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Rating Forex Brokers -Rating Formula v5.0

Rating Formula v5.0 –Rating Forex Brokers According to three (3) Different Trading Styles

“The most advanced Rating Formula ever build by TradingCenter”


Preface: The Need for a 100% Objective Rating Framework

The series of the Rating Formulas by TradingCenter.org represent a brand new way of rating financial services. Most ratings found in the internet today are made by users (User Ratings). Based on research, more than half (50%) of these user ratings are fake. Brokerage companies have a huge incentive to hire outsiders in order to rate them favorably and rate their competitors unfavorably. The series of the Rating Formula is designed to solve that problem by providing a 100% objective framework of rating Financial Services (Brokers). Two categories of brokerage services have been rated so far, Forex Brokers and Binary Option Brokers. The Rating Formula v5.0 is developed to rate Forex Brokers using some innovative features.

What is New in the version 5.0 of the Rating Formula:

The version 5.0 includes many rating innovations.

(i) The number of the core rating factors has been reduced to three categories in order to make the rating categories more specific (Safety of funds, Transaction Cost, Trading Options & Technology).

(ii) The Formula version 5.0 focus more than ever on trading cost (40% weight) while new individual rating factors have been added such is SWAP charges, Stop Levels etc

(iii) What really distinguishes the version 5.0 from previous versions is that for the first time ratings are divided in three (3) different trading styles (Intraday Traders, Swing Traders, Long Traders).

(iv) The rating formula v5.0 produces actually 4 different ratings values. There is an individual rating for the three different trading styles mentioned before (intraday, swing and long) and an Overall Rating which is the average value of the three individual ratings.

(v) The first Rating Factor (1.Safety of Funds) is common for all trading styles but the other two factors (2.Transaction Cost and 3.Trading Options) are generated by unique rating values according to the three pre-mentioned trading styles. This rating specialization adds value to traders seeking for the best brokerage choice according to their unique needs and style. Take for example swap charges which are very important for long-traders but absolutely irrelevant for intraday traders. On the other hand, trading aspects as the slippage on execution or the distance of the stop-orders are very crucial for intraday-traders but absolutely irrelevant for long-traders who execute only a few trades per month and leave a lot of space for their stop-losses.

Rating Formulas History:

Rating Formula v4.0 for Rating Forex Brokers ► Forex Rating Formula –V4.0 (TradingCenter.org)

Rating Formula v3.5 for Rating Binary Option Brokers ► Binary Options Rating Formula -V3.5 (BinaryValue.com)

Rating Formula v3.0 for Rating Binary Option Brokers ► Binary Options Rating Formula -V3.0 (BinaryValue.com)

Rating Formula v2.0 for Rating Forex Brokers ► Forex Rating Formula –V2.0 (TradingCenter.org)

Rating Formula v1.0 for Rating Forex Brokers ► Forex Rating Formula –V1.0 (OnlineForex.Biz)


Rating Formula Mission: “Ensure Funds Safety, Pay Low Transaction Cost on and use State-of-the-Art Technology”

The Core Mechanism behind the Rating Formula v5.0

The series of Rating Formulas is designed to focus on what makes a Broker the best choice for the average trader. The version v5.0 goes a step further than that, and recognizes three (3) main categories of traders based on their time frame horizon:

(a) Intraday Traders (Timeframe Intraday)

(b) Swing Traders (Timeframe 2-10 days)

(c) Long Traders (Timeframe 1-6 months)

The average rating value of these 3 individual categories determines every broker’s Overall Rating.

Three (3) Rating Categories and their Weight (%)

The Algorithm of the Rating Formula consist three Rating Factors:

(1) Safety of Deposited Funds (25%) (Includes: Regulation Level, Years of Operation, Segregated Bank Accounts, Headquarters Country etc)

(2) Transaction Cost & Similar Factors (40%) (Includes: Trading Spreads and Commissions, Maintenance Fees, Withdrawal Fees, SWAP charges, Slippage on Execution etc)

(3) Variety of Trading Options & Technology (35%) (Includes: Variety of Trading Platforms, Mobile Trading, API Trading, Automated Trading, Asset Index, Fund Methods, Rate of Leverage, Bonus Policy etc)

 

Here is the Analysis of all three (3) Categories-forming altogether a maximum Rating of 100%.

