Forex trading is one of the most popular trading options as it does not require years of experience. All you need is to select a currency pair that you would like to trade, internet-enabled devices, a good strategy, and an excellent Forex broker. Finding the last component of this list is the trickiest and the most crucial as well. You can have good skills and capital but without a good Forex broker.
What is a Forex Trading Broker?
Looking at the origin of the word we see that the word broker is derived from the Anglo-French word “brocour”, “broacher” ( one who sells). Forex brokers operate as an intermediary between traders and the trading market, buy and sell currencies on behalf of clients while charging a commission for the service.
Forex brokers are intermediaries. They connect traders with the interbank system. An interbank system is a network of banks that have trade relationships. Forex brokers take a quote from the bank of which they have access to forex liquidity and lines of credit. Many established brokers can get pricing from various banks and offer you the best possible option. You can agree with the price offered by them and they will do the transactions on your behalf.
What Does a Currency Broker Do?
Currency brokers provide a trading platform, accounts for traders, streaming prices from major banks and the Electronic Broking Services (EBS) system, offer a leverage to traders, offer information and news feed, professionally managed accounts, research services.
Other than acting as an intermediary, a Forex broker has a lot of other functions that facilitate Forex trading. Some of these functions are:
1. Brokers Provide a trading platform
You need a trading platform through which you can trade. You are required to open a trading account with a broker. Many brokers offer demo accounts that you can use to test their trading platform. You need to provide basic information to open a demo account but it does give you an insight into the platform. You can get accustomed to it before making a real investment.
2. Brokers offer a leverage to traders
Leverage is the borrowed capital or money that you invest in Forex trading. Forex brokers offer you all kinds of leverage, the most common being 1:100. This means that for every dollar, you can trade $100. Brokers give you the opportunity to trade more than what you have invested.
The more you invest, the more profit you can get. But, be wary as more investment can also lead to more losses. Forex brokers are required to be transparent about their rules related to leverage. They will disclose every detail in advance. If you don’t have a huge capital, you can use the leverage offered by Forex brokers and capitalize on it. Make sure that you are making the right decision and not trading without thinking properly about the risks involved.
3. Clarity of net balance
As the trades increase, it gets difficult to manage balances. Your account with a Forex broker allows you to deal with this situation easily. You will see two balances in your account. First is the actual balance that does not include your open trades and the other one is the net balance. This is the sum that you will have when all the trades are closed. This feature not only helps traders in managing their balances bt also allows them to see where they are standing.
4. Educational material
Forex market is affected by a number of variables like the GDP, economic development, infrastructural development, and other things happening in the country. This is because these variables have a direct or indirect impact on the value of the currency. New investors find it difficult to keep a track of news that can affect the stock price. Fundamental and technical analysis is not easy for new traders. Therefore, many Forex brokers offer educational material to help traders and investors who are using their services. Traders can use this information to form their trading strategies. Without this educational material, many investors feel lost and end up making regrettable investments.
Forex brokers provide you with all the necessary tools and insights that enable traders and investors to function in the Forex trading market without any hiccups.
Why do I need a broker to trade forex?
Traders do not need brokers to trade forex or any other asset. Direct Access Trading is way of trading without brokers when traders can connect to major stock exchanges, forex and electronic communication networks using software. For this way of trading traders need to have large amount of investment and and be willing to trade without any leverage.
If trader has $50 000 using the broker’s leverage 1:100 trader can control $5 million dollars. If a trader uses direct access trading without a broker, trader will need 100 bigger amounts of money to trade with the same laverage.
Advantage of Direct Access Trading in forex trading is that this kind of trading will save the trader expensis on commissions, but it also allows for faster executions and immediate trade confirmations. The disadvantage is lack of leverage, trading and technical support.
How to be a forex broker?
If some company deceide to be a forex broker that the company needs to find a trusted FX technology provider, buy a licence for trading platform, hire legal and financial experts, start procedure to get brokerage licence. Regulated brokers need to spend huge amount of money for licences, introduction of a work system in the company, start capital.
Things to Consider Before Finalizing a Forex Broker
There are many things that you need to consider when you choose for a good Forex broker. Listed below are the two most important ones:
1. The Spread type and spread size
Your Forex broker gives you a quote for the currency pair. This price will slightly differ from the price that they will get in the market. For example, you might receive a quote of 1.3000/1.3005 for the currency pair EUR/USD. Here, the first number is what you will get from the broker should you decide to sell the pair and the second number is what the broker will charge should you decide to buy the pair. In this quote, the difference of .005 is referred to as 5 pips. This will be your broker’s commission. This bid spread can widen or become narrower in correspondence to supply and demand of trades.
This difference between bid and ask price is spread. This difference is charged on the leverage trade size which is different than your actual account balance. A majority of brokers are transparent about their commission but you must also be certain about their spread type.
2. The Reputation of the Broker
Forex brokers are responsible for connecting you with the banks for which they have to adhere to certain rules and regulations. Although the Forex trading market has been operating since 1971, it was not always regulated. While most of the brokers are now regulated and have good international presence and reputation, it isn’t unlikely to run into a broker that is not regulated. You can follow the National Futures Association (NFA.futures.org) to know more about your chosen broker’s reputation.
Conclusion
Working without a Forex broker will leave you confused and maybe in debt, especially if you are a new trader or investor. Forex brokers offer many features that prove to be advantageous for traders and investors. All you need to do is to check that you are working with the one that believes in maintaining transparency and has an overall good reputation.
