Forex Regulation Across Africa – The Complete Guide

Partly, this intense growth was caused by the fact that ESMA enforced new restriction laws on the maximum leverage that EU traders can use (this caused FX brokers to focus on other big markets, like Africa)

An average of over $5.1 trillion is traded daily in the Forex market. Though worldwide, there are major forex trading centres which include London, Tokyo, Paris, Sydney, New York, Zurich, Singapore, and Hong Kong. A Forex trading day starts in Australia and ends in New York. The market stays open for 24 hours a day and five and a half days a week.

There are specific regulations in countries, continents that oversee the trading of Forex. In some countries, FX trading is restricted and banned while in others, it is fully supported. In this post, our focus is on Africa as we’ll be looking at Forex regulation across the continent.

Overview of Forex Trading In Africa

Forex trading is a very competitive activity, and in Africa, it is no different. The market has experienced speedy growth over the last two decades as more Africans are being enlightened on what Forex entails.

Significantly, the last decade has seen the Forex market go from almost unnoticed to becoming one of the most dynamic industries in the content. This can be attributed to the advent of mobile devices and other technologies.

There are about 1.3 million Forex traders in Africa. South Africa and Nigeria lead the way as both countries constitute a large percentage of the total figure.

Other countries where Forex trading is gaining ground are Kenya, Egypt, Angola, Namibia, and Tanzania. This has attracted international Forex brokers like IQ Option, IC Markets, XM Forex Trading, ForexTime (FXTM), and Olymp Trade.

With this vast amount of forex traders, it is expected that government financial regulatory bodies will be interested in monitoring trading activities in individual countries.

Forex-Friendly African Countries

A lot of African countries are Forex-friendly, but there are minor restrictions from the government. Forex can be traded in Nigeria, South Africa, Egypt, Kenya, Namibia, Ivory Coast, and many other African countries.

Whereas Forex trading cannot be said to be legalized in these countries, it also does not break the law. Before a Forex broker can offer Forex trading services to a country’s citizen, it is mostly mandatory to acquire a trading license.

Forex-Prohibited African Countries

Currently, a complete Forex ban is not placed on any country in Africa, unlike world countries like North Korea and Israel. As stated earlier, there are minor restrictions from the government in some countries. These restrictions do not prohibit the trade of Forex but are imposed to prevent fraudulent and scam activities.

Some of these restrictions are on the maximum trading amount and the maximum amount you can have in your Forex account. These are similar to Forex restrictions imposed in countries like China and Russia. Furthermore, Forex trading with non-licensed Forex brokers is prohibited in some African countries. Likewise, you can only trade Forex for yourself and not for anyone else (identification is mandatory for most Forex brokers).

Forex trading is usually not welcomed in countries governed with strict sharia laws. As a result, countries like Algeria, Benin, Burkina Faso, Egypt, etc., may not be the best to engage in Forex trading.

Let’s consider how Forex trading is regulated in some major African countries:

Forex Regulation In South Africa

In South Africa, various regulatory trading rules are put in place to minimize Forex trading risks. These regulations are imposed by the South African Financial Sector Conduct Authority (FSCA), formerly known as the Financial Services Board (FSB). The FSCA is the body responsible for monitoring and controlling all financial activities in the country. It is the most vigorous Forex market regulation in Africa.

The FSCA regulatory policies are in line with what is obtainable from regulatory bodies overseas. Notably, all OTC derivative brokers must report all trades in a bid to organize CFDs. Through the FSCA, Forex brokers can relate with each other without resulting in conflict.

According to topforexbrokers.co.za, the FSCA license incorporates some immense benefits like that FX brokers regulated by the FSCA treat their customer in good faith and that they help them with financial education and financial literacy. Not to mention that if anything goes south, a South African trader who is trading with FSCA regulated broker can go to FSCA if they think they have been scammed by their broker or mistreated.

Forex Regulation In Kenya

In Kenya, the Capital Markets Authority (CMA) regulates all financial activities, including foreign exchange trading. Before a Forex broker can do business in Kenya, they must be registered and licensed by the CMA.

Forex was previously unregulated in Kenya. Before 2016, lots of Kenyans were trading with unregulated brokers, and there were too many reports of fraudulent activities. As a result, the Kenyan government authorized the CMA to regulate Forex trading activities in the Finance Act 2016. The principal aim of the regulation is to make the market transparent and protect investors’ funds.

The CMA drew regulatory leads from international regulatory bodies like the Australian Securities and Investment Commission (ASIC) and the United Kingdom’s Financial Conduct Authority (FCA).

Forex Regulation In Nigeria

Forex trading in Nigeria is still unregulated despite the market being one of the most active ones in the continent. However, it is perceived that the country’s apex bank is working with the Securities Exchange Commission to commence Forex trade regulation.

Despite the absence of regulation in the country, the government does not consider Forex trading illegal. There are local Forex brokers who register just like other businesses and carry out foreign exchange activities as usual. Most Forex traders in Nigeria make use of foreign Forex brokers rather than the local ones due to this lack of regulation. The trading risk is totally on the trader, so they assume the foreign brokers are more trustworthy.

Banking policies do have effects on Forex trading in Nigeria. Some Nigerian banks may prevent customers from using their electronic cards to make payments or withdraw from foreign exchange platforms. Presently, there are imposed restrictions on the amount of foreign currency a Nigerian can spend outside the country. These are individual policies that could be eliminated if the Nigerian government properly legalizes Forex trading.

How To Select The Best Forex Broker For Africa

Due to the risks involved in Forex trading, it is vital to be cautious when deciding on the best Forex broker to invest in Africa.

Firstly, you should check for the broker license. If Forex trading is regulated in your country, check to see the Forex brokers licensed by the regulatory body. For a country like Nigeria, where the market is not restricted, consider foreign brokers who are licensed by global licensing authorities.

The next thing to do is to check out the trading platforms offered by these brokers. Check for their deposit bonuses, ratings, minimum deposit, and payment options before making a decision. For a practical trading experience, a Forex demo account should be featured where you can try your hands before going live. Do not invest real money if you haven’t fully understood how the platform works.

How To Stay Safe While Trading Forex

You should avoid any unlicensed Forex broker in Africa. The amount of Forex scams in African countries is on the high side, and it has resulted in grave losses for the victims. By going with a well-licensed broker, this risk is almost eliminated, and you can trade more assuredly.

Additionally, you should be cautious when making a substantial investment when you don’t fully understand the Forex market. Likewise, you should control your emotions and don’t spend all your money on Forex trading.

Conclusion – The Future Of Forex In Africa

Interest in Forex will undoubtedly continue to rise in the coming years. The sensitization level is currently high as Forex trading is advertised on newspapers, TVs, radios, websites, etc.

There are equally Forex seminars and programs to create awareness. More overseas Forex brokers are also picking interest in offering their services to African countries. Consequently, better regulatory policies will be imposed in countries that lack them so that aspiring traders can trade safely.

What are the Different Types of CFD brokers?

CFDs are relatively new financial derivatives that have become increasingly appreciated among investors, especially in the Forex market. But as with any other activity, to be successful while trading CFDs, you need to have the right set of tools – the most important one being your broker.

