How to decide which CFD and forex broker is best for you
As you can see, you have a lot of different brokers to choose from if you want to use MT4 to trade CFDs or on the forex market.
So, which one should you choose? Well, each comes with its own set of benefits, so you should ideally compare the different features of each broker and decide which best suits your investing strategy and experience.
Continue reading my comprehensive guide to discover some of the key things you should keep in mind when comparing different CFD and forex brokers using the MT4 platform.
As the name may suggest, the trading costs are charges you will typically face when you trade forex or derivatives.
Depending on the broker, you may find that trading fees and commission on trades are built into the spreads, which could result in a tighter overall spread.
However, some brokers list a flat fee for every trade instead of building them into the spreads. Before opening an account with a broker, you should double-check their charges and commissions – tighter spreads could potentially result in less profit on forex trades.
If you are planning on making high volumes of trades, you may want to consider using a forex broker that has low trading fees. Otherwise, you could end up spending a lot of money on charges.
When it comes to regulation, most of the brokers listed above are regulated in the UK by the FCA.
When a broker is regulated within the UK, you can typically expect to see stricter limitations on leverage. These brokers are also audited regularly and must provide a “negative balance protection” to all traders, which means you can’t lose more money than there originally was in your account. This is a brilliant facet of UK-regulated brokers, as it can prevent you from getting into excessive debt.
Of course, there are brokers out there that aren’t regulated within the UK. For example, some may be offshore brokers, such as in Seychelles, Mauritius, or the British Virgin Islands.
When a broker isn’t regulated in the UK, you can typically expect to receive higher leverage on trades. Though, you should keep in mind that there will likely be fewer protections, thus making them a riskier option.
Educational materials and customer support
Some brokers may also provide more educational material to their users. This should ideally be seen as nothing but an upside, since it doesn’t detract from the level of service you will receive.
You may also find that certain brokers have far more attentive customer service which, again, is always a benefit.
Something else that may be worth keeping an eye out for is copy trading. This feature allows you to mimic how other, potentially more experienced, investors are trading; if you are a newer trader, copy trading could help you realise some of the best markets to invest in.
The MT4 forex trading platform can be complex and tricky to understand, especially for newer or more casual investors. So, a broker that offers educational materials and has a helpful customer support service should be something you take into consideration when deciding which broker to choose.
Analysis and trading tools
As well as education materials, you may want to consider choosing a forex broker that offers different analysis and trading tools for you to use.
For example, some CFD and forex brokers may offer plugins for the MT4 platform that provide pattern recognition which could make it easier to stay on top of ever-changing markets.
Of course, analysis and trading tools aren’t essential when it comes to trading forex or CFDs, but they could go a long way in assisting you, especially if you are still a beginner to the MT4 platform.
What exactly is MT4?
MetaTrader 4 (MT4) is an external trading platform that allows you to trade several financial instruments, such as foreign currencies (forex) or CFDs (contracts for difference).
The MT4 platform offers many advanced tools for the technical analysis of forex or CFD markets which allows you to better keep track of typically complicated markets.
This is the beauty of MT4 – the platform aims to help users spot trends in currency markets.
MT4 itself doesn’t host trades though – this is where the CFD and forex brokers come in. The brokers will host the MT4 platform, and all trades will be conducted by the brokers.
So, even though you’re making trades on the MT4 platform, you’re technically trading with the broker you signed up with.
Trading forex on MT4
The foreign exchange market, which is more commonly referred to as the “forex” or “FX”, is the global marketplace that deals with exchanging currencies.
When you trade on the forex, you will see that currencies are listed together. For example, GBP/USD, USD/EUR and USD/JPY. These are called “currency pairs”, and they are typically split into major currency pairs, like the examples listed above, or minor currency pairs, which are typically between two less commonly traded currencies. These minor currency pairs include GBP/CAD or GBP/JPY.
Trading on the forex involves speculating on currencies, with the aim of selling your positions when the value, which is also known as the spread, has increased. This is how investors typically turn a profit when investing in forex.
Unlike the regular stock market, the forex market is open at all hours of the day, seven days a week. Also, since there isn’t a central marketplace for foreign currencies, all forex trades are conducted “over the counter” (OTC) and take place electronically on computers.
Forex trading can be slightly more complicated than regular trading on the stock market and there is even some technical jargon commonly thrown around.
So, if you want to join other forex traders and start using the MT4 platform, continue reading to find out what this jargon is, and what it all means.
Leverage, like that seen in derivative trading, is also present in forex trading.
This is when investors are “borrowing” money from brokers that enables them to trade on the forex for larger amounts of money than they initially pay in.
You will commonly see leverage presented as a ratio – for example, 30:1, 50:1, or even 200:1.
