A good forex broker can be your best ally while trading currencies. This guide should help you choose the broker that suits you.
Want to bet the British Pound will decrease after an event like BREXIT? Then you’ll need to trade the USD/GBP pair. Containing every currency in the globe, the Forex market is the biggest and most liquid market in the world, with an average daily turnover of around $6.5 trillion.
To access this market, you’ll need an online broker. In order to choose the right broker to trade with, you need to understand how they work and most importantly, how they can help you.
Each broker is different and has its own qualities and downfalls. Some brokers may put a stronger focus on customer support, or low fees, while others may offer more advanced tools and resources. Knowing your investing style, and which areas you would like your broker to be strong in, will make it easier for you to narrow down your search.
Of course, there are also things that you should be aware of when searching for your ideal broker, the industry has varying regulations, and different countries enforce stricter laws.
In this guide, we are going to go through how Forex brokers can help you on your path to success, how they make money, and what to look out for when choosing the broker for you.
Overview & Summary
- Forex brokers essentially work as the middleman between a trader and the interbank, or network of banks, to enable you to buy and sell foreign currencies
- Opening a Forex trading account has become easier over the years. Now, it’s quite a simple and straightforward task, and generally only takes a couple of short steps to complete.
- A broker will offer you a significant leverage with your account, which varies in amount.
- Forex brokers traditionally made money from fees and commissions, but these are now becoming a thing of the past, paving the way for a more accessible industry.
- Many brokers offer education, research materials and even centers to help guide you and prevent you from many any rookie, or even more advanced but preventable mistakes.
- Some brokers offer superb knowledge, research, and customer support to help you strategize, avoid loss and grow into an expert trader.
- The Forex market as we know it today is a relatively new industry with varying regulations that can also depend on where the broker is located.
What is a Forex Broker?
Forex brokers essentially work as the middle-man between a forex trader and the interbank, or network of banks, to enable you to buy and sell foreign currencies. A forex broker will retrieve prices from the banks and offer you the best price available.
Forex Brokers can also be called a retail Forex broker, or a currency trading broker. Once you have a broker, you can access the market to speculate on rising or falling prices in the hopes of making your own big Soros win – Okay, so you might not have that much money to put down (yet), but a big win none-the-less! Institutions or large corporations can also benefit from broker services.
Understanding the Role of a Forex Broker
In order to trade, you need access to currency pairs; Brokers do just that by giving you access to the major currency pairs, including:
Along with the other G10 currencies.
You can then begin buying and selling currency pairs. For example, buying the British Pound with the U.S Dollar will require the purchase of the GBP/USD pair. Once you do this you can then try to make a profit by closing the pair when the exchange rates change in your favor.
Opening an Account
Opening a Forex trading account has become easier over the years. Now, it’s quite a simple and straightforward task, and generally only takes a couple of short steps to complete. The whole process should only take a couple of days.
To open an account with a broker, you simply choose the account type that you would like to open, then fill out their online application – it could not be easier!
Keep in mind: Some Forex brokers will require you to have an account minimum. However, fewer brokers are asking for this with the industry moving towards zero fees.
Increase Your Earnings with Leverage
A broker will offer you leverage with your account, which varies in amount. This leverage can be anywhere from 10:1 to 100:1. For example, if you have $500, your broker may provide leverage of 100:1 which means that you can make an initial trade of a currency pair up to $50,000.
Don’t let this get to your head though. Traders can often forget the risks that come along with a leverage. It could increase your profits, but it could also lead you down the path of a terrible loss.
Brokers’ Commissions & Fees: A Shift Towards Accessible Trading
The broker industry traditionally made most of their revenue from commission & fees, but we are now approaching a new era with many brokers reducing and eliminating fees in a bid to remain competitive.
Not all brokers have reached the stage of zero fees yet, so you’ll need to be aware of individual fees and commissions depending on the broker. Some brokers, including Robinhood, are known for their zero-fee policy, while online brokers including Charles Schwab are fast on their heels to catch up.
The Spread ↔️
The spread is one way that brokers will accrue money. This is the difference between the bid and ask price of a currency pair, or in other words, the price at which to buy and sell. Forex brokers analyse the market and then offer you a price for the pair. This price usually varies slightly from the market price.
For example, if the asking price of a currency is 1.1051-1.1053, the spread is 0.0002, or 2 pips. A pip is a term used to express the broker’s fee amount.
Changes in price of currencies are usually measured in pips by traders.
The spread is one way of determining the broker’s commission. However, some brokers offer a variable spread or a fixed spread, then take the difference between the market spread and their own spread.
A Variable Spread
A Broker would offer a variable spread to avoid the possibility of a loss, or market risk. To do this, the broker adds a fee on top of the spread, which leaves room for market fluctuations on the spread. If your potential broker offers a variable spread, then you should take this fee into consideration when trading.
A Fixed Spread
If a broker is offering a fixed spread, then you’ll have a pre-arranged spread no matter the currency pair. The idea is that the brokers spread will be higher than the market spread, which will allow them to profit from the difference.
Fixed price spreads are easier to work with and better for consistency when buying and selling currency pairs.
Some brokers also charge a fixed dollar commission per 100,000 unit trade. For example, if you trade 100 units, you’ll need to multiply this by .01 to get the commission price.
With this, if you are trading with margin, then you will probably be charged an interest rate for this, too.
The last fee to be aware of is an overnight holding cost. Some brokers charge this for holding an overnight position, this happen when the market is closed, which is not often. You will not need to pay a fee on futures trades though, because they already have the cost built into the spread.
The FX Industry’s Regulation
This is an important one. The Forex market as we know it today is a relatively new industry with varying regulations that can also depend on where the broker is located. Certain countries have stricter regulation that has been enforced by the country’s government.
Brokers regulated in the U.S or U.K will be liable to stricter regulations than most other countries.
There are two entities that serve regulation functions among forex brokers: The Commodity Futures Trading Commission (CFTC) and The National Futures Association (NFA). Both organizations make the public aware of any lawsuits they pursue against any fraudulent or potentially harmful practices a broker may have.
Be aware of smaller, possibly semi-unregulated Forex brokers. These brokers can, and have, re-requoted prices and traded against their own customers.
The regulation protects the banks participating in forex trading first and foremost. As the banks trading around the world take on sovereign risk and credit risk there are processes to protect them as much as possible.
Be sure to check out our broker reviews to see a broker has the tools, resources, and reputation to match your needs before making a decision.
The Bottom Line
Brokers have a lot to offer traders whether you are just starting out in the trading world or whether you are more advanced.
Choosing the right one will help you learn, grow, avoid risky situations, and strategize along the way. Be sure to research where your broker is and the regulations, they are liable to before committing, and be careful with your leverage; the possibility of a huge win also brings with it the potential for a huge loss.
There are lots of great brokers out there, just check out our broker reviews to learn more and find the perfect one for you.