Of all the different CFD brokers available, almost all fall within 2 overall categories – ECNs and Market-Makers. While a novice user may not notice much of a difference between them, the behind-the-scenes mechanics are substantially different. These differences have a significant impact on you, the trader, whether you realize it or not.

What are the differences between an ECN broker and a Market Maker, and which one is best for your trading style? Let’s jump right in.

What is a CFD and how does it work?

CFDs, which stands for Contract For Difference, are financial contracts you have with your broker to exchange the difference between the opening and the closing price of a trading position.

When you trade CFDs, you do not own the underlying asset you’re investing in, as you are only getting (or paying) the difference in price between the value of your contract when you opened it and when you closed it.

CFDs are leveraged financial products, allowing you to use margin trading to profit from increased market exposure. Every time you want to open a trading position, you have to put aside a fraction of the total value of this position as collateral – this is the margin.

As a result, you are able to invest more money than what you possess in your trading account. Consequently, as leverage amplifies price movements in all directions, they can be risky – you might make larger profits, but you could also lose just as much.

In addition to leverage, one of the biggest advantages you have, when you trade CFDs, is that you can benefit from rising as well as falling markets, which means that you can earn money regardless of the market direction.

Why are CFDs popular in the Forex market?

The Forex market is the market dedicated to currencies. It is one of the most liquid and active financial markets in the world, and it is open 24-hours a day, 5 days a week. It is also the largest financial market, with US$ 5.1 trillion exchanged every day.

If you decide to trade the Forex market with CFDs, you can do so by borrowing capital from your broker to place a trade. This is called margin trading.

Trading CFDs on Forex currency pairs is very popular, as it is an ideal market for leverage and margin trading due to its high liquidity, as you can enter and exit the market quite easily with small slippage. Of course, leverage can be offered on many different markets, but leverage, as applied to the Forex market, is generally much higher than any other trading instrument.

Because CFDs are very risky leveraged products that are linked to speculation, they are not allowed everywhere. For instance, there are forbidden for US residents, but they generally are permitted in many other countries.

In Europe, the European Securities and Markets Authority is the deciding authority on the rules brokers need to follow when it comes to trading CFDs. Recently, the organization decided “to strengthen restrictions on the marketing, distribution or sale of contracts for differences to retail clients”.

Forex Brokers Regulations also varies in different parts around the world, as it is a fast-growing OTC market.

What are the different types of CFD brokers?

A “No Dealing Desk” Forex broker usually provides direct access to the interbank market and can either be an STP or an ECN broker (or a mix of both).

This type of broker only sends trading orders directly to liquidity providers, which means that it doesn’t bear the risks of its clients internally. They only act as an intermediary between trader orders and the liquidity providers available.

ECN, which stands for “Electronic Communication Network”, describes the broker type that is connected to an electronic trading system in which many buying and selling orders from different large liquidity providers compete. Therefore, an ECN broker only connects different market participants together, so then they can trade with each other.

STP stands for “Straight-Through-Processing” and describes a broker that does not execute trader orders. They only carry out trading operations, without human intervention (No Dealing Desk – NDD) to external liquidity providers connected to the interbank market.

Dealing Desk (DD) – Market Maker

A Dealing Desk Forex broker is a Market Maker, which means that they don’t offer liquidity provider prices, as they are the ones providing liquidity for its traders by offering their own prices. It is for this reason that they are called market makers, as they “create” the market for their clients. This means that they are the ones setting the bid and ask prices of any financial instruments offered.

A Dealing Desk broker is very often the counterparty of their traders’ positions, as they do not directly trade, or hedge their clients’ position, with their liquidity providers. Therefore, a Dealing Desk broker has to pay for profitable client trades with their own money. If a client makes a winning trade, the broker loses money – and vice-versa.

How do CFD brokers make money?

A No Dealing Desk CFD broker earns money on the trading volume of their clients, as it receives a commission on all trades, and/or a markup on the spread (the difference between the buying and the selling price). Most of the time, these spreads are variable spreads, which fluctuate depending on the market conditions.

A Dealing Desk CFD broker usually gets money from spreads, as well as client losses. Spreads offered by market makers are usually fixed spreads.

The most important thing for a No Dealing Desk broker to provide is the best trading conditions for their clients – that way, their clients are more successful, they trade more, and everybody earns more money. It is for this reason that most traders prefer to use an ECN or STP broker, as they find them more reliable and profitable.

As a market maker broker earns money from their traders losing money, it is often seen as less transparent, as they have the ability (and motivation) to manipulate prices. Revenue is usually higher for a Market Maker than for an ECN/STP broker, given the same trading volumes.

Bottom line

CFDs are complex financial products that are not suitable for everyone, as leverage can trigger big losses. But, leverage also means that you can make huge gains on the financial markets by using volatility to your advantage.

CFDs are generally a good fit if you’re a short-term trader (like a scalper or a day trader), and if you have time to spend in front of the markets. Most importantly, to trade CFDs you need to have a high tolerance for risk – especially if you’re trading the Forex market, as it’s a very volatile market.

To better protect your trading capital, always use tight money and risk management rules when trading CFDs on the FX market. Equip yourself with the right suite of trading tools by selecting the right broker for your trading needs.

Regardless of whether you choose a dealing or a non-dealing desk broker, both can be perfectly reliable. Trading with No Dealing Desk broker, like SimpleFX, is likely to be a better choice, both for avoiding the conflict of interest inherent in the Market Maker model, and for partnering with a broker whose interests are aligned with yours.

To find the best broker for your trading needs, be sure to:

  • Establish your preferred trading style and your requirements first
  • Make sure your broker is regulated and licensed (in the more regional markets the better)
  • Be sure that the broker’s client support is knowledgeable and easy to access
  • Open a demo account first to know if the trading platform is going to be a good fit for your trading strategy
  • Check out trading conditions:
  1. Costs
  2. Fees
  3. Spreads
  4. Minimum/maximum deposit
  5. Margin requirements
  6. Financial assets
  7. Trading platforms
  8. Type of trading accounts offered

Why Using Leverage is Popular in Forex Trading

While the word leverage is commonly used, few investors know the definition of leverage and how it is incorporated into their profits and losses.

Leverage is a double-edged sword and while it can help you generate enhanced gains, it can also accelerate your losses. If you plan on using leverage while you are trading the forex markets you need to have a complete understanding of the benefits of investing with borrowed capital.

What is Leverage?

You probably have used leverage before in your life without realizing it. If you have purchased a house or car or even used a credit card you are using leverage. When you purchase a house, you generally take out a mortgage which is a loan that is collateralized using the house. The term collateral refers to the asset that the lender will take if you are unable to pay off the loan. In many cases, you will only put up 20% of the purchase price while a bank will lend you 80% of the value of your new house. By using borrowed capital you are able to purchase a home for a cost that is likely more than you could afford if you did not borrow from the bank.

When you trade in the forex market, you can borrow capital to place a trade. Your broker will lend you capital and your collateral is the value of the currency pair. For example, your broker might require that you post 5% on a EUR/USD trade that has a total notional value of $10,000.

In this case, you would need to have a minimum of $500 in your account to initiate this transaction. With leverage, instead of placing a trade that has a total value of $500, you can borrow $9,500 from your broker and make a $10,000 trade. In essence, leverage is the ability to control elevated levels of capital by borrowing money from a forex broker.

