How to Choose the Best Islamic FOREX Broker: Explained

Best Islamic FOREX Brokers for 2024

The Foundations of Islamic Trading

There are a few key rules to follow if you are going to trade according to Islamic principles, but one rule stands out – it is forbidden for an Islamic trader to earn or pay interest. 

Many regular traders take part in day trading, which sees them maintaining open positions for short periods, often a few hours or less. However, from time to time, some traders must keep their positions open for longer than 24 hours. In this case, it is accepted practice for traders to pay interest to the broker for this facility, otherwise known as a rollover fee. In Shariah finance, this customary practice is prohibited.

Interest payments incurred for keeping overnight positions open might be commonplace for regular traders, but for followers of the Islamic faith, they are a non-starter. This is where Islamic brokers come in, as they have developed accounts that comply with the requirements of halal (acceptable) Islamic trading while staying away from what is haram (not acceptable).

Many more rules need to be followed for traders to remain in good standing with Shariah finance. We will cover these later in the article. However, it is crucial to note that receiving or paying interest is a cornerstone issue to navigate when a follower of the Islamic faith starts their trading career.

Best Islamic FOREX Brokers in 2024

Is FOREX Trading Allowed for Islamic Traders?

The question of whether FOREX trading is acceptable or unacceptable within Shariah law generates much conversation, which is why it is worth underscoring the commonly accepted positions. Islam allows for the enhancement and improvement of your personal situation. This means that seeking to improve your financial situation through trading is acceptable. 

It is understood that FOREX trading can be considered halal according to the principles of Islamic finance. Bear in mind that although Islamic traders are not required to pay interest, they must pay the margin, commissions, and administrative fees like everyone else. Also, to compensate for losing out on swap fees, brokers usually widen the spreads between currency pairs, which benefits them but costs Islamic traders.

What Is an Islamic FOREX Account?

How to Open an Islamic FOREX Account

What Is a Swap Fee?

Regulation and Licensing of Shariah-Compliant Brokers

There is no difference in how brokers are regulated when they offer Shariah finance products. Shariah-compliant FOREX brokers must be regulated by the same regulators that regulate non-Shariah brokers. Both these types of brokers can readily provide access to financial assets such as FOREX, commodities, and indices. If you want to learn more about some of the best-regarded regulators, read our article on regulation here. Remember that you do not have to use a broker with international regulation if your local broker is regulated by a solid local regulator.

To ensure that your broker is legit, you can follow these steps:

• Ask the broker to explain its FOREX product, with specific emphasis on swap-fees

• Check if the broker is registered with a top-tier regulator or at least the applicable regulator in your area

• Ask how the broker plans to compensate you if it goes insolvent

• Stay on top of your account and make sure all transactions are above board

Which Regulations Guide the Use of Leverage in Islam?

There is a healthy debate among Islamic scholars about the use of leverage. Some feel leverage trading can be permissible within limits if it complies with the principles of Islamic finance. However, other scholars argue that leverage trading is not permissible in Islam due to its association with excessive speculation and gambling, which is prohibited.

Consult an Islamic scholar or your broker directly for more information. On the matter of leverage in general, several key regulators have introduced specific guidelines to safeguard retail traders.

Let's look at some of these leverage rules set by major regulators:

Financial Conduct Authority (FCA) in the UK:

30:1 for major currency pairs

20:1 for non-major currency pairs, gold, and major indices

10:1 for commodities (excluding gold) and non-major equity indices

5:1 for individual equities and other reference values

Australian Securities and Investments Commission (ASIC) Australia:

30:1 for major currency pairs

20:1 for non-major currency pairs, gold, and major stock market indices

10:1 for commodities other than gold and minor stock market indices

5:1 for equities (stocks) and other underlying assets

The Cyprus Securities and Exchange Commission (CySEC) in Cyprus:

CySEC regulations fall closely in line with the European Securities and Markets Authority (ESMA) guidelines and the Markets in Financial Instruments Regulation (MiFIR).

