This article looks at different aspects of forex brokers.
In order to trade the foreign exchange market successfully, you must have working knowledge of market and all aspects related to trading. One essential feature that will be encountered is the forex broker. To ensure you find a reliable, trustworthy and reputable broker, you must be aware of different services the brokerage must offer. This article will review some of the key points to an efficient broker.
What is a forex broker?
Forex brokers act as middle men between you and the interbank network. Unlike other financial markets, the foreign exchange market is decentralised which means trades do not pass through a central exchange. Instead, all transactions are exchanged via a system of one or more banks, also known as an ‘interbank network.’ It allows for more direct and flexible trading, but has the disadvantage that traders cannot dispute any bad trades.
As is stated, the broker acts as an intermediary between you and this network negotiating the different selling and bidding prices on a currency pair. Many forex brokers utilise multiple banks in the network in order to find you the best deals.
How do I work with forex brokers?
To work with a forex broker, you will need to open a trading account with the brokerage. Opening a trading account with the broker is similar to opening a bank account as it requires the same type of paperwork and identity verification. There are three basic types of trading accounts available on the forex market – the micro, the mini and the standard. It is dependent on the broker as to which accounts they will offer. A premium account is also available, but this is targeted to the larger players such as central banks and large corporations.
It is recommended that you open a demo account before registering with the chosen forex broker. This is to ensure the account you are using is most suited to your trading style and type. Furthermore, opening a demo account requires a great deal less paperwork.
When working and trading with a forex broker you should be aware that there are two types of trading balances. The first is your actual trading balance. This does not include any of your open trades. The second balance is your net balance. This balance indicates your potential amount should you close all your trades.
How does a forex broker earn money?
Unlike a stock broker who charges a set commission on their transactions, the forex broker charges a slightly different style of ‘commission.’ This commission is known as the spread and is the difference between the bid and ask prices on a trade. You must be aware that the spread is taken from a broker’s viewpoint, and thus varies from brokerage to brokerage. It also varies from trade to trade as the spread is taken from a trade size, not your account balance size.
What is leverage?
Leverage can be described as a loan from the forex broker to a trader. It allows traders with smaller trading balances to conduct larger trades. This is available with every forex trading account; however the levels of leverage will differ between accounts.
Leverage must be used with caution as it increases the risk of a trade dramatically. On one side, you can earn very advantageous profits if the trade is good; however, if the trade is bad you can experience losses beyond what they would have been if leverage had not been used.