0.5% of trade value; volume discount available||$10,000 $5,000 for IRAs, $3,000 for clients 25 or younger||
Get started securely through Interactive Brokers's website
1 Minute Review
If you’ve got $10,000 and you consider yourself a sure-footed professional trader, Interactive Brokers might a major possibility for you, particularly if you’re adept at navigating tricky trading platforms (can you say 124 option indicators?) or have done more than just dipped your toe a “coupla times” into the complex world of international markets.
Lower minimum activity requirements ($3/month) and opening account minimum requirement ($3,000) for clients 25 and younger.
||$6.95 for fewer than 30 trades/quarter.||$0||
Get started securely through eTrade's website
1 Minute Review
E-Trade is best known for its user-friendly browser, desktop and mobile trading platforms and its extensive research and educational information. E-Trade may not have the lowest commissions compared to discount online brokers, but customers certainly get their money’s worth from E-Trade’s comprehensive offerings.
60 days of commission-free trades with deposit of $10,000 or more