-1- Safety of Deposited Funds, Weight 25.0%

All Financial companies (investment firms, venture capitals, hedge funds, brokers, dealers) tend to accept more risk than they can really afford. This is happening when the Potential Profit of a corporate decision is larger than the Incorporated Risk. Historically speaking, financial companies tend to accept high levels of risk and that exposes them and their clients to a high likelihood of collapsing. This is exactly what happened during theUSfinancial crisis of 2007-2008. If you are an investor you don’t care about your broker’s potential profit, you only care about the level of risk that he tends to accepts. Financial companies maintaining their corporate risk low and ensuring the safety of their client funds are rated favorably by the Rating Formula. The Rating Factor-1 is common for all trading styles, because funds safety is important no matter your trading style and your timeframe.

Table: Safety of Funds Rating Analysis

1. SAFETY OF DEPOSITED FUNDS 25.0% FACTOR-1 RATING WEIGHT
  SHORT SWING LONG   ANALYSIS
1.1 Regulation 10.00% FSC (BVI) = 1.0%, | CYSEC = 3.0%, | FFMS = 3.0%, | RAFMM = 3.0%, | CBI = 4.0%, | ASIC = 4.0%, | FSC (NZ) = 4.0%, | FSA (UK) = 6.0%, | FCA (UK)=6.0% | BAFIN = 6.0%, | FSA JAPAN = 6.0% | CFTC = 6.0%, | FINMA = 8.0% | and MiFID = +2.0% High regulation is very important for any Financial Company
1.2 Headquarters Country 5.00% General Offshore = 0%, Cyprus, Greece, Israel, Latvia = 2.0%, Ireland, Spain, Italy, Belgium = 3.0%, Canada, Australia, New Zeeland = 4.0%, USA, UK, Germany, Scandinavian, France, Switzerland = 5.0% The country where a brokerage company is based determines in a high extend the reliability of its balance sheet.
1.3 Years of Operation 5.00% 0-1 Years = 0 %, 2-5 Years = 2.0 %, 5-10 Years = 4.0 %, 10+ Years = 5.0 % The long existence of a Forex company in the market means that this company operates under a successful business model and that it is proven capable of managing enterprising risk over time
1.4 Segregated Client Bank Accounts 4.00% Yes = 4.0 %, No = 0.0 % Transparency is an important issue when many transactions take place.
1.5 Internet Ratings (Differentiating Results Usage) 1.00% ForexPeaceArmy Rating = 0.5%, | EarnForex Rating = 0.5% This rating parameter is used in order to differentiate the overall results.
1.6 (+) FACTOR (1) ADJUSTMENTS (+ADJUSTING)    
1.6.1 Company Size Adjustment 1.00% More than 1 Million Active Traders = +1.0 % Large companies tend to fall harder than others.

 

-2- Trading Cost & Similar, Weight 40.0%

The cost of opening and maintaining trading positions is absolutely crucial when investing online. Therefore the Rating Factor-2 receives the maximum weight (40%). As the year passes and more Rating Formulas are introduced by TradingCenter, the Cost Rating becomes optimized and includes every single cost aspect. The Rating Formula v5.0 consist many individual mechanisms to rate with precision the Transaction Cost according to each different trading style. Intraday traders have a completely different trading approach than swing and long-term traders. For example an intraday trader is highly affected by the spread and commissions charged, from the other hand a long trader is highly affected by the Swap charges but not by the spread and commissions charged. Different trading styles form different trading needs and that is exactly what the Rating Formula 5.0 is designed to rate, different trading needs.