What is a Margin Account, and How Do You Use It?

Before your broker will hand over borrowed capital to allow you to trade the forex markets, you will need to open a margin account. Margin is a term that describes a good faith deposit, which is used by your broker as a portion of the collateral on your trades. Remember, your forex broker is in business to make money by facilitating trades. They will not take losses on your behalf. They will not put themselves in a position where your losses will exceed the amount of money you have in your account.

When you open a margin account at a forex broker it is in some ways similar to applying for a credit card. Your broker will question about your trading background including your experience. They want to know how long you have been trading, as well as your investing goals. Your broker might also ask about the potential account size, as well as other accounts that you currently have open. All of these questions are used to determine if they should provide you with a margin account and the type of leverage they should offer you.

Your broker will charge interest on the money that is used in your margin account. So, if you make a EUR/USD trade that has a notional value of $10,000, and borrow $9,500, your broker will charge you a margin interest rate on that balance for as long as you have a trade open. Once you close the trade, the interest charge ceases. The interest rates that are charged on margin are generally market rates.

Prior to trading using margin you should find out the rate that your broker charges. If it is out of line with other market rates you might consider using a different broker. A 5% difference on $9,500 for an entire year would come out to be $475. Remember, you are only charged for margin when your trades are active. For example, if you borrow $9,500 for 1-week, at a rate of 5%, you will be charged $9 =(5% * $9,500)/52.

What is a Margin Call?

When you open a margin account and use leverage, your broker will require that you maintain your account. The margin that you use to open trade can change as the profits and losses accrue for each transaction. If you place a trade, and the exchange rate moves against you, your broker will require that you have enough capital in your account to meet the new margin requirements.

If your trade is underwater, your broker will begin to charge you for the borrowed losses you have accrued, on top of the money that you used to initially place a trade. This is referred to as the maintenance margin.

For example, if you borrow, $9,500 to buy $10,000 of EUR/USD and the value of the trade declines to $9,500, you will have to pay interest on the initially $9,500 as well as interest on the additional $500. So there is a charged on the initial margin and a charge on the maintenance margin.

If the equity in your account drops below the maintenance margin level, your broker will generate a margin call. This is an alert to you that you have a certain number of days, to deposit additional capital in your account. If you do not meet the margin requirements following a margin call, your broker will have the right to liquidate your position. Prior to making your first leveraged transaction, you should find out exactly what the margin requirements are as it pertains to a margin call.

Because you have the potential to lose more money in your account that is initially deposited, the requirements to open an account are generally rigorous. Your broker wants to make sure you understand how the process works before you begin to risk capital on forex investments. They also want to understand the broker’s rights and what will happen if you don’t comply with a margin call. If a broker liquidates your position to meet a margin call, they will not try to get out at the best exchange rate. They will sell your position at the market and you will incur any slippage from the liquidation of the trade.

You broker will post the amount of margin that is currently being used on trades, as well as the total available. You might see a designation called “used margin” as well as “available margin”, in your account balance.

Margin Requirements and Leverage

The amount of margin that is required determines the maximum leverage on your account. For example, if you are required to post a 5% margin, the leverage you can generate is 20:1. As the margin requirement falls, the leverage increases.

For example:

Margin Requirement Leverage
5% 20:1
2% 50:1
1% 100:1
0.5% 200:1
0.25% 400:1
0.20% 500:1

High levels of margin are generally granted by reputable brokers such as Multibank. By using well-known platforms such as MT4 and Mt5, Multibank can offer leverage up to 500:1 on liquid currency pairs:

Your margin-based leverage is the total transaction value divided by the margin that is required. For example, if you place a EUR/USD trade that has a notional value of $10,000, and the margin that is required is $500, then your margin-based leverage is 20:1.

There is a theory that some refute that margin increases the amount of capital that you are willing to rise. Just because you can control more capital, does not mean that you are willing to lose more money.

Even if you only have to post 2% of the value of a trade, it does not preclude you from adding more money to your account if one of your trades moves against you. This means that your risk is more of a function of real leverage than margin leverage. Your real leverage is the amount you are able to leverage based on your discretionary capital. You would calculate real leverage by dividing the average margin requirement by your discretionary capital. For example, if you are willing to risk $10,000 on forex trading then your real leverage using 5% margin is $200,000 ($10,000 / 5%).

How Does Leverage Effect Your Trading

It’s important to understand the pros and cons of using leverage. Here is an example.

You place a $10,000 EUR/USD trade using 5% margin which is leverage of 20:1. This means that you would post $500 and borrow $9,500. Assume that the margin interest rate is 5%. In this hypothetical trade, you achieve gains of 2%, on the entire notional value of the trade which is $200 ($10,000 * 2%). Your trade only lasted 1-week.

This would allow you to achieve gains on the capital you risk of nearly 40%. Your gain of $200 is reduced by $9.13 as an interest charge for 1-week of margin on $9,500 ($9,500 * 5%) / 52-weeks in a year. Your net gain is $200 – $9.13 = $190.87. Since you only posted $500, your net return is 38%.  Your annualized gain is 1,985% = (38% * 52).

What is important to understand is that while the gains are robust, leverage is a double-edged sword. A loss of 5% on $10,000 ($500) would wipe out the entire amount of equity you have in this trade. In addition to a margin call, you would be subject to an interest charge on the initial $9,500 as well as the $500 of borrowed capital to handle your unrealized loss as maintenance margin.

Risks of Trading with Leverage

The risks stem from the amounts you can lose from small changes in the value of a currency pair:

  • You are exposed to market risks, especially if you are unaware that your position has moved during hours when you are not watching the market.
  • You also are subject to political risks, that can affect the value of your position, and make it impossible for you to exit your position. This is more likely to happen with an emerging currency pair as opposed to a major currency pair.
  • You are exposed to interest rate risks. If interest rates rise, the cost of borrowing capital will also increase.

Why Is Leverage Offered in Forex Trading

There are several reasons why brokers offer leverage. Leverage is offered in many instances of capital markets trading, but forex leverage is generally much higher than any other trading vehicle. The leverage that is offered for US equities is approximately 1.5 times the value of the stock. So your margin is at most 50% the notional value of the trade.

Forex leverage can reach levels up to 500:1. Brokers are comfortable offering this type of leverage for several reasons.

  • Forex markets are very liquid – You can enter and exit with very little slippage. If a broker has to liquidate your position, they can easily exit.
  • Forex markets are less volatile – The average volatility on major currency pairs is close to 10%. This compares to 40% volatility in many equity shares
  • Forex markets are open around the clock – you can trade in and out 24-hours a day, 6-days a week. Many other markets are only open during exchange hours.

Conclusion

Trading the forex markets is popular as it can enhance your gains and allow you to generate robust returns with only a portion of your portfolio. Many investors are attracted to forex trading as the margin requirements are low relative to the value of the capital you can control.

Leverage is a double-edged sword and while it can help you generate enhanced gains, it can also generate large losses. There are several risks involved in trading forex with leverage, but the most obvious risk is market risk. When you trade with borrowed capital, your broker will charge a margin interest fee. Make sure you are aware of all the fees related to leverage before you place your first trade. Lastly, spend time going through examples of how leverage will affect your projected gains and losses and make sure you have allocated enough capital to an account before you begin to trade with a margin account.

