UK Forex Trading 2022 Guide

How Do You Choose A Forex Broker?

When choosing a forex broker in the UK, there are many important factors to consider. There are many brokers that accept retail investor accounts, with some offering unique features suited to different trading experience, style and strategies.

Three of the most important considerations include:

• The type of broker and the spreads they offer.
• The trading platforms and tools are available.
• The risk management features available.

Types of Brokers

Forex brokers follow one of two main pricing and execution models that determine the forex spreads you can trade.

1. Dealing Desk Brokers
2. No Dealing Desk Brokers

When trading forex, the spread refers to the difference between bid-ask prices. As a forex trader, you want the lowest spreads possible.

Dealing Desk Brokers

Also known as market makers, brokers that use a dealing desk set their own bid-ask prices and use their own liquidity to fill your orders. When placing an order with a dealing desk broker, they act as the counterparty to your trade.

There are both pros and cons to market makers. While this type of broker offers better risk management tools, there’s a potential lack of transparency as market makers have full control over the spreads they offer and the profit of your losses.

No Dealing Desk Brokers

Conversely, no dealing desk (NDD) brokers use external liquidity sources to determine bid-ask prices and fill orders. When you place an order with an NDD broker, it is directly passed onto liquidity providers with no dealing desk interference. As prices are sourced from multiple providers, bid-ask prices react to current market conditions such as volatility and liquidity.

A major benefit to NDD brokers is they often offer faster execution and tighter spreads than market makers, as they are purely acting as a bridge between forex traders and multiple top-tier liquidity providers.

NDD brokers use straight-through processing (STP) or electronic communications network (ECN) execution methods, or in some cases a combination of the two:

• STP: Has an internal pool of liquidity sourced from multiple a selection of providers. Broker retains some control over liquidity.
• ECN: Routes orders onto an interconnected hub that includes different banks and other major market players. Broker has no control over liquidity providers.

Trading Accounts and Spreads

Forex brokers may offer one account type or a selection of trading accounts with varying spreads and features. There are two main pricing structures and trading account types – commission and commission-free.

Commission-Free Account Types and Spreads

These trading accounts allow you to trade forex spreads with no commission fees yet brokers widen the spread to compensate for their brokerage services. No commission accounts are offered by both the dealing desk and NDD brokers.

In the table below you can see that NDD brokers like IC Markets and Pepperstone offer the tightest no commission spreads. For social trading brokers like eToro, commission-free spreads are over twice as wide as Pepperstone or IC Markets.

No Commission Spreads	EUR/USDUSD/JPYGBP/USDUSD/CADAUD/JPYAUD/USDEUR/GBPEUR/JPYUSD/SGD	EUR/USDUSD/JPYGBP/USDUSD/CADAUD/JPYAUD/USDEUR/GBPEUR/JPYUSD/SGD	EUR/USDUSD/JPYGBP/USDUSD/CADAUD/JPYAUD/USDEUR/GBPEUR/JPYUSD/SGD	EUR/USDUSD/JPYGBP/USDUSD/CADAUD/JPYAUD/USDEUR/GBPEUR/JPYUSD/SGD	EUR/USDUSD/JPYGBP/USDUSD/CADAUD/JPYAUD/USDEUR/GBPEUR/JPYUSD/SGD
	0.62	0.74	0.83	0.85	1.50
	0.69	0.86	1.19	1.07	1.67
	1.20	1.20	1.50	1.30	1.50
	1.10	1.20	1.50	1.40	1.40
	3.00	2.00	4.00	N/A	7.00
	1.20	1.40	1.40	1.60	1.40

Data taken from broker website. Accurate as at 01/01/2022

Commission Trading Accounts and Spreads

Forex traders can trade spreads that are passed on from liquidity providers with no markup. As spreads are not widened, brokers are compensated through a commission fee. Only NDD brokers and often referred to as Raw or ECN Accounts.

As shown below, commission spreads can vary significantly depending on the forex pair and broker. For currency pairs like the EUR/USD (Euro vs US Dollar) and USD/JPY, Pepperstone offers the tightest forex spreads averaging 0.16 pips + commission fees. Likewise, Pepperstone provides access to the lowest spreads for the GBP/USD at 0.40 pips, while Dukascopy the tightest for the AUD/JPY at 0.47 pips.