Table: Trading Cost Rating Analysis

2. TRANSACTION COST 40.0% FACTOR-2 RATING WEIGHT PER TRADING STYLE
  SHORT SWING LONG   ANALYSIS
2.1 EURUSD Typical Spread 8.00% 6.00% 3.00% <0.3 pip = 100%, | <0.4 pip = 95%, | < 0.5 pip = 90%, | <0.6 pip = 85% | <0.7 pip = 80%, | <0.8 pip = 70%, | <0.9 pip = 60% | <1.0 pip = 50%, | < 1.25 pip = 40%, | < 1.5 pip = 30%, | <1.75 pip = 20%, | <2.0 pip = 10%, | <2.5 pip = 5%, | >2.5 pip = 0%

For rating the size of the spread, the most popular Forex currencies are used: EUR/USD, GPB/USD and USD/JPY.

Filter:

If the trading spread exceeds 5.0 pips then automatically the 2.4 rating has also a zero (0) value. This is happening because a very high spread eliminates the advantage of not charged trading commissions.

2.2 GBPUSD Typical Spread 5.00% 4.00% 2.00% < 0.70 pip = 100% | < 0.80 pip = 95% | < 0.9 pip = 90% | < 1.0 pip = 80%, | < 1.25 pip = 70%, | < 1.5 pip = 60%, | < 1.75 pip = 50%, | < 2.0 pip = 40%, | < 2.25 pip = 30%, | < 2.5 pip = 20% | < 2.75 pip = 10% | < 3.0 pip = 5% | > 3.0 pip = 0%  
2.3 USDJPY Typical Spread 5.00% 4.00% 2.00% < 0.70 pip = 100% | < 0.80 pip = 95% | < 0.9 pip = 90% | < 1.0 pip = 80%, | < 1.25 pip = 70%, | < 1.5 pip = 60%, | < 1.75 pip = 50%, | < 2.0 pip = 40%, | < 2.25 pip = 30%, | < 2.5 pip = 20% | < 2.75 pip = 10% | < 3.0 pip = 5% | > 3.0 pip = 0%  
2.4 Commissions when Trading 9.00% 6.00% 3.00% No Commissions = 100% | Commissions < $1 / lot = 90% | Commissions < $2 / lot = 80% | Commissions < $3 / lot = 60% | Commissions < $4 / lot = 40% | Commissions < $5 / lot = 30% | Commissions < $6 / lot = 20% | Commissions < $7 / lot = 10% | Higher Commissions = 0%

Brokers that are charging low commissions are rated beneficially.

Filter:

A filter was added on 2.4 If trading commissions on 2.4 rating are very high {more than $20/lot traded} then the 2.1, 2.2 and 2.3 ratings are forced to zero (0) values. This is happening because very high commissions are eliminating the advantage of low or even zero spreads that a Forex broker may offer.

2.5 Slippage on Execution 4.00% 1.00% 0.00% Slippage < 0.5 pip = 100% | Slippage < 0.75 pip = 90% | Slippage < 1 pip = 80% | Slippage < 1.25 pip = 70% | Slippage < 1.5 pip = 50% | Slippage < 1.75 pip = 30% | Slippage < 2.0 pip = 10% | Slippage > 2.0 pip = 0% Execution delays and re-quotes are certainly some of the worst enemies of Short-Traders.
2.6 Stop Order Minimum Distance (in pips) 4.00% 1.00% 0.00% Stop-Loss Distance < 2.0 pip = 100% | <3.0 pip = 80% | <4.0 pip = 60% | <5.0 pip = 40% | <6.0 pip = 20% | <7.0 pip = 10% | >7.0 pip = 0% Anyone has traded intraday knows that the minimum stop-orders distance can make the difference between winning and losing.
2.7 SWAP Charges 0.00% 10.00% 20.00%   Very importnat for those that trade long but for Swing Traders also.
EURUSD SWAP   5.00% 10.00% Long/Short EURUSD  
GBPUSD SWAP   2.50% 5.00% Long/Short GBPUSD  
USDJPY SWAP   2.50% 5.00% Long/Short USDJPY  
2.8 Maintenance or Inactive Fees 0.00% 3.00% 5.00% No = 100 %, | Yes = 0 % Some brokers are charging fees for maintenance and commissions for inactive accounts. This means extra cost for long traders.
2.9 Deposit or Withdrawal Commissions 2.00% No = 2.0%, | Yes = 0 %, | 1-Free / Month = 1.0% Withdrawal and Deposit commissions are reducing trading funds and that is why they are rated.
FACTOR (2) ADJUSTMENTS (+ADJUSTING)    
2.10 Order Execution 2.00% 1.00% 0.00% ECN = 100% / STP = 75% | Market Makers = +0.0% The type of order execution is very crucial for short-traders as it affects slippage and the size of the spread.
2.11 Interest on Funds 0.00% 1.00% 2.00% Yes = 100%, No = 0.0 % This is a very interesting account option for long-traders that unfortunately is offered only by a few Forex Brokers.