How To Choose the Best Forex and CFD Broker

The Forex market is the world’s largest financial market with a turnover in excess of around $4 trillion a day. Despite its huge size, this market has no central exchange for Forex traders to conduct their transactions. Instead, Forex traders must conduct their trading activities through an intermediary, the Forex broker. This shows the importance of the broker’s role in the trading process. When it comes to choosing a broker, traders have literally thousands of Forex brokers to choose from on the internet. But the real question is how can you be certain that the broker you have chosen is the right fit for your trading needs.

To help you in your broker selection process, we have prepared a guide with a list of key factors that you have to look at when choosing a broker.


Guide Sections


Regulations

The first thing that you should look at when selecting a broker is to see if the broker is regulated by a competent regulatory agency(read more about Forex and CFD broker regulations). By dealing with a regulated broker, you can have the assurance that the broker has met the operating standards imposed by the regulatory body. Some of these standard regulatory requirements include having adequate capitalization and maintaining segregated accounts in order to protect the clients’ funds. Additionally regulation offers fund protection should the firm become insolvent and ensures the broker is upholding rigorous standards as a financial service provider.

Countries that have financial regulatory agencies that are backed with strict regulatory enforcement include:

  • Australia  (ASIC)
  • Eurozone (Mifid and local regulators)
  • India (SEBI)
  • Japan (FSA and JSDA)
  • Switzerland (FINMA)
  • UK  (FCA)
  • USA (CFTC and SEC)

Discover the best regulated forex and CFD brokers

Trading Platform & Software

As the trading platform is your gateway to the market, you want to ensure that the trading platform that you are using can be relied upon. Most brokers will offer traders a selection of trading platforms to choose from. Most of the time, the trading platforms are provided by third party trading solutions providers such as MetaQuotes Software. There are also some brokers who have taken to developing their own proprietary trading platforms in an attempt to differentiate themselves from other brokers in the industry. Often times, these proprietary platforms are the best platforms to trade with as they are specifically designed by the broker’s client base.

Nevertheless, a good broker should be able to provide a good selection of platforms. This is because some traders prefer to trade from the desktop computer and some traders prefer to trade from their smartphones. It should be noted that the most common trading platform that you will find among the different brokers in the industry is the MetaTrader 4 platform. It is estimated that at least 85% of brokers in the industry uses the MetaTrader 4 platform. So this means there is a very strong possibility that this is one of the platforms that you will be using.

Additional Features

Look at the features which the trading platforms have to offer. Do they come with:

  • Comprehensive charting package
  • Wide range of technical indicators
  • One click trading on the trading platform
  • Risk management tools such as stop loss order and trailing stops.

While all these may seem trivial initially, they will later play a crucial part in ensuring that you will get to enjoy a seamless and productive trading experience.

But when it comes to platform selection, it is really a matter of personal choice. Most of these platforms will have the same basic features. The best way for you to find out which platform is right for you is to try them out with the demo account provided by the broker. For those brokers that do not provide a demo account, they may not be worth considering.

Commissions & Spreads

This market unlike other traditional financial markets mostly operates on spreads rather than commissions. This is the reason why most brokers advertise their services as being commission free.

So how do brokers make money?

Simply, they earn by charging traders a spread. The spread is the difference between the buying price and selling price. For example if the Bid & Ask price for the EUR/USD currency pair is 1.0875/1.0878, this means the spread is 3 pips.

As a Forex trader, you will come across 3 kinds of trading cost structure charged by a broker:

  • Fixed spread – where the spread is not changing and you know the spread amount before you trade.
  • Floating spread – this spread is variable and always moving depending on the market volatility.
  • Commission fee – this is calculated as a percentage of the brokers spread. You should be aware of the amount payable before you trade.

Generally for traders looking for certainty with their trading costs, fixed spreads will be the preferred choice. Traders who are looking to pay a smaller spread would prefer floating spreads. Ultimately as to which is better will depend on your specific trading needs.

The kind of spreads that you will receive depend to a large extent on the kind of business model the broker is operating on.

Broker’s Business Model

In the course of your search for a broker, you will come across terms like “STP”, “ECN”, “NDD” and “Market Maker”. All these terms are in fact used to describe the business model which the broker is operating by.  So what do they all mean?

There are two major types of broker – Dealing Desk and Non Dealing Desk.

Dealing Desk

Forex dealer or Market Maker processes their clients trading instructions through a dealing desk within their company. A dealing desk broker takes the other side of the trade to you, meaning when you open a position like the EUR/USD the trade will be executed by the broker and they are then exposed to that trade.

Non-Dealing Desk

A Non-Dealing Desk (NDD) broker passes the trade straight through to a third party. There are two kinds of NDD broker (ECN and STP). They are both essentially the conduit between you the trader and the market maker or dealer.

ECN

With the first type (ECN) when you press “Buy” on your trading platform, your trade orders will be processed on the broker’s computer trading system automatically and transmitted through the Electronic Communications Network (ECN) without a dealing desk (This is where the term “Non Dealing Desk” (NDD) comes from).

What is ECN Trading and What are its Advantages?

STP

With the second type of NDD broker, upon receiving your trade orders they will pass the trade orders directly to another party to be executed by the market maker’s dealing desk. In this instance, the broker is known as a Straight Through Processing (STP) broker.

Both the Forex ECN and STP brokers are intermediaries to several dealing desks or market makers in the global Forex market. Market makers or dealers will transmit their pricing to the ECN or third party liquidity provider together with the volume which the quote is valid for. The ECN/STP will in turn distribute the pricing to traders/market makers linked to the system. It should be noted that the ECN/STP does not execute trades but rather acts as the conduit for transmitting the trade orders from the trader to the dealing desk where the trader took the price from.

Why is this important?

The business model of the broker is important as this will affect the kind of spreads that you will receive and whether the spread will be fixed or variable.

Forex Broker for Beginners

For beginner traders, look for brokers with the following qualities:

  • Comprehensive trading education resources – many brokers supply a suite of education materials to help push traders into mastering their skills. These usually include webinars, videos, courses, guides and articles.
  • Unlimited access to the demo account for practice trades – most if not all Forex brokers supply demo-trading accounts to their clients. This is particularly useful if you are new to the world of Forex trading or if you’d like to test-drive a broker’s platform before you trade for real.
  • User friendly trading platform – there are a whole host of trading platforms on the market, some more complicated than others. As a beginner trader you will not need a complicated platform with features like EA’s and complex trading strategies. That comes later, but now you should be looking for a platform that is fast and simple to grasp.

Here you can find the best forex brokers for beginners

Forex Broker for Professionals

For professional traders, their trading needs differ significantly from those of a beginner trader. Generally, professional traders prefer brokers which can provide them with:

  • Comprehensive trading tools – as a professional trader you will now need a variety of tools including commission calculator, economic calendar and of course complex live charts in order to implement trading strategies.
  • High leverage – not for the faint hearted, professionals will seek to use leverage in order to multiply their capital. Leverage increases the risk and equally increases the reward.
  • Low spreads – if you trade a lot you want to ensure that your spreads aren’t eating away at your capital. It’s important to check the spreads payable before you select a broker, usually the greater the account type you take the lower are your spreads.