Say, for example, you were to trade one lot of GBP/USD for £100,000. If your broker offered you a leverage of 100:1, you would be required to pay £1,000 to make the above trade. This initial investment amount is called the “margin”.
Of course, while leverage may allow you to make larger trades with less money, this can also work against you. You could, for example, end up losing far more money than you initially paid in.
This is why leverage is such a double-edged sword, and you should only use higher leverages if you’re confident that the advantage is on your side.
Still, it can be very difficult to precisely predict whether your trade is advantageous, which is why casual or beginner investors typically don’t need high leverages.
Meanwhile, “spreads” are the difference between the bidding price and the asking price of a particular currency pair. These spreads are often measured in “points”, or “pips”, as they are sometimes referred to.
When you trade on major currency pairs, such as GBP/USD or USD/EUR, you will typically see tighter spreads. This is because they are usually traded in higher volumes.
On the flip side, minor currency pairs may have much wider spreads since they aren’t as commonly traded. This can come with its own set of issues though, like increased market volatility.
As previously mentioned, you can sometimes expect trading costs to be built into spreads. This is quite common – even some of the best forex brokers will do this.
Spreads are subject to change frequently and can sometimes be tricky to keep track of. This is why platforms like MT4 are ideal for forex trading – it gives you the tools to properly track spreads, so you know when the perfect time to close your position comes.
Before opening a brokerage account, you should first check the typical spreads prospective forex brokers offer on certain currency pairs – many brokers offer live spread updates on their websites, which could give you a rough idea of the spreads they offer.
Trading derivatives on MT4
Another popular method of trading on the MT4 platform is derivatives, though this is where things tend to get slightly more complicated.
Derivative trading is often done by either spread betting or using CFDs, and essentially involves you placing a “bet” on how a currency’s value will change.
It is vital to keep in mind that spread betting and CFDs are complex instruments. In fact, more than half of retail investor accounts lose money when trading CFDs, so you should ensure you’ve done adequate research before you decide to invest this way.
As mentioned, spread betting is a method of investing that involves you placing a “bet” on how you predict a currency’s value will move.
When you do this, you aren’t purchasing any currency whatsoever and don’t own any of the underlying assets you’re betting on. You are instead speculating on the movement.
For example, if you were to spread bet on the GBP/USD currency pair, a broker will typically quote an asking price and a bidding price.
Say, for this example, that the asking price was 1.0015, and the bidding price was 1.0010. If you believed the value of the pound would decrease, then you could open a position that stakes 50p for every point the pound decreases below the asking price of the broker. As you’re betting that the value will decrease, this is called “shorting” or “going short”.
If the GBP/USD spread later dropped by 10 points to 1.0005, you would earn £5 from your 50p position.
Of course, if this were to go the other way and the value of the pound increased by 10 points to 0.0025, then you would lose £5.
One of the advantages of spread betting is that you can take full advantage of leverage without needing to place a trade.
While this leverage does allow you to “borrow” money to meet the margin requirement to finance the bet, this does mean you could end up losing far more money than you originally put in.
This works both ways though – you could end up earning more money than you originally invested if the bet goes your way.
Also consider: What is Forex Spread Betting?
Meanwhile, “contracts for difference”, or CFDs as they are more commonly referred to, are another way of trading derivatives.
Trading CFDs is similar to spread betting, with a few key differences.
You are still “betting” on how the value of a currency pair will move when you trade CFDs, though, unlike spread betting, you will instead receive the difference in price from when you opened the position.
For example, if you predicted that the value of the pound was going to increase, you could open a position against the GBP/USD currency pair.
So, say you purchased £20,000 worth of contracts stating the value of the pound would increase, and at the time of purchase, the GBP/USD spread was 0.00050.
Depending on the margin rate of your broker at the time, you wouldn’t even need an initial investment of £20,000 to buy that many contracts. If the margin rate of your broker was 3%, you would only need £600.
While this does mean you can make larger bets with a lower initial investment, you could also end up losing more money than you initially bet if you’re overexposed.
If the value of the pound did indeed increase by 30 points to 0.00080, you would earn profits of £6. This is because the new spread is 0.00080, multiplied by your £20,000 contract, minus £20,000 multiplied by the original spread of 0.00050.
This is where the name “contracts for difference” comes from – while your profits would be calculated from the number of points the pound increased by with spread betting, CFDs instead calculate your profits from the final spread value.
Of course, if the value of the pound decreased by 30 points to 0.00020, and you predicted it would increase, you would lose £6. Again, this is because your initial stake of £20,000 is multiplied by the opening spread value of 0.00050, minus your initial £20,000 investment multiplied by the new spread, which in this case would be 0.00020.
Similar to spread betting, when you purchase CFDs, you don’t actually own any of the underlying assets. You are just betting whether or not the value will increase or decrease.