 

-3- Trading Options & Technology, Weight 35.0%

The existence of sufficient trading options and the existence of an advanced technological environment are also important issues for everyone who is trading online. Efficient technology makes investing more practical and more profitable. Furthermore, a financial company that invests today to make its services more technological advanced means a company with a long-term perspective and a customer-oriented business philosophy. Again as in the case of Factor-2, the Rating Factor-3 consist different rating aspects according to the 3 different trading styles. Each different trading style generates different needs regarding the available options and technology. For example the allowance of scalping and automated trading is very important for intraday traders but absolutely useless for long-traders. On the other hand long-traders are considerably interested in a wide asset index to exploit abnormalities in the level of interest rates while intraday traders most of the time trade just 3 currency pairs: EURUSD, GBPUSD and USDJPY. The reason for this specialization of intraday traders is that these 3 pairs enjoy maximum liquidity and therefore minimum spreads.

Table: Trading Options & Technology

3. TRADING OPTIONS & TECHNOLOGY 35.0% FACTOR-3 RATING WEIGHT
TRADING OPTIONS SHORT SWING LONG   ANALYSIS
3.1 Forex Asset Index 2.00% 8.00% 16.00% 60+ Currency Pairs = 100% | 55+ Currency Pairs = 90% | 50+ Currency Pairs = 80%, | 40+ Currency Pairs = 70% | 35+ Currency Pairs = 60% | 30+ Currency Pairs = 50% | 25+ Currency Pairs = 40% | 20+ Currency Pairs = 30% | 15+ Currency Pairs = 20%, | 10+ Currency Pairs = 10%, | Less than 10 pairs = 0% The higher the number of currency assets available, the higher the potential for traders to exploit opportunities in the Forex Market.
3.2 CFD / Futures Trading 2.00% CFD / Futures Trading = 2.0 % | Only Mteals on Spot = 1.0 % | Nothing = 0% The wider the variety of trading instruments as CFDs indicates a Forex company that tries today to expand its services and adapt on more customer needs.
3.3 Demo Account 2.00% Yes = 2.0 %, No = 0.0 % The existence of Demo Accounts helps traders to make the right choices without loosing precious time.
3.4 Fund / Deposit Methods 2.50% For each deposit method available = 0,5%, max = 5 methods The wider the variety of Deposit Methods the more suitable a broker becomes to his customer needs.
3.5 Fund / Withdrawal Methods 2.50% For each withdrawal method available = 0,5%, max = 5 methods Variety of withdrawing methods is of equal importance.
3.6 Minimum Deposit 1.00% Min Deposit < $500 = +1%, | Min Deposit < $1,000 = 0.5% The smaller the minimum deposit the easier a trader can ‘test’ a Forex broker on real conditions.
3.7 Bonus (%) 5.00% 4.00% 0.00% Bonus (Higher or Equal) >50% = Rating 100%, | Bonus >40% = Rating 80%, | Bonus >30% = Rating 60%%, | Bonus >20% = Rating 40%, | Bonus >15% = Rating 20%, | Bonus >10% = Rating 10% The higher the bonus offered, the larger the available funds.