Commission Spreads	EUR/USDUSD/JPYGBP/USDUSD/CADAUD/JPYAUD/USDEUR/GBPEUR/JPYUSD/SGD	EUR/USDUSD/JPYGBP/USDUSD/CADAUD/JPYAUD/USDEUR/GBPEUR/JPYUSD/SGD	EUR/USDUSD/JPYGBP/USDUSD/CADAUD/JPYAUD/USDEUR/GBPEUR/JPYUSD/SGD	EUR/USDUSD/JPYGBP/USDUSD/CADAUD/JPYAUD/USDEUR/GBPEUR/JPYUSD/SGD	EUR/USDUSD/JPYGBP/USDUSD/CADAUD/JPYAUD/USDEUR/GBPEUR/JPYUSD/SGD
	0.09	0.26	0.59	0.35	0.67
	0.30	0.50	0.60	0.60	0.60
	0.50	0.50	0.50	0.80	1.70
	0.20	0.30	0.60	0.70	0.60
	0.17	0.24	0.59	N/A	N/A
	0.28	0.34	0.77	1.18	0.64
	0.20	0.20	0.50	0.30	0.50

Data taken from broker website. Accurate as at 01/01/2022

Compare All Spreads >>

As market makers set their own bid-ask prices, all trading accounts with dealing desk execution are commission-free. On the other hand, many NDD brokers that use STP and ECN execution often offer both commission and commission-free pricing structures and account types.

For example, Pepperstone, an ECN-style broker, offers two trading account types:

• Standard Account: A commission-free account with spreads starting from 1.0 pips for the EUR/USD
• Razor Account: An ECN-like account with forex spreads from 0.0 pip plus a commission fee of £4.59 round turn, per 100k traded.

Experienced traders will prefer NDD brokers with tighter spreads and faster execution, while beginner traders will find commission-free spreads attractive as there is no need for complicated fee calculations.

Other Trading Account Types

As well as commission and commission free account types, certain brokers may offer:

• Islamic accounts, aka swap free accounts, where those following Sharia Law do not pay any fees or receive any payments derived from interest rates.
• VIP accounts for those trading volumes higher than a certain amount, or making a high minimum deposit.
• Micro accounts where small trading volumes (micro lots) are available. Micro accounts usually require lower minimum deposits.
• Professional trading accounts for those with experience in the industry and trading high volumes.

What Trading Platforms Can You Use?

The trading platform you choose to develop and execute trading strategies is key to successful forex trading. Different software is suited to different styles of trading, with some renowned for algorithmic trading or social-copy trading tools.

MetaTrader 4, MetaTrader 5 and cTrader

The three most popular trading platforms worldwide are MetaTrader 4 (MT4), MetaTrader 5 (MT5), cTrader. While many forex traders use these platforms for their automated trading capabilities, the advanced charting tools also enable you to conduct sophisticated technical analysis.

• Advanced inbuilt charting tools with multiple charts, timeframes and technical indicators.
• Trading robots with Expert Advisers (EAs) on MetaTrader platforms, and cBots on cTrader.
• Backtesting features where you can test and optimise Expert Advisers and cBots.
• Available as desktop trading platforms, web trader platforms or mobile apps.
• Suited to all styles of trading, including scalping, day trading, hedging and algorithmic trading strategies.

Proprietary Trading Platforms

Proprietary trading platforms are well-suited to two styles of trading, being beginner traders or those wanting the unique features for copy trading, strategy development or risk management. For example:

• Markets.com developed Marketsx, a proprietary CFD trading platform that comes with exclusive sentiment trading tools not offered by other forex brokers.
• Plus500 is an option for beginner traders with premium order types to manage the high risk of trading, such as guaranteed stop-loss orders available.
• eToro a copy trading platform and broker that offers access to a large social network where you can interact with other eToro traders and copy the trading strategies of other investors.

What Are The Risks When You Trade Forex?

As CFDs are complex instruments, online trading comes with a high risk of losing money. To ensure markets and brokers operate fairly and transparently, the Financial Conduct Authority (FCA) oversees operations in the United Kingdom.

The UK regulator is one of the strictest worldwide, requiring brokers to provide strict investor protections to reduce the high risk of forex for UK traders, such as:

• Negative balance protection
• Close out margins
• Investor compensation schemes
• Segregated client funds
• Leverage caps of 30:1 for major forex pairs and 20:1 for minors.

Forex brokers offer various risk management tools to reduce the high risk of trading CFDs. The two key trading tools offered by nearly all online brokers are:

1. Demo Accounts: Allows you to practice trading CFDs in real-time market conditions but in a risk-free environment.
2. Order Types: To set limits on when to close or open positions, allowing you to maximise gains and minimise losses, i.e. stop losses or trailing stops.

Other leading regulators include MAS in Singapore and ASIC for Australian forex traders.

Spread Betting vs Forex Trading in the UK

If you live in the United Kingdom or Ireland, the Financial Conduct Authority (FCA) allows you to spread bet as an alternative to trading CFDs. Spread betting involves taking a specific amount of money for each point of price movement in the underlying instrument. Although spread betting is similar to CFD trading in many ways, the key difference is how profits are treated under UK tax laws.

Any profits made from trading CFDs is exempt from stamp duty but subject to capital gains tax (CGT), while profits from spread betting are exempt from both stamp duty and CGT.

Brokers that offer spread betting services to UK residents include Pepperstone, CMC Markets, IG, City Index, ThinkMarkets, FXCM and OANDA.