Day trading can often seem attractive with the promise of money and freedom. It is a unique undertaking and can be extremely profitable. Having said that, forex and futures trading involves substantial risk. One quickly discovers the challenges of trading securities on the same day in margin accounts.
Nonetheless, achieving success in this venture is possible if you have the right assets and strategy. One of the best assets for day trading is the right broker. Herein is a comprehensive guide on considerations when looking for a day trading broker based on your specific needs.
1. The Type of Broker
Your overall trading performance can be impacted by the type of broker you choose. There are two broad categories of brokers. These are Dealing Desk and Electronic Communication Network (ECN) brokers.
A dealing desk broker makes money through spreads (the price difference between the bid and ask) and by providing liquidity to the clients. These brokers create a market for clients and often take the other side of a client’s trade. This type of broker can be ideal for you if you appreciate fixed spreads.
An ECN broker grants you direct access to other market participants via an electronic communications network. An ECN broker is the best choice for day trading for a number of reasons. ECN brokers can offer much better spreads as they deal with price quotations from various trading parties. The operational model of ECN brokers eliminates the conflict of interest exhibited with dealing desk brokers.
Since they are not the only market makers, they cannot trade against their clients. It is worth noting that some brokers claim to be the ECN type but have elements of dealing desk in their operations. Always inquire about the details of a broker’s business model.
2. Regulation
Regulatory compliance is one of the most important things to look out for when deciding on a day trading broker. An official regulator should always govern the activity of any trustworthy broker. Regulatory bodies are tasked with protecting and promoting the integrity of brokerage operations.
A day trading broker who is unregulated can do as it pleases with your funds. Most of the times they turn out to be scammers or incredibly incompetent. With a regulated broker, all the abusive and black hat activities linked to trading futures and options are just out of the question.
A broker in the US has to be registered with the US Commodity Future Trading Commission (CFTC) and be a member of the National Future Association (NFA). Every country in the world has equivalents of the regulatory bodies and professional associations.
Always check the About Us section of a broker’s website for these credentials and ask for proof as well. You can also check the year that a broker obtained its license. This can be important when determining the operational history and overall reputations of the broker.
3. The Trading Platform
The trading platform is an integral component of brokerage. This will be your portal to the market. As such, you have to ensure that the trading platform and type of trading software is easy to use and responsive.
A good trading platform should have fundamental and technical analysis tools as well as essential features. You should also be able to access the platform from a wide range of devices, i.e. smartphones, tablets, laptops, and desktops. Entering and exiting trades must be effortless since day trading profits can depend on mere seconds.
A poorly designed platform can cause costly order entry mistakes. You can end up adding to a position instead of closing or going long when you mean to go short. These seemingly simple discrepancies can make the whole day trading venture emotionally draining and unprofitable. A good practice is requesting a demo/trial account to assess the design and features of the trading platform.
4. The Commission Structure and Fees
Commissions are an unavoidable part of enlisting the services of a day trading broker. It is very important not to get too caught up in commissions. Avoid picking a broker simply because they have the cheapest commissions. If the broker cannot help you make money, then the cheap commissions won’t matter.
Different brokers have varying commission structures as well as costs. Always, pay attention to the structures and fees to determine their suitability to your trading style. Day trading broker fees can include data, platform, withdrawal and inactivity fees. Other essential costs to compare include day trading margins and minimum balance/deposit.
Commission structures can be categorized into two main types; per-trade and per-share commissions. A per-trade commission refers to a small fee that you pay with each trade. Per-trade commissions can get expensive if you are an active day trader who buys and sells portions of your position (scaling in and out). The per-share commission is the best option if you scale your positions.
5. Fund Safety/Security
Day Trading carries very high risks. For this reason, the brokers have to comply with a raft of rules that safeguard your assets. This is one of the main reasons why regulation compliance is important.
Every broker is subject to the Net Capital Rule. This rule requires them to have a minimum amount of capital kept in liquid form. The rule ensures that you are under the protection of safety net in case the broker has to close shop.
In addition, some jurisdictions require brokers to keep client funds in segregated accounts to avoid accidental (or purposeful) use of your funds for activities other than trading. It is advisable to research the funds safety regulations in your jurisdiction to ensure that your select broker is fully compliant.
6. Customer Care
Day Trading takes place every hour of the 24 hours in a day. Therefore, a broker’s customer support has to be available whenever needed. You cannot compromise on this.
You must be able to communicate with an actual person. An auto-attendant can be time-consuming and very frustrating. Avoid brokers who leave the customer support functions in the hands of auto-attendants.
When considering day trading on how to find the best broker, a simple call will give you a hint at the type of customer support they provide. Take note of the wait times and the ability of the representative to answer questions regarding spreads, leverage, regulations, and fees.
Overall, choosing the right broker is among the most important decisions you will make in your daily trading venture. One broker may be more suited to your needs depending on your trading style. Remember that choosing a broker is a process, not a goal. Conduct due diligence and continuously monitor your broker.
