Hello and welcome to my YouTube channel, Trading Software Tutorials.

The first video in this series provided an overview of the three software components necessary for online trading of financial instruments: data, charts and brokers. The second tutorial provided more detail about data: where and how it is generated, what data you need for trading, and which software platforms provide current and historical data.

The third tutorial provided more detail about charts: the difference between broker charts and charts produced by independent businesses; where you can get free charts and whether they are worth using; the difference between static and dynamic charts; what functionality to look for in a charting package; and which charts allow you to scan for entry setups and backtest trading systems.

This tutorial focuses on what you need to know about brokers:

• their history and reliability as a financial institution
• what suite of financial instruments they offer
• the fees they charge for different services
• the reliability and speed of their trading platform
• the quality of their charting software
• whether they offer a demo account
• whether they offer scanning, backtesting and automated trading functions
• the quality and speed of their technical support
• what other services they offer, such as software tuition tutorials and educational material.

However, before you begin looking for answers to these questions, let’s define what a broker is and does. Brokers are intermediaries who have government regulatory authority to buy financial instruments on behalf of a trader or investor. That means they are licensed and regulated by the federal government in your country, and they have an obligation to act in the best interests of their clients.

Importantly, there are two main types of brokers in terms of how they place trades. The first type is the traditional, direct market access (DMA) brokers who place all of their client’s trades through a regulated exchange. Typically they deal in shares and their fees come from specified brokerage on each buy and sell transaction which may be based on either a per trade price or a per unit price.

The second type is brokers that do not put their trades through an exchange, but instead trade over the counter, or OTC. This means that the broker transacts both sides of the exchange in-house. These brokers are often called market makers. Typically they create income for themselves by charging a spread on the buy and sell price, plus they may also charge a commission. While OTC market makers provide liquidity on the market, they carry a much higher level of risk than DMA brokers, and so many of them hedge their order book exposure.

It is difficult to know on initial inspection whether a broker is DMA or OTC. The best way to find out is to ask, although typically If they offer shares, but not a shorting option on shares, they are likely to be DMA. If they offer foreign exchange, either through contracts for difference or spread-betting, they are likely to be an OTC market-maker. Similarly, if they use MetaTrader 4 or 5, they are likely to be OTC.

The first thing that is important to know is that you might not be able to open an account with a particular broker. This may happen for a variety of reasons, such as the fact that you are not over 18 years old, or that you do not reside in or have a bank account in the same country, or that you need to deposit a minimum balance in your account that you don’t have yet. While you might be allowed to open an account with just $100, each type of financial instrument will have its own account minimum, and thus require a different level of deposit to others. You are likely to have to provide some form of personal identification and, if you are opening an account in a company or a trust name, you will need to provide a certified copy of documentation proving that you are the owner of that legal entity.

Most brokers will allow any retail trader to trade in shares without constraint. However, you may not be able to immediately trade all of the financial instruments that your chosen broker offers. There may be levels of access within a particular broker where, for example, you need to apply for a higher level of access to trade international shares, or you have to pass an accreditation test to get access to trade more complex financial instruments.

For example, to trade international shares, the Australian broker CommSec requires you to submit an application which includes proof that you are an Australian citizen or resident, and to complete and submit an American W-8 tax form. And before you can deal in exchange-traded options through CommSec, you must be accredited by passing a ‘target market questionnaire’.

Also note, you may not be able to trade specific financial instruments at all in your country. For example, America does not allow retail trading of CFDs – contracts for difference – though most other countries do. The opposite also occurs where a country will have its own class of financial instruments. For example, in the UK and Ireland there is a type of trading called spread-betting which is of form of derivatives trading on shares, indices, commodities and foreign exchange, and which is tax-free.

In addition, if you are managing investments through a self-managed superannuation fund, you may need to check that the broker you want to use is approved by your super fund administrator.

You may also find that you require separate accounts for different instrument classes. For example, UK broker IG markets has separate accounts for share trading and for contracts for difference. This is because a minimum margin is required for trading CFDs, while it is not required for shares other than you deposit sufficient money in their account to cover the cost of the shares and the brokerage. Also, some global brokers offer different platforms for each country. For example, again, IG Markets offers a separate platform for Australian traders and another for American traders, although it only offers foreign exchange to American clients. Finally, many brokers do not allow hedging of trades, so if you are at that level of trading, you will need to find one that does.