30:1 for major currency pairs 

20:1 for non-major currency pairs

10:1 for major indices, such as the S&P 500

5:1 for equities (stocks) and other underlying assets

What are Competitive Commissions and Fees at the Best Islamic Brokers?

Trading fees can be tricky to keep track of, so it's important to compare them with industry standards. Here are some fees of which to be aware:

Spreads: 

There are two main kinds of spread, one is fixed and the other is variable. A first step in FOREX trading is identifying the spread differential, defined as the difference between the bid (sell) price and the ask (buy) price of a currency pair. While most FOREX currency pairs are traded without commission, the spread is one “cost” that applies to any trade that you place. This is, indeed, the biggest source of profit for the FOREX company.

The spread refers to the difference between two prices, such as the bid/ask rate in a currency exchange rate. An example of a good spread is 1.4 pips for the EUR/USD (the narrower the better, this means that a spread of 1.4 pips is better than a spread of 2 pips). You can learn more about this concept in this article.

Remember that because brokers catering to Islamic clients cannot charge rollover fees as it is against Shariah law, they often seek to make more money through spreads, which are typically higher in markets bound by Islamic law.

Commission: 

This is the service charge that brokers require for carrying out transactions on behalf of their clients. As for commissions, FOREX trading companies can be placed into three categories. The first offers fixed spreads, while the second tenders variable spreads, with a third category of companies offering low-cost spreads, but that comes with a (relatively high) fixed commission.

Rollover fees: When you leave a trade open overnight, the broker normally charges a rollover fee for the facility of holding your trade open for that period. This is because they assume the risk of the market changing adversely. As we have said, you should know that as a Muslim trader, it is haram to pay conventional rollover fees. This is why you should only trade with a broker that offers Islamic swap-free trading.

Withdrawal and deposit fees: 

Some platforms might charge fees for depositing or withdrawing funds. Pay attention to this. It's important to know these and any associated limits or conditions.

Subscription or inactivity fees: 

Certain platforms have monthly charges or fees for inactive accounts. Ensure you're aware of these potential costs.

Withdrawal and Deposit Fees Comparison Table

What Assets and Instruments Do Islamic FOREX Brokers Offer?

• FOREX

• Commodities

• CFDs

• Equities or Stocks

• Indices

What Trading Platforms, Tools and Features Should Islamic Broker Offer?

When choosing a trading platform, you should consider a range of features that cater to both novice and seasoned traders. Here are some elements to keep in mind:

• Shariah-compliant accounts: You should be able to access a swap-free account consistent with Islamic financial law's dictates.

• Technical analysis tools: The platform should have robust technical indicators to help traders make informed decisions.

• Customization and user interface: Traders should be able to mold the platform according to their preferences, allowing them to set up their trading environment precisely how they want. We find that the products from the MetaTrader suite, especially MT4, offer excellent features for this purpose.

• Platform accessibility: A top-notch trading platform should offer flexibility in terms of access, whether it's web-based or a downloadable application.

• Risk-management tools: Trading inherently comes with risks, and a high-quality platform should provide instruments that allow traders to set stop-losses, take-profits, and other crucial order types.

• Performance and reliability: Beginner traders especially need a platform that operates seamlessly with minimal downtimes or glitches. This ensures a smooth trading journey, allowing them to focus on market movements rather than technical hiccups.

• Learning and educational resources: The best brokers will offer platforms that are not only intuitive but also come with tutorials, guides, and responsive customer support to assist traders in navigating any challenges they might face.

To choose the perfect trading platform, here’s some solid advice:

• Determine your trading style and needs.

• Research different platforms and compare their features.

• Test the platforms with a demo account to see which one suits you best.

• Choose a platform that offers the features you need and is user-friendly.

• Ensure that the platform is reliable and has a good reputation in the industry.

Remember that the trading platform you choose can have a significant impact on your trading success, so it's important to choose wisely.

How Do Stop Outs Affect You As a Trader?

