Traders Agree that the Worst Trading Mistake is Choosing the Wrong Broker
You can spend endless months creating and refining your trading strategy, but if you choose the wrong broker it just may well be one of the biggest mistakes traders make.
In fact, having the wrong broker can convince some people that their trading strategy is totally unviable when it isn’t.
Having the wrong broker can cost traders thousands of wasted dollars per year.
Not just in fees, but the opportunity cost from not executing better trades from having better infrastructure, tools, and product choices.
The danger is that traders often settle into the familiarity of a platform and are unaware of what they’re missing out on.
So in order to know what to avoid, we must know all the advantages and best aspects that brokers can offer – this can help gauge if our current one falls short.
So, what makes a broker the right choice?
Before answering this question, it’s wise to create a list of the top ~10 brokers, such as these Canadian brokers for example, and go through them with each point below.
Strategy and Pricing
First and foremost, our strategy determines the broker we choose – not the other way around.
We should be clear on what asset classes we’re focused on, the frequency in which we trade, and the financial products we will make use of.
For example, some brokers are forex specialists.
They will have a vast liquid market with small spreads, no fees, and yet when it comes to equities they charge high fees – or they simply do not have any or many markets for it.
So, when reviewing the costs and comparing them between brokers, evidently we must try and filter out the great stuff we hear that isn’t relevant to our trading strategy.
Another example is trading frequency.
For people looking to buy-and-hold large values of securities, the commission isn’t too much of an issue.
It will not only be an infrequent fee but a relatively small one.
However, a trader who is scalping or day trading will require low or zero commission on their trades, otherwise, it has a far greater impact on their profitability.
Instantly working against a fee margin is difficult when you’re only holding a position for an hour or so.
This could be the difference between a strategy being profitable or not.
It’s also worth bearing in mind that very high-frequency trading strategies should be prepared to invest in better platforms that facilitate faster trades.
Finally, the financial products we use are highly relevant to the broker we choose.
Having no commission on stocks is somewhat irrelevant if we’re looking to leverage our trades and the overnight charges are vast.
Sometimes it’s difficult to calculate between brokers when they have pros and cons in different areas.
It’s worth simulating this through a demo account or running your trading strategy through both brokers simultaneously for comparison.
Strategy and Tools
Another reason why there is no universal broker that is the best is that many will focus on different tools and functionality.
First and foremost, mobile traders should disregard the reviews of a platform that relate to its web-based platform and mostly look at the app store reviews.
Secondly, it’s often clear from the offset whether the platform focuses on technical analysis or fundamental analysis.
If it lacks information from the company’s financials, this can be a deal-breaker for some, but it likely means it has good charting capabilities.
This is an easy way to eliminate a handful of brokers from the equation.
Whether or not the platform can integrate with MT4 or algorithmic programming languages may also be important for some people.
These can make executing a trading strategy a whole lot easier, and settling into using a broker with limited functionality can be deceivingly detrimental – particularly if you don’t know what you’re missing.
Other factors to consider are notifications (such as live price alerts), technical indicators and customisation, news flow, learning centre, trading hotkeys, direct market routing.
There are some easy ways to put some aspects of a broker ahead of another.
For example, there is no reason for a broker to have poor customer service.
Unlike with fees or tools, where their focus may be elsewhere, there is no excuse for being ignored when you cannot deposit funds – and thus miss out on trading opportunities.
One way to check this is from customer reviews.
However, don’t just check one review platform like TrustPilot, as it can often be manipulated.
Check through as many reputable sites as you can and see if the narrative adds up between them – including the app store reviews.
You can even try contacting customer service when using your demo account and put them to the test before fully onboarding.
Another universal must-have is solid regulation from a Tier 1 regulator, such as the FCA.
Having no such regulation should be considered a red flag, and if it’s a peripheral regulator, research to see if you’re covered for lost funds, and so on.
This isn’t the only security that it’s important, as you should also ensure the platform has two-factor authentication.
Many do not, and this may not rule them out for some users, but it will for others.
Finally, if two brokers are of an equal match to each other, there’s no shame in going with the one that has the better sign up promotion.
It shouldn’t be the first or key factor in your decision, but there’s no reason why it should be ignored.
Brokers aren’t always the good guys.
They can be our biggest resource and a dream to work with, but it’s difficult to know if you’re with a bad egg.
Be careful of dishonest tactics such as churning, in which brokers will overtrade on your account to maximise the amount of commission they receive.
This is a bit like a mechanic claiming you need your clutch fixed when you don’t.
It can be costly and hard to detect, so it’s important to keep an eye out for it with reviews.
Generally, it’s worth paying a bit more for an honest broker than replacing it with one known for dishonest tactics as well as being loosely regulated.
As you can see, having the wrong broker can have a significant negative impact on trading and is one of the most common mistakes traders make.
Given that trading usually requires operating on fine margins, every detail matters.
If a broker is positioning themself as being costly but worth the price due to having great functionality and tools, it might be wise to consider becoming a pro at MetaTrader, which is free and can be integrated into many different brokerage platforms.
Otherwise, great tools, news flow, and charting capability can be make or break for a trader, so it’s not wise to choose a broker on cost alone.