When you’re making a decision whether to open an account with a particular broker, your first question should be how reliable is this company? How many years has it been operating? How many clients does it have? Does it have a good reputation in the market?

Your research should include an internet scan on the company to see how it ranks against other brokers. You’ll find, as this selection shows, that no one broker comes out on top in every survey, and that some brokers clearly specialise in a specific aspect of trading, such as the financial instruments they offer, low fees, best mobile app, best customer support, and best for beginner or advanced traders.

Like any other type of corporation, brokerage firms can and do go broke. The global financial crisis of 2008 proved that, as did the collapse in May 2022 of one of Australia’s largest independent stockbroking firms, which had global operations and acted as a clearing house for 25 other brokerage firms which, in turn, lost the ability to place buy and sell orders for their clients. However, there had been a paper trail to the demise of this broker, with the ASX having previously fined it numerous times for inadequate operational procedures, then finally suspending the firm from trading operations.

The most common saying in trading is DYOR – do your own research, and, with your choice of broker, this is vital. As a trader, you are entitled to contact your national securities regulator or financial industry regulatory authority to get information on licensing, registration and disciplinary actions about brokerage firms if you feel the need.

In terms of the five equity securities and the five derivative securities most commonly traded by retail traders, not all brokers offer every type of financial instrument. Indeed, most brokers specialise in particular classes of tradeable assets. There are some brokers that only offer stocks, and others that specialise in foreign exchange. If you are interested in swing trading stocks or trading stock options, a bank broker with a long history in offering equities will be your best bet. If you are interested in short-term trading, day trading or scalping, you will need a broker that offers foreign exchange, commodities and indexes, and perhaps cryptocurrencies. Plus their trading platform must be especially set up for day-traders and scalpers. If you are interested in both stocks and CFDs, as I am, then you may need two or more separate brokers. Indeed, it is good risk management policy to spread your money over at least two accounts.

As mentioned in Tutorial 3, the range of fees charged for trading can include:

• brokerage for buying and selling stocks which can vary dramatically from nothing to a percentage of your trade value
• commissions for buying and selling non-stock financial instruments
• paying the spread in foreign exchange and CFD instruments
• exchange fees for real-time data, and
• chart fees.

These fees can vary dramatically between brokers. Some brokers offer free trading indefinitely, and some brokers offer free trading for the first few months only, primarily as an enticement to open an account.

Let’s look at each of these categories of fees and the way in which they relate to different financial instruments.

Brokerage is usually charged on shares, both when you buy and when you sell. This can vary significantly between brokers and even within brokers. For example, a higher brokerage might be charged on international shares compared to local. Brokerage is usually charged on a proportional basis; that is, the more shares you buy, the higher the brokerage.

You may also be required to pay tax on your brokerage. For example, in Australia, a 10% goods and services tax is applied; while the brokerage charged might be $29.95, $2.72 of that is GST which ultimately goes to the government, not the broker.

If you are trading global shares, you are likely to be charged currency conversion fees for transfers between currencies which could add up given the transfer would be made twice, once on buying and once on selling, though some brokers operate a multi-currency ledger which helps reduce exchange costs. You may also incur custodian fees if you are an Australian trader buying stocks from overseas exchanges. You may also be charged an inactivity fee if you do not trade for a certain period.

If you are trading foreign exchange, commodities and indices through CFDs or spread-betting, you won’t have brokerage fees, but you will pay the broker indirectly through the spread. This is the difference between the sell and buy prices at any given time, some of which goes to the broker if they are not using the minimum spread and are charging commissions instead. If you are scalping, the size of the spread becomes very important.

You are also likely to pay interest on any currency trades which you hold overnight, with the close of day usually considered to be 5 pm North America Eastern time. If you are a day-trader or scalper, you will not incur these fees, but if you trade FX on the daily charts, you will. While small, if you are an active trader, they can add up.