Forex Broker for Day Trading

Generally for a day trader, most brokers will be able to meet their trading needs. However given the shorter time period with day traders are trading with, it is best that the broker is able to provide a diverse range of instruments for the day trader to scout for trading opportunities. These can include a signal service, tools like an economic calendar, updating market news and also earnings reports. As you will probably be placing more short term trades make sure that you are aware of the spreads before you trade.

Forex Broker for Scalping

Scalpers are traders who hold their market positions for an extremely short period. While they only hold a market position a short period of time, the frequency of their trades is higher than the average trader. Their objective is only to make a small profit on all the trades that they make spread across a large number of trades. Note that not all brokers allow scalping. As such if you intend to trade as a scalper, you should always check with the broker that you intend to sign up if they allow scalping.

Account Types

The majority of the forex brokers in the industry offer traders a selection of trading accounts to cater for different categories of traders.

  • Micro Account – The smallest type of trading account is the Micro trading account where one trading lot is equivalent to 1000 units of the instrument traded.
  • Mini Account – The next type of trading account higher up the hierarchy is the Mini account where one lot represents 10,000 units.
  • Standard Account – The standard account is where one lot is equivalent to 100,000 units.

With the Micro and Mini account, only a low minimum initial investment is required to let you start trading. With the standard account, although the minimum investment may vary from broker to broker, generally you will need a higher amount of trading capital. Given the varying minimum investment for each type of trading account, you should select the trading account that is commensurate with your investment capital.

Customer Service

Most beginner traders tend to forget to factor in customer service when making their choice of the broker to sign up with. They may not realize the importance customer service plays in their overall trading experience. With customer service, it is not whether you will ever need their assistance but rather a question of when you will need their assistance. Because regardless of how experienced or knowledgeable a trader might be, there will always come a time when assistance from customer service is required. When that time comes, you want to be able to get in touch with the support team without any difficulties. So it is important to check if the broker that you intend to sign up with is able to provide you with reliable customer support.

Check to see if there are multiple ways of contacting customer support. Most brokers will provide their clients with several ways such as email, live chat and telephone for their clients to get in touch with customer support. In short, you don’t want to be in a position where you have to spend countless nights worrying about what your broker is going to do with your problem.

Value-Added Services

In an industry as competitive as the online forex trading industry, some brokers will try to distinguish themselves from other brokers, by offering additional value added services such as free market analysis, real time news feeds and trading signals. Most of these value added services are provided free of charge but there are some brokers which may require you to deposit a minimum amount before you can have access to these services.

Questions to Ask the Broker

If you have any general questions regarding brokers we can usually advise and recommend, however for more specific information you can read our broker reviews for deep insight. Our video reviews cover many aspects of the trading cycle. Please note, it is important that if you have any doubts about a broker’s product offerings or service, by asking the right questions you can clear up any ambiguity that you might have before they develop into an issue later after you sign up.

The kind of questions that you should ask include:

  • How the broker maintains the safety of your funds
  • The broker’s regulatory status
  • The range of instruments that is available for trading
  • Their business model
  • Their customer service hours
  • Their deposit and withdrawal process and whether there any fees involved
  • Whether there are any conditions attached to the value added services provided

Check our broker filter tool >>> FX Empire is perfectly placed to help our readers choose reliable CFD brokers to work with. We have compiled this resource, which looks at all the key factors a trader should consider before selecting a broker to work with. We hope you find it useful.

Click here to check the broker filter tool now!

Q&A

  • How Can I Choose A Broker?

We are here to help with that! Check out our list above and choose the most suitable broker for you.

  • Should I Pick a Regulated Broker?

Yes, you should try to pick a regulated broker to work with. This ensures recourse in the event of a dispute or should your broker face insolvency. Remember by using a regulated broker you will also have access to an investor compensation fund, which insure your deposit up to a certain amount.

  • What Else Should I Look at When Selecting a Broker?

You should look at the range of platforms on offer and even ideally test-drive the platform you may wish to use. Take a look at the additional resources being offered by that broker eg. Signal service, educational tools, copy trading. Finally remember to find out about spreads, and account types before you place a deposit.

Conclusion

As noted above, there are many factors that you have to consider when selecting your broker. Nevertheless with the help of this guide that we have provided, you should be able to see which broker is better suited to your needs. To further facilitate your search, we have also conducted in-depth reviews and vetted each of the brokers in our recommended list to ensure they meet up the right standards. Once you have found the right broker to work with, you can focus more on your trading activities and trade more confidently thereby increasing your chances of success trading the market.

Click here to discover the best forex and CFD broekrs

Forex Brokers Regulations

One of the biggest risks when using Forex brokers that aren’t under regulatory supervision is that they don’t have to conform to any established standards, and so unethical – or even illegal – behavior cannot be ruled out. Worse, should something happen, there is often no way to take legal action against them.

Forex broker regulations are thus essential – they ensure that you’re trading with a broker that adheres to standard business norms, acts in your best interests, and offers some manner of financial protection.

Selecting the right broker starts by checking that it is truly licensed, regulated and authorized where you live. In addition to a broker’s regulatory status, you need to know which regulatory body it belongs to, as they do not all follow the same kind of regulations or offer the same type of financial protection.


Regulations by Geography


Regulators around the world have tightened regulations to protect traders in recent years, with increased oversight from regulatory bodies such as the SEC in the US, the FSA in the UK and the CySEC in Europe. Typically, Forex brokers are required to deal with top-tier financial institutions and liquidity providers, as well as to keep their client funds in separate accounts. FX brokers also need to meet certain other criteria, such as capital and fiscal requirements.

In Europe

In light of the vast number of Forex & CFD brokers that are regulated by European regulatory bodies, we’ll start our overview from there.

There are many local regulatory bodies in the European Union, such as:

  • Bundesanstalt für Finanzdienstleistungsaufsicht (BaFin) in Germany,
  • Swiss Financial Market Supervisory Authority (FINMA) in Switzerland,
  • Finanstilsynet (FSA) in Denmark,
  • Autorité des Marchés Financiers (AMF) in France,
  • Comisión Nacional de Mercado de Valores (CNMV) in Spain,
  • Financial Market Authority (FMA) in Austria,
  • Comissão do Mercado de Valores Mobiliários (CMVM) in Portugal,
  • Malta Financial Services Authority (MFSA) in Malta.

Members of the European Union, under the supervision of the MiFID directive – which we talk about later – are allowed to “passport” an authorization received from a European regulatory body, to be allowed to operate legally within the European Union (EU) as well as within the European Economic Area (EEA).

One of the most attractive regions in Europe to set up a forex company is Cyprus, due to its advantageous fiscal and tax structure.

So, if a financial company decides to set up shop in Cyprus, it will be registered, licensed, authorized and operate under the Cyprus Securities and Exchanged Commission (CySEC), which monitors the financial markets with the support of the European regulatory authorities and the European Commission to protect traders.

But this company would also be able to legally offer its financial services in other countries in the EU and the EEA, and it will be registered in every local European regulatory body.

