Now that you know your bit about Forex trading and the forex market, you’re probably itching to start your pip adventures. But before you set off on your trading journey, there is one more thing left to do…
Creating a forex trading account with an FX broker! As a matter of fact, you can’t really trade the forex market unless you have an account with a forex broker. Sure, whatever. What the heck is a forex broker and how do you actually choose the right forex broker out there for trading forex?
Let’s get to it.
Forex brokers, also known as market makers, are financial intermediaries that match a buyer with a seller and arrange the transaction between the two for a commission paid by the initiator or by both parties. In simple terms, a retail currency trading broker is the middleman between retail forex traders and the interbank global market.
Most forex brokers make their money from the difference between the buy and the selling price (known as the spread) and can therefore offer commission-free trading for forex traders. In fact, when comparing the transaction costs of forex trading to other financial markets like the stock market, forex brokers’ commissions are the lowest of all and create a perfect trading environment for beginner and professional traders.
In addition, apart from providing a connection to the forex markets, a retail forex broker also gives users access to a forex trading platform (or several trading platforms) where forex traders can view quotes of currency pairs, analyze the markets, and manually place orders. Also, forex brokers offer investors to trade currency pairs with significant leverage ratio, which is essentially the use of trading currency pairs with borrowed funds from your forex broker.
Finally, to attract new traders, online brokers offer a variety of trading tools and promotions. For example, many forex brokers enable users to trade on mobile platforms, utilize the negative balance protection tool, and to be able to practice different trading strategies on a demo account before risking real money.
You see, back in the 90s, it was so much more difficult to participate and trade forex in the retail Forex market. This was mainly due to high transaction costs and because the forex market was not ‘open’ to the public. At that time, governments were like strict parents keeping an eye on all foreign currencies exchanges, restricting a considerable amount of forex trading activities, and controlling the rate of their currency.
And then, on one wonderful day, the CFTC (Commodity Futures Trading Commission) and the NFA (National Futures Association) decided that enough is enough. They passed a couple of bills, namely the Commodity Exchange Act and the Commodity Futures Modernization Act, and opened the doors for online Forex brokers to offer retail traders to trade forex and exchange currencies.
And as you may have guessed, online Forex brokers were eager to take advantage of the booming Forex industry. And they sure did. Nowadays, there are so many brokers to choose from out there, that it makes it a little tough to choose that one forex broker that is perfect for you.
As we mentioned, there are hundreds of forex and CFD brokers online that enable you to trade forex and get access to top-notch trading tools. So how are you supposed to know which online broker to choose and what the most important features are?
Are you supposed to be looking at the broker’s commission structure? trading fees? trading software? spreads? charting? analysis option? minimum deposit requirement? Do they offer demo accounts? AAAAARGH!! It’s easy to get overwhelmed with the amount of information you’re supposed to be looking at. Especially if you’re not even sure what to look for and you still don’t know exactly how to buy and sell currencies!
Luckily though, we have been trading forex for over 50 years now and know exactly what distinguishes the good forex brokers from the scammers. So worry not, we are here to make your life easier.
The first step in choosing a Forex broker is finding out if it is regulated. Regulated brokers are required to follow the rules and guidelines of their regulatory agency and are generally considered safe and secure. They also must keep their clients’ funds in segregated accounts in a separate account from their own account and must submit regular audits and their financial reports to the regulatory body.
Secondly, you need to check the trading costs of a forex broker as this factor is perhaps the most crucial one. Obviously, it would be much easier to start trading forex pairs with a discount broker and not lose money on paying high trading fees. For this matter, take a quick tour of the broker’s site to find out if they offer fixed spreads or variable spreads. Then, browse around and see what are the spreads for trading the most popular currency pairs, especially major currency pairs. Additionally, if necessary, compare the broker’s trading costs on a certain currency pair to other forex brokers in the industry (preferably major currency pairs like the EUR/USD, GBP/USD, and USD/JPY).
Then, you also need to check the trading platform, and the trading tools offered by the forex broker. MetaTrader4 is by far the most popular trading platform among forex traders, however, not all brokers offer this trading platform.
Finally, you need to find out what the broker’s execution model is.
There are two main types of Forex brokers:
In a nutshell, a dealing desk forex broker is a type of broker that does not execute all traders’ orders via liquidity providers and thus, keeps some of the trades ‘in-house’. The good thing with a dealing desk broker is that you always get market execution no matter what happens in the market and you usually get fixed spreads. The con is that you essentially trade against your forex broker.