Not only do brokers differ from each other in the fees they charge, some brokers offer different accounts for different types of clients. For example, Pepperstone offers two different accounts for trading: the Standard and the Razor. The Standard account, which is targeted at novice traders, has no charges other than the spread, although the spread is larger than the Razor account which is targeted at professional traders, and has a minimal spread plus a commission.

The bottom line with trading expenses is to make sure that you read the fine print. No broker in the world is going to let you trade totally for free. So do get clear exactly what you are likely to be up for, before signing up with a broker. And you may find that you lose out on other benefits by choosing the cheapest broker, such as clearing-house sponsorship.

It would be easy to think that with modern-day technology, all trading platforms offered by brokers will be equally fast and reliable. However, this is simply not true. While all computer operations can and do suffer from occasional outages, some trading platforms are slow to load. And some platforms can be glitchy in that a particular operation doesn’t function correctly all the time. And some are simply slower than others. However, you need to make a distinction between the reliability and speed of your broker’s operations and the reliability and speed of any third-party charting software, or the interface between the two.

The key element in the speed of a broker’s platform is the data feed. However, if the feed it slow by a few seconds compared to another platform, but is still accurate in terms of elapsed time, then that’s not a significant problem. The main problem that traders experience is the fact that charts are slow to load when switching from one financial instrument to another.

For example, it is well known that Metatrader 4 can be slow, so much so that there are numerous videos on how to optimise the speed of the program. There are criticisms too of Interactive Brokers and I’m sure there are others. However, don’t confuse a slow trading platform with an underpowered computer. If you’re computer doesn’t have the grunt to handle scalping on one-minute charts, then you can’t blame the trading platform.

So once again, do your own research to see if the broker you intend on using doesn’t have any black marks against it in terms of reliability and speed of operation.

In Tutorial 3, I described in detail the various aspects of charting packages and the fact that some brokers partner with charting software companies to provide a more sophisticated platform for trading. If you haven’t watched that video, there’s a link in the description. While charting is vital, don’t choose a broker simply because you like their chart functionality. Your first criteria should be that the broker is reliable in terms of both their track record of financial probity, and the functionality and reliability of their trading platform.

Most traders lose money and some traders lose a lot of money when they are first learning to trade, especially if they start with day-trading or scalping full contract sizes. The concept of paper trading has been around for decades. It means pretend trading. You document the buying and selling of shares, or other financial instruments, on paper rather than with real money.

With the advent of computer trading, brokers opened up the opportunity for traders to practice trade and now many brokers will allow you to trade a demo account. In fact, these days they advertise their free demo account as an enticement to sign up. Some brokers will let you trade demo accounts indefinitely and some will only allow you to trade for a limited time, and some provide a mix of both. For example, IG Markets will let you trade CFDs for as long as you like, but you can only trade shares in its demo account for two weeks.

While fake trading sounds like a great idea as a way to learn, there are some psychological problems associated with paper trading simply because of the difference between pretend money and real money. The trick is to trade a demo account for as long as it takes to become profitable with whatever strategy you are using, then move to a live account. When you start losing too much money, or blow-up your account, go back to a demo account. It will feel much more like real trading the second time around, especially if you have lost a lot of real money.

As you become a more experienced trader, you will want to look for trade opportunities through technical set-ups in the data by looking for entry signals, such as a new 12-month high, a significant price gap at open, a moving average or MACD crossover, or for particular candle stick patterns. This is called scanning and while in the beginning you might do this manually, you will eventually want to have this sort of technical analysis tool as an automated function in your trading platform. If your broker doesn’t routinely offer this function, an associated charting package they offer might, so check that out. There is a good list at Investopedia under the heading Top Technical Analysis Tools for Traders

You may also want to assess the probability of success of a particular trade entry and exit system by using historical data to see when the entry was triggered and what the result was. This is called backtesting and most novice traders do it manually. Many brokers offer this functionality through their charting packages, either in-house or as an add on through a supplementary charting package. Most broker-offered backtesting systems are rather rudimentary, but it is better to have it than not. The most sophisticated backtesting software is AmiBroker, however this package has a steep learning curve and requires the purchase of historical data.