To be a CySEC Forex broker, as of April 2019 a financial firm must follow certain rules, such as*:

  • An initial share capital of at least €200,000,
  • At least €750,000 in operating capital,
  • Submit regular financial statements, as well as yearly audit reports through certified independent third-party auditors,
  • Ensure the protection of clients funds by holding them in segregated accounts, and using top tier 1 banks and quality liquidity providers,
  • Adhere to the Investor Compensation Fund (ICF), which means that in case of bankruptcy, each client can recover up to €20,000.

To verify the authenticity of a CySEC regulated broker, always look for the 5 digit CySEC License Number (CIF) on the broker’s website:

Tickmill Group Licences and Regulationsulations
https://tickmill.com/about/licence-and-regulations/

Then verify the license on the CySEC website and make sure that the domain on CySEC website is the broker’s one:

Cyprus Securities and Exchange Commission
https://www.cysec.gov.cy/en-GB/entities/investment-firms/cypriot/74706/

Legislative Frameworks

MiFID II

Brokers following MiFID, the European Markets in financial instruments directive implemented in 2007 by the European Commission, must follow several rules:

  • Warn their clients about risks involved and categorize them (retail investors vs. professional investors),
  • Display their prices,
  • And act honestly towards their customers.

However, transparency in the financial markets did not improve following the establishment of MiFID, with the 2007-2008 financial crisis highlighting the lack of liquidity, settlement and delivery defaults, as well as the circumvention of the transparency principle through highly secret platforms, known as “dark pools”.

In light of these issues, the European Commission considered a revision of this regulation. MiFID II, which went into effect last year, thus aimed to address the grey areas in fast-growing OTC markets, particularly for derivative products. The direction also wants to work for better investor protection by ensuring that consumers have a clear understanding of the financial products in which they invest.

For instance, it is now necessary for a broker to assess a future client’s knowledge and risk profile before doing business with them. It is, therefore, a question of selling the right financial product to the right customer. To do this, a broker usually asks future clients a few questions about their personal and financial situations, but also about their knowledge of the financial markets and trading.

Brokers must also comply with procedures to be sure they know their clients and where the money used for trading comes from – Know Your Customer (KYC) and Anti-money laundering (AML) procedures.

To sum up, this new directive is supposed to enhance the transparency of regulated platforms, as well as of the financial markets, improving trader protection through better business conduct.

The European Securities and Markets Authority (ESMA)

Because of high leverage and margin trading, retail investors have lost a lot of money over the years on the Forex market trading CFDs.

The European Securities and Markets Authority (ESMA) recently decided to strengthen “restrictions on the marketing, distribution or sale of contracts for differences (CFDs) to retail clients”.

The restrictions for retail investors include:

  • A leverage limit of 30:1 for major currency pairs, 20:1 for non-major currency pairs, and 2:1 for cryptocurrencies,
  • 50% margin closeout rule,
  • Negative balance protection,
  • Restriction about the incentives offered by brokers to trade CFDs,
  • Standardization of a risk warning showing the average retail investor’s percentage of losses on CFDs accounts.

On March 27th 2019, the ESMA decided to renew these restrictions on CFDs for another 3 months from May 1st, 2019.

As the UK is still in the European Union until at least April 12th, this means that UK firms must comply with ESMA’s decisions and measures until then. However, the FCA Forex regulation could change, as it declared that it “expects to consult on whether to apply these measures on a permanent basis to UK firms providing CFDs to retail clients.”

The ESMA is constantly publishing updates linked to the Brexit situation and the recognition of UK central counterparties (CCPs) like LCH Limited, ICE Clear Europe Limited and LME Clear Limited, and Central Securities Depository (CSD) like Euroclear UK and Ireland Limited.

In the UK

According to the BIS Triennial Central Bank Survey 2016, the UK hosts the most important sales desk in the world, via its trading hub in London. It alone processes 36.9% of global OTC Forex turnover.

In order to prevent broker scams, financial malpractice or other types of fraud affecting traders, there are 2 important financial regulatory bodies in the UK, the FCA and the PRA.

To be able to undertake financial services activities in the UK, a broker needs to be authorized by the Financial Conduct Authority (FCA). This national regulatory body ensures consumer protection while guaranteeing the integrity of the financial markets in the UK

The Prudential Regulation Authority (PRA), which belongs to the Bank of England, helps in developing ethical and professional standards to protect the financial firms it is responsible for, so that in the case of a failing financial firm, there is no real impact to the financial markets or the taxpayers.

Of course, these institutions work with other bodies, such as the Financial Ombudsman Service, the Money Advice Service, the Payment System Regulator, and the Financial Services Compensation Scheme among others.

To be an FCA Forex broker, a broker should adhere to strict guidelines, such as:

  • Having at least £1,000,000 in operating capital,
  • Submitting audit reports and financial statements,
  • Ensuring the protection of client financial funds with the Financial Services Compensation Scheme (FSCS). This scheme is about protecting clients in case of bankruptcy of insolvency. If an investment firm failed between January 2010 and Mar 31st 2019, a client can ask for £50,000. If it failed after April 1st, you could be compensated up to £85,000.

In the USA

With 19.5% of global OTC FX turnover, the United States is the world’s 2nd most important sales desk. To regulate the Forex markets, and other derivative and OTC markets, there are 2 main regulatory bodies, the NFA and the CFTC, who work together.

The National Futures Association (NFA) helps investors to be more protected. The NFA also works to ensure its members respect their regulatory responsibilities for better market integrity, fighting scams and fraud through best financial practices.

The NFA also works with the Commodity Futures Trading Commission (CFTC). Together, they fight systemic risk, and ensure traders of the quality and reliability of Forex firms regulated by them.

In 2010, the CFTC issued regulations. Among those, the leverage used by retail trades was limited to:

  • 1:50 for major currency pairs,
  • and 1:20 for all other pairs.

To be an NFA and CFTC FX broker, a broker must follow the below rules:

  • Follow safe and transparent best market practices:
    • hire knowledgeable and professional staff,
    • use real facts and numbers in advertising and promotional materials without misleading traders,
    • submit reports and financial statements that are later on published on the NFA website,
    • follow the FIFO rule (first in, first out),
    • never open positions against its clients,
    • never allow hedging for traders,
    • offer a leverage effect of 50:1 maximum,
  • Keep client funds in segregated accounts,
  • Have at least $20,000,000 in operating capital.

In Australia

The Australian Securities & Investments Commission (ASIC) is the main regulatory body supervising the securities and investment market in Australia. It works with various regulators and organisations in protecting consumers and investors.

For instance, ASIC works with the Australian Prudential Regulations Authority (APRA), which supervises financial institutions to maintain the safety of financial institutions.

To be able to conduct financial service activities in Australia, brokers are required to have an Australian Financial Services (AFS) licence. As an ASIC Forex broker, certain criteria must be followed:

  • At least AUD 1,000,000 in operating capital,
  • A representative office in Australia,
  • Must comply with the organizational competence obligation in s912A(1)(e) of the Corporations Act 2001 (Corporations Act),
  • Adhere to a professional indemnity (PI) insurance cover,
  • Total financial transparency, with the submission of periodic audit reports,
  • Work with tier-1 banks, keeping client funds in segregated accounts.