3.8 Leverage Rate 3.00% 2.00% 1.00% (Higher or Equal) Leverage >100:1 = Rating 100%, | Leverage > 75:1 = Rating 50%% | Leverage >50:1 = Rating 25% The magnitude of the capital leverage adds extra capabilities to Forex traders and that is why it is considered as an important parameter.
(+) ADJUSTMENTS (+ADJUSTING)    
3.9 Offering 100+ Currency Pairs 0.00% 0.50% 1.00% Yes = 100% / No = 0 % Brokers who are able to offer such an extensive currency index are rated favorably.
3.10 Competitions / Championships 1.00% 0.50% 0.00% Yes = 100% / No = 0 % A trading competition (Real / Demo) can provide easy money for good traders.
TECHNOLOGY SHORT SWING LONG   ANALYSIS
3.11 Available Platforms 4.00% 4.00% 2.00% Each Supported Platform = 20% Rating, max = 5 platforms A wide variety of trading platforms provides traders with more options.
3.12 Automated Trading 2.00% 0.00% 0.00% Yes = 100 % / No = 0 % The ability to receive signals from Expert Advisors (i.e. Zulu Trade and Tradency's Mirror Trader) is an important trading feature for short-traders.
3.13 MT4 / MT5 Availability 2.00% 2.00% 1.00% Yes = 100% / No = 0 % MetaTrader platform is a clear standard in the Forex industry.
3.14 Mobile Trading 2.00% 1.00% 1.00% Each Supported Device = 25% (iPhone, iPad, Android, Windows Mobile, Blackberry), max = 4 devices Mobile trading is not just a trend, it is the future of trading.
3.15 Scalping / Hedging Policy 1.00% 0.00% 0.00% Yes both = 100% | Yes only Hedging or Scalping = 50% | No = 0 % The ability to scalp Forex currencies is an important option for short-traders.
3.16 Customer Service 4.00% 24/7 = 1.0%, | 24/6 = 0.5%, | 24/5 = 0%, | email = 1.0%, | Phone = 1.0%. | Live Chat = 1.0%, | Skype = 1.0%, | Call-Back = 0.5%, Max = 4.0% Online services require the existence of a high-quality customer service.
3.17 (+) ADJUSTMENTS (+ADJUSTING)    
3.18 PAMM / Managed Accounts 0.50% MAM / PAMM Accounts = +0.5% | Simple Managed Accounts = +0.25%, | No = 0 % Managed accounts have become very popular nowadays so we rate their existence favorably.
3.19 Swap-Free Accounts 0.00% 0.50% 0.50% Yes = 100% / No = 0 % SWAP-Free (or Islamic) accounts provide an extra option for long-traders.
3.20 API Trading 0.50% 0.00% 0.00% Yes = 100% / No = 0 % The availability of API trading indicates furthermore that a Forex Broker focus on state-of-the-art trading technology.


Calculating Overall Rating Results

Calculating Rating Values for Individual Styles

If we sum the results of all Rating Factors (1, 2,3) we are able to calculate every Broker's Rating Value for each of the three Trading Styles.

FORMULA v5.0 OVERALL RATING

Rating Factor-1: Safety of Deposited Funds (25.0%) +

Rating Factor-2: Transaction Cost & Similar (40.0%) +

Rating Factor-3: Trading Options & Technology (35.0%) =

= 100.0%

The Overall Rating Value for the Average Trader

The average rating value of the three trading styles forms the Overall Rating Value.

■ Overall Rating = (Intraday Rating Value + Swing Rating Value + Long Rating Value) / 3

 

Giorgos Protonotarios, Financial Analyst –Web Projects

Rating Brokers Formula © TradingCenter.org

 

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