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How to find the best broker

Picking the right broker is also crucial in your trading journey.

Quest: Pricing of brokers
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Who determines the price of the traded asset when using a broker?

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There are many subtle differences between brokers which may cost you a lot of money in the end. The first thing you need to figure out is what asset you want to trade. If you want to day trade crypto and forex, you need a broker that has access to both. Not all brokers offer crypto trading. Maybe you haven't decided yet. And that is perfectly fine since this guide is for beginning traders. Meaning you first need to determine what strategy you're gonna use and if this strategy works on the asset you want to trade. You should read this chapter again once you:

  • Found the strategy that fits your needs
  • Did some proper backtesting
  • Created a trading journal

Once you have done this, the next step is creating an account on a broker that fits your needs. The best way to test brokers is by creating a demo account and trying each broker. You can’t compare brokers by just reading their stats. Let’s have a look at a few things that matter.

9.1 Spread vs commission

Probably the most important thing when picking a broker is whether you have to pay a commission or spread. A commission is mostly a certain fixed percentage over the trade value you have to pay each time you trade. Spread is actually the same thing only it’s calculated differently and is more confusing for beginning traders. That’s because brokers that use spreads to earn money advertise with zero commission costs. Beginning traders think that they have zero commission, and while this is true they might be even paying more because of huge spreads. 

I talked about spreads before but as a reminder:

Spread is the difference between the buy and sell orders in the orderbook. Orders in the orderbook are open orders. These orders are in the book because the buyer and seller did not agree about the price. Once the price matches, the order is filled. Let’s say the seller wants $1000 for one bitcoin but the buyer only wants to pay $999. The difference between these prices, $1, is called spread.

Spread will increase once the asset has low liquidity. If there are only a few buyers and sellers, the spread is most likely pretty big. But, in a high liquidity market like bitcoin, the natural spread is very small. Meaning the buy and sell price in the order books are very close together. Some brokers offer zero commission trading but instead artificially create a bigger spread independent of liquidity. You should be very careful when looking for brokers that use spreads to make money. Most of the time you have to pay much more compared to commission based trades. If you have high spreads, you first need to be out of the range of the spread before you take profit. If you are using tradingview, you can see the spread in the top left corner:

Or when you are paper trading:

If you are going with a broker that uses spreads, aim for a 1 pip spread max.

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9.2 Leverage

Leverage can be a very dangerous tool if you don’t know how to use it. That’s why many countries have set a legal limit on how much leverage you can use. Most regulated brokers are limited to 30x leverage. If you want to use up to 100-500x leverage then you need to find an unregulated broker or a broker outside your country that offers the kind of leverage you need. As a beginner, you should never use more leverage than 30x. 

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9.3 Lot sizes

As mentioned in chapter four, lot sizes can be different for each broker. But most brokers follow the standard lotsizes. If you are trading a US dollar currency pair with a standard lot that means that every pip has a value of $10. This is calculated by multiplying 100.000 units with $0.0001 (1 pip) = $10

Name Size in units Value per pip
Standard lot 100.000 $10
Mini lot 10.000 $1
Micro lot 1000 $0.10
Nano lot 100 $0.01

If you are trading a JPY currency pair (or gold, metal and US30) you have a different pip size (0.01 instead of 0.0001) so the value per pip also changes with two decimals:

Name Size in units Value per pip
Standard lot 100.000 $1000
Mini lot 10.000 $100
Micro lot 1000 $10
Nano lot 100 $1

9.4 Broker speed

A very important part of any broker is the speed at which orders are placed. Some brokers act very slow which can result in wrong entry or exit points. You should test your broker with a real money account before you can find out the exact behaviour. You won’t find these issues when using demo accounts.

9.5 Negative balance protection

I discussed risk management in chapter six. One very important part of risk management is how far your capital can drop below zero. Most people start with a small capital of $5000 or less. Meaning you have to use leverage when trading forex. Because the margin between forex pairs is very small, you need very large amounts of units to make some money. But that also means you can blow your account pretty fast when not using appropriate risk management (stop loss placements and amount of risk per trade).

In the case you make a mistake and use high amounts of leverage, a negative balance protection can protect your account from severe losses. You should be very aware that many brokers do not have negative account protection. Meaning your account balance can go negative and you have to pay this money back.

Besides that, stop losses are no guarantees that you can sell your asset fast enough. When things get very volatile, your stop loss might not be hit in time. When using high amounts of leverage this can result in huge losses. When you have a broker with negative balance protection you can never lose more money than your entire account balance. As a beginning day trader you should never use a broker that has no negative balance protection.


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