In South Africa

Regulation in the financial sector in South Africa was maintained by the Financial Service Board (FSB) but it is now in the hands of the Financial Sector Conduct Authority (FSCA). The core mission of these regulatory bodies is to protect investors from losing money through scams and fraud thanks to a safer, more transparent and reputable trading environment.

The FSCA is quite new. It was created in April 2018, as “the start of a new, more holistic and intensive approach to regulating the conduct of financial institutions operating in South Africa – focusing on how they treat financial customers and on how they support the efficiency and integrity of the financial markets”.

Conclusion

The Forex market is one of the most volatile markets in the world. This highly leveraged market is also an unregulated market, with no real international regulatory body that monitors currency trading world-wide.

However, we’ve seen that there are national regulatory authorities that are working on protecting Forex investors. In addition, a Foreign Exchange Working Group (FXWG) was created in 2015 to provide global good practices for the FX market. In May 2017, this group published an FX Global Code to provide a set of guidelines to promote market integrity and protect traders against large losses, scams or other financial manipulation.

It is therefore essential that before investing real money on the Forex market with a specific broker, you check its regulated status.

In Europe, for instance, you can make sure the broker you want to make business with is regulated and authorized to provide investment services by an EU regulator on the ESMA website. In addition, each country’s regulatory body keeps a record of all the firms it regulates.

The ESMA also keeps a list of companies (or persons) that offer (or are suspected to offer) services without proper authorization. More details about these companies/persons can be found on the websites of the regulators. There is also the International Organization of Securities Commissions (IOSCO) website, which ggathers alerts and warnings from the IOSCO’s members in its “Investor Alerts Portal”.

Choosing a broker that is regulated in one place is good, but it’s always best to pick one that is regulated in several countries. For instance, Tickmill is registered in three different places – firstly, as a Securities Dealer by the Seychelles Financial Services Authority (with the FCA via Tickmill Ltd), secondly, by the UK FCA via Tickmill UK Ltd, and thirdly, by the CySEC as a CIF limited company, via Tickmill Europe Ltd.

What is ECN Trading and What are its Advantages?

Forex trading doesn’t take place on a regulated exchange (like shares or other assets do), as it occurs between buyers and sellers from anywhere in the world, through an over-the-counter (OTC) market. To be able to access this market, you need to use a broker.

As this market is not centralized, you’ll quickly realize that you can access different exchange rates and trading conditions, depending on the broker you use.

For this reason, choosing the right broker for your trading style is essential in becoming a successful Forex trader.

It’s important to note that even if there are many brokers out there offering similar products and services, there are a few things you should check before deciding which one to use, to be sure you’ll be giving yourself the best chance to succeed.

Of course, the first thing you need to be sure of is that you’re trading with a regulated broker.

For instance, the broker MultiBank Group is registered with 7 different regulators, including Spain, Germany (BaFin), Austria, Australia (ASIC) and the UAE. In addition to being heavily regulated, MultiBank follows strict rules and obligations regarding client funds and security. For instance, MultiBank uses fully segregated client accounts and offers negative balance protection to its clients.

Besides checking out the regulatory status of your broker, you also need to be sure it offers the right kinds of trading platforms and trading accounts for your trading style – not to mention other details such as trading conditions, spreads, minimum deposit, payment methods, main currency of the account, and the availability of the technical support.

Another very important thing to consider when choosing a broker is what type of broker that they are, as they are different kinds – predominately, Market Makers and ECNs.

Market Maker vs. ECN broker

Understanding the definition of a Market Maker is pretty straightforward – it’s a broker that “makes the markets” by setting the bid and the ask prices via its own systems. Then, they display these prices via their platforms, so that investors can open and close trading positions.

Usually, a Market Maker broker will not hedge its client positions with other liquidity providers like an ECN broker would do. Instead, what Market Markets do is they pay winning client positions out of their own accounts. It also means that when a client has a winning trading position, a Market Maker broker loses.

An ECN broker stands for Electronic Communication Network (ECN). This type of broker provides its traders with direct access to other market participants via interbank trading prices. This network allows buyers and sellers in the exchange to find a counterparty of their trading positions.

By using different liquidity providers, an ECN broker is able to allow prices from these providers to compete in the same auction, which usually means that traders get better prices and cheaper trading conditions. Moreover, by using an ECN broker, traders usually trade in a more efficient and transparent environment.

Usually, the way an ECN broker makes money is with the trading volume of its clients, charging a commission on each position.

Why you should trade with an ECN broker?

An ECN broker doesn’t trade against its clients

An ECN broker is only the intermediary between your buying and selling orders, matching you up with different market participants.

Hence, an ECN broker doesn’t bet against you, which means that it never takes the other side of your trading positions.

This trading model ensures you that there is no conflict of interest, as an ECN broker gets a commission whether you make or lose money.

Using an ECN broker limits price manipulation, increases transparency and provides better trading conditions

As an ECN broker doesn’t “make the market” by creating its own quotes, it is harder for it to manipulate prices, simply because it uses prices from different liquidity providers.

With an ECN broker, you have access to real-live, current information, as well as more accurate prices history, hence why it is more difficult for this type of broker to manipulate prices.

Displaying prices from official sources transparently in the ECN broker’s trading platforms makes it easier for you to trade instantly, with tighter spreads than other types of brokers. Moreover, you usually get lower fees and commissions, as well as immediate confirmations.

Another benefit of accessing real quotes is that you avoid “re-quotes”, which can have a negative impact on your overall trading performance. This usually happens when your trading order is rejected because of the change in the price of the asset you want to invest in. Then, the broker offers you a “re-quote” of the given asset (which rarely works out in your favor).

Bottom-Line

As you can see, using an ECN broker allows you to trade more efficiently and profitably, thanks to better trading conditions and better trading execution. With increased transparency and no conflict of interest, ECN brokers like MultiBank are the most reliable and safe way to trade.

MiFID II – What You Need to Know

Trading online is highly fluid, not just because of the dynamic nature of the global markets and economies, but also the constantly evolving laws and regulations. At AvaTrade, our clients are our top priority and as part of our commitment to our traders, we are always staying abreast of these regulatory changes to ensure that we remain fully compliant.

Fundamentals of MiFID

The first version of MiFID (Markets in Financial Instruments Directive) came into effect across the EU in 2007 and it is the cornerstone of the EU’s financial markets regulation. The aim of MiFID was to improve competitiveness for investment services and provide protection for investors in financial instruments by establishing:

  • A code of conduct and organizational requirements for investment firms
  • Authorisation requirements for regulated markets
  • Reporting to prevent market abuse
  • Trade transparency for shares
  • Rules on the admission of financial instruments for trading

Over the years, there have been various proposals and debates around the revision of MiFID, and the final legislative texts were finally adopted by the EU Parliament in June 2014. This revised version, which includes MiFIR (Markets in Financial Instruments Regulation), became collectively known as MiFID II and it came into effect in January 2018.

Assisting in the technical standards, advice, and implementation of the regulation is ESMA (European Securities and Markets Authority), an independent EU Authority. ESMA continues to play an active role by creating a supervisory culture and practices, including the development of Q&A’s (questions and answers) to help organizations in the implementation of MiFID II. ESMA, while independent, reports to various EU bodies, including the EU Parliament.

