Lesson 4: How to Select a Broker
Part of Module 2: Getting Started - Your Trading Setup
Introduction: Your Most Important Partner
Choosing a forex broker is one of the most important decisions you will make. Your broker is your gateway to the market—they hold your funds and execute your trades. Understanding how different brokers operate is the key to selecting a safe and reliable partner for your trading career.
The Two Main Types of Brokers
In the world of retail forex, brokers generally fall into two main categories based on how they handle your trades.
1. Dealing Desk Brokers (Market Makers)
Think of a Dealing Desk broker like a local currency exchange kiosk at the airport. They set their own prices (the "bid" and "ask") and when you want to trade, you trade directly with them. They are the "counterparty" to your trade.
- How They Operate: They create their own market for their clients. When you buy EUR/USD, they are the ones selling it to you. When you sell, they are the ones buying it from you.
- How They Profit: Their main income is from the "spread" (the difference between the buy and sell price). However, because they are your counterparty, if you lose on a trade, they win. This creates a potential conflict of interest.
2. No Dealing Desk (NDD) Brokers
Think of an NDD broker as a transparent "matchmaker." They don't take the other side of your trade. Instead, their job is to connect your trade directly to the broader forex market, matching it with an order from another trader or a large liquidity provider (like a major bank).
- How They Operate: Your order goes straight through to the interbank market (this is called Straight Through Processing or STP), giving you direct access to real market prices. The most transparent type is an ECN broker, which creates a live network of buyers and sellers.
- How They Profit: Their main income is from charging a small, fixed commission for every trade you place.
- The Key Advantage: An NDD broker's profit comes from your trading volume, not your losses. This means their interests are aligned with yours. They want you to be a successful and active trader.
How Unethical Brokers Can Manipulate Prices
Because of the conflict of interest, some unregulated or dishonest Dealing Desk brokers have been known to use tactics to profit from their clients' losses. It's important to be aware of these red flags:
Vivid Example 1: Stop Hunting. The broker can see where all their clients have placed their protective stop-loss orders. An unethical broker might briefly push the price down to that level, triggering all the stop losses (making those clients lose), and then let the price return to normal.
Vivid Example 2: Platform "Freezes". During a big news event when the market is moving fast, the broker's platform might conveniently freeze or disconnect. This prevents you from closing a profitable trade or managing a losing one, often leading to a worse outcome for you.
Conclusion: How This Helps You Choose
For beginners, an ECN or STP (No Dealing Desk) broker with strong regulation from a top-tier authority (like the FCA in the UK or ASIC in Australia) is almost always the safest choice. Their business model aligns with your success, and regulation ensures your funds are protected.