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Ultimate Guide to Regulated Forex Brokers: Advantages and Disadvantages

Forex is a risky and complex job or pastime that needs a lot of knowledge, skills, and experience. That’s why many traders rely on forex brokers to help them access the market and execute their trades.

However, not all forex brokers are created equal. Some are regulated by reputable authorities, while others are unregulated and operate in shady ways.

In this article, we will explore the advantages and disadvantages of regulated FX companies, and how to choose the best one for your trading needs.

trading charts on a laptop
Regulated Forex Brokers have many advantages and utility for traders, but they may present several drawbacks too.

What are Forex Brokers and How Do They Work?

Forex brokers are intermediaries that connect traders to the currency market. They give traders the platform, tools, and services they need to trade currencies online.

Most brokers typically offer two types of accounts: demo and live:

  • Demo accounts allow traders to practice trading with virtual money, without risking any real funds.
  • Live accounts allow traders to trade with real money, and potentially earn or lose real profits.

Those brokers make money by charging fees and commissions on the trades they execute for their clients. They also make money by offering leverage and margin to their clients, which are forms of borrowing that allow traders to trade with more money than they have in their accounts.

Types of Brokers

Brokers can be classified into two main categories: market makers and ECN brokers.

Market Makers:

Market makers are brokers that create their market and act as the counterparty to their clients’ trades. They set the bid and ask prices for the currency pairs they offer, and make money from the spread, which is the gap between the ask and bid prices.

Those brokers may “trade against their clients” if a price is carried on, the institution will take the other side of a transaction,

ECN Brokers:

ECN brokers are brokers that use an electronic communication network (ECN) to connect their clients to the interbank market, where the actual trading takes place.

They do not act as the counterparty to their clients’ trades, but rather match them with other traders or liquidity providers on the network.

Those brokers make money from charging a commission on each trade and offer variable spreads, which depend on the market conditions and the liquidity available.

What are Regulated Forex Brokers?

Regulated forex brokers are brokers that are licensed and supervised by an authority, like the FCA in the UK, the Cyprus Securities and Exchange Commission (CySEC) in Cyprus, or the Australian Securities and Investments Commission (ASIC) in Australia.

These authorities are responsible for ensuring that the brokers comply with the rules and standards that are designed to protect the traders and the integrity of the market.

Regulated forex brokers are important for several reasons:

  • Provide security and protection to the traders, as they have to keep their clients’ funds in segregated accounts. They also have to participate in compensation schemes, which can reimburse the traders in case the broker goes bankrupt or becomes insolvent.
  • Transparency and fairness to the traders, as they have to disclose their trading conditions, and they also have to report their financial performance and activities to the regulators and undergo regular audits and inspections.
  • Customer service and support to the traders, as they have to handle their clients’ complaints and queries in a professional and timely manner.
  • They provide education and training to the traders, as they have to offer various resources and materials that can help their clients improve their trading skills and knowledge.
a laptop next to some books on top of a desk
Regulated forex brokers have their pros and cons, and not all of them are suitable for every trader, make sure to compare several companies and decide the one that accommodates your needs.

Advantages of Regulated Forex Brokers

As we have seen, regulated forex brokers offer many benefits to the traders, such as:

Security and Protection

Trading with a regulated forex broker gives you peace of mind that your money and personal information are safe and secure. }

You don’t have to worry about losing your funds due to fraud, scam, or bankruptcy, as the broker has to follow strict rules and regulations that safeguard your interests.

Also, you have the option to seek compensation or legal action in case of any misconduct or malpractice by the broker.

Transparency and Fairness

Using a regulated forex broker gives you access to clear and accurate information about the trading conditions and features they offer.

You can compare different brokers and choose the one that suits your trading style and preferences.

Make sure that the broker is not manipulating the prices or the execution of your trades, as the broker has to adhere to the ethical and professional standards that the regulator imposes.

Customer Service and Support

They allow you to receive quality and reliable customer service and support from the broker. You can contact the broker anytime and anywhere, in several ways.

You may also have the option to escalate your complaints or disputes to the regulator or a third-party mediator if you are not happy with the broker’s service or performance.

Education and Training

Trading with a regulated forex broker gives you access to a handful of education and training resources and materials that can help you enhance your trading skills and knowledge.

You can learn from the experts and professionals that the broker employs or partners with, and get valuable insights and tips on how to trade successfully and profitably.

Nowadays, most brokers have a community where you can interact with other traders, and share your experiences and opinions with them.

close up of a trading chart
Make sure to check if the broker is regulated by a reputable and trustworthy authority, like the FCA, CySEC, or ASIC.

Disadvantages of Regulated Forex Brokers

However, regulated forex brokers also have some drawbacks and limitations that you should be aware of.

Higher Fees and Costs

A regulated broker may cost you more than trading with an unregulated one, as the broker has to pay for the license and the compliance costs that the regulator imposes.

These costs may be passed on to the traders, in the form of higher fees, commissions, spreads, or other charges.

You may also have to pay taxes or other duties on your trading profits, depending on the jurisdiction and the regulation that the broker follows.

Limited Leverage and Margin

They may limit your trading potential and flexibility, as the broker has to follow the leverage and margin requirements that the regulator sets.

These requirements will vary from country to country, but they are generally lower than the ones offered by unregulated brokers.

Restricted Trading Strategies and Instruments

Since the broker has to follow the trading rules and restrictions that the regulator imposes, they may restrict some strategies and instruments.

These rules and restrictions may vary from country to country, for example, some regulators may prohibit or limit the use of certain trading strategies, such as scalping, hedging, arbitrage, or automated trading.

Some regulators may also prohibit or limit the use of certain trading instruments, such as cryptocurrencies, CFDs, or binary options.

Regional Differences and Limitations

Most of these laws and regulations applied to regulated brokers vary from one region to another, and may not be compatible or harmonized with each other.

For example, some regions may have different trading hours, holidays, or daylight saving times, which may affect the availability and liquidity of the market.

Some regions may also have different legal and political systems, which may affect the stability and security of the market.