Introduction of MiFID II

At the beginning of 2018, MiFID II came into effect for investments firms. This new legislative framework was designed to not only strengthen investors protection but to provide additional transparency; the fairer, safer, more resilient, and efficient functioning of the financial markets.

In summary, some of the key issues that MiFID II addresses:

  • Removal of trading bonuses – under the new regulation, brokers cannot offer trading bonus incentives to clients.
  • Professional trader classification – based on a questionnaire that clients complete and other criteria, clients must be classified as either retail or professional traders. Depending on the client’s classification, they are entitled to different features and benefits. For example, the amount of leverage.
  • Reduction in leverage for retail clients – while leverage can be a great tool to maximize profits, it can also magnify losses. Overall, the amount of leverage that can be given to clients who are classified as ‘retail clients’, has been reduced.
  • Avoiding conflict of interest – one of the key concerns that MiFID addresses is the avoidance of conflict of interest between brokers and their clients. The aim is to ensure that brokers continuously act in the best interest of their clients.
  • Registering of automated trading algorithms – under the new regulation, algorithms used for automated trading have to be tested, registered and have protection measures built-in.
  • Greater transparency and reporting – brokers must provide more detailed reporting on trades, including volume and price, as well as keep records of all communications and conversations with their clients.
  • Communication simplicity and clarity – all communications, especially marketing communications, must be clear, fair and not misleading. Plus, the risks of investing in financial instruments must also be clearly stated.

In conclusion

The new regulation has been in the making for many years, with many iterations and will continue to adapt and evolve. The entire MiFID document is almost 7,000 pages, but the essence of this framework is to ensure a fair, transparent and more secure environment for all stakeholders, especially investors. The above is a highlight of just some key areas that MiFID II deals with. AvaTrade clients can have complete peace of mind knowing that AvaTrade complies with these regulations and will always act in their clients’ best interests.

For more information detailed information on MiFID, please visit: https://www.esma.europa.eu/policy-rules/mifid-ii-and-mifir

Scalping, Swing and Long-Term Trading Strategies: A Complete Guide

tradiThere are many different trading styles, and some of them will fit your trading personality. Each trading style, whether long-term or short-term, will allow you to generate gains if you combine it with a robust risk management strategy. Prior to developing a trading strategy, you should determine if you want to be very active or more passive. Are you comfortable holding positions overnight, or do you want to enter and exit during the course of a trading session? Would you prefer trading the popular currencies such as EUR/USD, GBP/USD or AUD/USD or perhaps the more exotic pairs, volatile and less liquid such as USD/TRY or USD/CNY? You should also ask yourself whether you are a value investor or like trading momentum. These questions will help guide you toward developing a trading strategy that matches your trading personality.

Your Trading Personality

Everyone has a trading personality. This is not solely determined by your willingness to accept the risk. Your trading personality stems from your desire to initiate risk and hold that risk. Some people need to be right at once, while others are content letting the markets take their natural path to their desired level.

Your trading personality also incorporates your ideas on investing. Are you the kind of person who is looking for value? Are you willing to catch the market and buy when others are selling or do you like the idea of jumping on a trend and getting off as soon as it accelerates? These concepts will help you determine if you are looking to trade a short-term or a long-term strategy. Remember, if you don’t have the time to watch the markets actively during the day, then a short-term strategy will likely be the wrong fit.

Types of Trading Strategies

There are several strategies that you can use based on your trading personality. If you like long-term trading strategies, you might consider the trend-following strategy. If you are more interested in short-term trading strategies, you can consider scalping or swing trading.

Long-Term Strategies

There are a couple of long-term trading strategies that are great for traders who are not looking for instant gratification. Two of the most popular are trend-following and contrarian trading strategies.

Trend Following

A trend-following strategy is one where you attempt to capture a trend where the exchange rate of a currency pair moves in the same direction for an extended period. One of the most efficient trading indicators that you can use to identify a trend is the Moving Average Crossover trading strategy. A moving average crossover uses two different moving averages to identify a change in the direction of a trend.

A moving average is used to smoothen the change in price action. A moving average is calculated by determining the average over a specific period. For example, the 20-day moving average is the average for the last 20-days. On day 21, the first exchange rate in the period is a drop, and a new average is calculated.

scalp

The moving average crossover strategy targets a time when a shorter-term moving average (such as the 20-day moving average) crosses above or below a longer-term moving average (such as the 50-day moving average). The red arrows on the USD/JPY chart shows crossover sell signals, while the green arrows show crossover buy signals. These crossovers represent periods in the middle of the trend. It is important to find a broker that provides low spreads with fast execution, such as Admiral Markets. There will be times when the market is in consolidation, meaning there is no visible trend, but you still receive a signal. The goal in trend following is to generate as much as you can knowing that markets only trend 30% of the time. Many traders use the opposite crossover to exit a position. For example, you enter a short position at the red arrow and stop and reverse at the green arrow. Alternatively, you can add a trailing stop or a specific risk vs. reward ratio to your risk management.

Swing Trading

The parabolic stop and reverse (SAR) is a swing trading system that is both time and price based and refers to a price-and-time-based trading system. The system was introduced by J. Wells Wilder. The parabolic SAR trails the price as the trend extends over time. This system always has you in a position that is reversed when you reach a signal. The indicator is below prices when they are rising and above prices when they are falling. The calculation of the parabolic SAR is based on the distribution of price and geared to catch a swing or trend in the market. You follow the trend until you receive the opposite signal. For example, you short the USD/JPY at the red arrows and reverse and buy at the green arrows.

long term

You can use the stop and reverse methodology for weekly data to make it longer-term, but most traders use daily or intra-day data, which means you have to watch the markets and be ready to stop and reverse.

If you are looking for a very short-term trading system, you might consider scalping the markets. This is a term that describes quick entries and exits with well-defined risk vs. reward parameters. You might consider using an indicator, such as the Fast Stochastic on intra-day data. This will provide you with short-term signals to scalp the market.

short term

The Fast Stochastic measures the rate accelerating in the exchange. When it moves too fast, the Fast Stochastic will rise above the 80-oversold trigger level. When the exchange rate declines too fast, the Fast Stochastic drops below 20. If you are able to place tight risk-reward parameters and buy when the Fast Stochastic drops below 20, you can also sell when the fast stochastic rises above 80. The Fast Stochastic also generates a crossover buy and sell signal. which can be added to your trading strategy to confirm your signal.

Summary

Whether you are trading a strategy that catches a trend or want to scalp the market for quick gains, you want to make sure that the strategy you chose matches your trading personality. Obviously, you must find a reliable broker to provide you with a good trading platform that allows you to operate a wide range of trading strategies. Admiral Markets is one of them. The company not only provides you with the cutting-edge trading platforms but also is a regulated broker that offers you a package of advanced Volatility Protection Settings and Risk Management. If you are trying to scalp the market, make sure you have time during the day to dedicate to your strategy. If you are more comfortable taking a long-term view, the trend-following strategy might be the best course of action.

This material is considered a marketing communication and does not contain, and should not be construed as containing, investment advice or an investment recommendation or, an offer of or solicitation for any transactions in financial instruments. The presented trading analyses refer to past performance which may change over time.