Finally, in terms of automating your trading, there are two different stages. The first is simply the capacity to lodge conditional orders. That is, if the instrument that you want to trade gets to a certain point, the broker’s trading platform will open a contract for you, usually with a stop loss and a price target added at the same time. Here is an example where I have placed a bracketed order on the UK exchange index FTSE, the IG Markets code for which is UKX. The index is moving down, having just formed a lower high. My order is conditional on the price forming a new low. I have a 100 pip stop loss and an equal take profit of 100 pips. If this short trade opens and moves into profit, I will move the stop loss lower down. If I wanted, I could have set a trailing stop loss as well.

The second stage is to have a fully automated trading system, also called algorithmic trading, where your entry and exit setups are coded into the trading platform. Your trades then open and close automatically when the setup is detected in the price action. Robot trading, which acts on specified market signals, is also available through some brokers.

When something goes wrong with either your internet connection or the trading platform you are using, it is vital that you are able to talk to your broker quickly. This means having phone access to a service where you are not kept on hold for a long period of time, or have to make an international call to speak to someone who may have an accent you find hard to understand, or log into on-online chat service where the respondent regularly disappears for a few minutes.

A major advantage of having a broker which is based in your country, is that it will have a local office that you can ring. If you are thinking of signing up with a global broker, check whether they have an office in your country, and what sort of communication service they provide. When your money is at stake, you will be grateful for the comfort of talking to someone who answers the phone quickly and speaks your language.

Many brokerages offer supporting information, such as video tutorials, on how to use their software platform. This can be very useful, especially if the trading platform and charting software are complicated and not intuitive to use. If you are about to subscribe to a broker, check whether they have videos on how to use the platform, especially how to use the charting and trading functions. Tradovate, for example, offers an extensive range of videos on using the platform.

Beginning to trade can be bewildering, and this is made significantly worse by not having access to user-friendly information about how to trade. Brokers frequently offer educational material about trading the financial markets. For example, TMGM offers an academy which provides a series of beginner, intermediate and advanced educational courses, though you have to sign up to a TMGM account first. And IG Markets offers educational courses, plus checks your progress as you work through them.

Finally, I should mention that there are still full-service brokers available. This means that they provide value-added services, above what an online, discount broker provides. They will place buy and sell orders in markets not readily accessible to retail traders, and they will give advice on financial investments, should you want it. They can also help you with off-market transactions, such as buying shares in an initial public offering, when a company is first being floated on a stock exchange.

Full service brokers will obviously charge higher fees than online brokers, but their services might be worthwhile if you have a large amount of money to invest and need advice on matters such as hedging with stock options.

In summary, there is a lot to consider when deciding on a broker to use for your trading activities. The most important points are as follows.

• You can, and probably should, use more than one broker. Different brokers provide different services at different costs. Start with a shortlist, do your research and then choose wisely.
• The most important factor in deciding on a broker is their reliability as a financial institution. While you might like the look of the charts provided by a newbie broker, or you like the fact that don’t charge fees for trading, brokers can and do go bankrupt and you can lose all your money.
• The next most important factor is the speed and reliability of their trading platform, and the quality and speed of their technical support.
• Don’t be seduced by the word ‘free’. You will end up paying for the brokerage service somehow, and do calculate the full cost you are likely to pay before signing up.
• Because brokers vary according to the financial instruments they offer, you need to match your broker to your style of trading. Most people start out trading either shares on the stock market or day-trading foreign exchange on five-minute charts. Choose your broker accordingly.
• Having access to a demo account is a must. Don’t think of learning to trade without one. Even if you think that you are just going to buy and sell a few shares, practicing first without financial penalty is a good way to get experience without losing your hard-earned capital. So find a broker that allows you to trade a demo account, even if it is only for a specified period.

And finally, a useful website for comparing brokers is Source Forge which can be found at www.sourceforge.net.

DISCLAIMER

This video is made available for educational purposes only. It does not provide financial advice of any sort to any person. The narrator of this video is not a qualified financial advisor. Any opinions expressed during this tutorial are the personal views of the narrator and you should not take anything that is said on this video to be advice regarding any investment in any financial product. Should you wish to invest in any financial market, you should seek professional advice from a qualified financial advisor or broker.