Stop outs are bad news. It is one of the worst things that can happen to a retail FOREX trader. If this happens to you, rest assured that you have not planned your trading activities well. Different regulators have different guiding policies relative to leverage. Key regulators have implemented specific rules to limit the leverage offered to retail traders as a means of consumer protection.

Here are selected leverage rules for CFDs according to some key regulators:

Stop out of 0%: 

Your broker won't close any of your positions, even if your margin level reaches rock bottom. This is because some brokers allow you to end up in the red, which means you might owe them money if your trades keep losing.

Stop out of 50%: 

Once your equity dwindles to half of your used margin, the stop-out alarm goes off. Your broker steps in and starts closing your trades, beginning with those least profitable. This continues until your margin level bounces back above the stop-out level.

Stop out of 100%: 

When your margin level hits 100%, your broker takes the drastic step of automatically closing all your open positions. In some setups where the broker separates margin-call and stop-out levels, the margin call happens at 100% and the stop out at 50%. If your margin level plunges to 50%, your trading platform springs into action with a stop out, closing your trade at the market price.

It's worth noting that while stop-out procedures are meant to protect traders from negative balances, they can lead to significant losses in volatile markets if positions are closed automatically, especially if the market quickly reverses after the stop out. As such, using protective measures, like stop-loss orders and not over-leveraging, is always a good idea. 

Important Matters to Note as an Islamic Trader

So, what do Islamic traders have to consider when they begin their trading career? The following are the four main Islamic trading principles:

• You cannot pay or receive interest.

• Transactions must be completed as quickly as possible.

• Gambling is not allowed.

• The risks and benefits of a transaction must be shared between the two parties. 

Conventional banking in the Western model does not easily support these principles. This explains the need for Islamic trading, a special type of trading that respects the dictates of Shariah Law as they relate to finance. Here are some of the practical considerations that arise when employing specific trading approaches. 

1. Day Trading

Day trading consists of working a strategy that requires you to open and close positions during the same session. In this instance, there are no swap or rollover fees to be paid. As you can see, day trading does not contravene Sharia law as no interest is paid or earned. So, what is the point of having an Islamic account for day trading? 

It is fair to say that if a Muslim trader can stick to day trading without ever rolling over trades into the next day, then they can use a regular account to perform day trading. If a trader believes they might be tempted to hold trades open the next day, then it is a good idea to work through an Islamic account. This will ensure that they remain compliant according to Islamic principles for the times they hold trades open longer than a day.

2. Scalping

Scalping involves opening a position to close it very quickly. Scalping trades can be opened and closed within a few minutes. Traders who scalp do so to open several small positions and make a tiny profit from each. As the transaction window for scalping is so small, there is no interest to be paid, making this form of trading acceptable in Shariah finance.

Normally, Islamic scalpers can use standard accounts that do not need the special facilities of an Islamic account. In the same way as normal trading, if a scalper goes on a roll and wishes to keep their positions open, then at that point they would need an Islamic account.

3. Swing Trading

Swing trading involves keeping positions open for days or weeks. As we have mentioned, any trading style that involves a position remaining open overnight is destined to attract interest, and this makes it against Shariah finance. Therefore, swing trading must be conducted free of interest payments.

As a Muslim trader, if your strategy revolves around swing trading, you must work through an Islamic account. What about Islamic traders who employ a combination of strategies? Some brokers will allow traders to hold regular accounts and Islamic accounts at once. It takes some research to find out who these brokers are, and it takes practice to understand how workable it really is to alternate between account types.

How to Select the Best Islamic Brokers 2024

• Is the account-opening process comfortable and quick?
• Are the fees, especially spreads, acceptable?
• Do I have the same level of functionality as regular accounts?
• Can I alternate between regular and Islamic accounts?
• Is there a demo Islamic account facility?
• Are there educational materials to teach me how to keep my activities halal?
• Has the broker created communities of Islamic traders like me?

Conclusion