What is a Forex Broker?
According to research in South Africa, if you want to trade on the foreign exchange you will need a Forex broker.
What is a Forex broker and why do you need them? We unpack the role of the broker to provide access to a platform where you can buy and sell currencies.
Transactions in the Forex market are always between a pair of two different currencies, so Forex traders either buy or sell the currency pair that they want to trade.
This is really not much different than any other type of market environment. In any market, there are buyers and there are sellers. In order to buy particular kind of goods you would go to the specific market that sells the products you want.
In the Forex markets, this is no different. You have buyers and sellers of different currencies – they need a place to come together to do their “trading” and there needs to be a market or “platform” in order to buy and sell those currencies.
In the Forex markets, the difference is that the buyers and sellers don’t have to physically be in the same marketplace.
Their marketplace is virtual and global. But even still, buyers and sellers need a “place” where they can do their buying and selling and this is where a Forex broker comes in.
A Forex broker provides the place, or platform, whereby Forex traders can go to buy and sell instruments, such as currencies.
The Forex broker is the intermediary between the trader and the Forex market itself. A trader goes to the broker and they, or their platform, would find a seller or buyer respective to what they need.
The Forex broker is also the intermediary, not just between buyers and sellers, but also between what is called “liquidity providers”, such as a bank or other financial institutions.
The idea of liquidity has to do with the availability of currency in the market that you are able to buy or sell.
This liquidity can come from large amounts of buyers and sellers doing smaller trades but more then likely this liquidity of the market will be because of a few sellers that are able to sell large amounts of currency.
They are therefore referred to as liquidity providers since they are doing exactly that in the market. These are usually large banks or other financial institutions, as mentioned previously.
In reality the chances are very high that when you, as a trader, buy a currency, you will be buying from a liquidity provider, and when you sell, you will be selling to a liquidity provider.
This is good because you know that when day trading you will always have someone to trade with.
It used to be that when dealing with a broker, you would do so over the telephone to buy or sell currencies.
The internet and new technologies completely changed the Forex game. This is especially true with the advent of trading platforms that are automated.
A Forex trading platform is a piece of software that automates the buying and selling process of currencies.
They can be downloaded from the internet to be on your computer or mobile, or you can access it through a broker’s web browser – this has completely changed the accessibility and speed of Forex trading.
Forex brokers usually make their money by charging a commission to traders.
They also pay a commission to the liquidity broker as well, so they pass that commission on to the trader while adding a bit for themselves.
There are brokers, however, that charge “zero commissions”. With some brokers this is misleading because they may not charge commissions on the trade, but they charge other fees to make up the difference.
Keep in mind that all Forex brokers are providing a service and want and need to be paid for it.
When a broker advertises “zero commissions” they will usually be making their profits on the “spread”, or the difference you pay when buying and then selling a currency pair. This is called STP or straight through processing brokering.
There are many different types of brokers and even within one broker there may be many account types that offer different platforms, conditions, fees, tools, and benefits.
It is very important that you pick the right Forex broker for you as the trader.
What is important to look for in a broker?
Make sure they are highly regulated
Before opening an account and giving a broker your money, make sure that they are highly regulated. This just makes sense, right?
You would want to know that there are rules in place to safeguard your money and that there are organisations that are watching the broker on your behalf.
If not, they could just be a rogue company that swindles you out of your money and you would have little to no recourse.
Fortunately, there are regulatory agencies all over the world and doing your due diligence is not that difficult when checking out a Forex broker.
Before you consider any broker, no matter how slick their advertising, website, sales pitch is, make sure that the broker is a member of at least one tier-1 regulatory body.
Fees and cost
Like we said earlier, there will always be a way in which you will have to pay the broker for use of their platform and services.
In which ways are these commissions, fees and/or costs structured?
Don’t always try to find the cheapest broker. Sometimes a broker with higher fees may be just what you need because of their reliability, the resources they offer and the protection they provide.
The Forex broker may also have a host of other Forex trading tools and resources that help you be a better trader and are therefore is worth the cost.
It’s all about finding the correct balance between what the Forex broker offers, the security and reliability they provide, while still trying to get relatively low transaction costs.
Deposit and Withdrawal
Good Forex brokers will allow you to deposit funds and withdraw your earnings with relatively no hassles.
There shouldn’t be any difficulty when withdrawing your profits and funds. Some Forex brokers do, however, make withdrawal harder than it needs to be.
Just be aware and make sure your broker makes the deposit and withdrawals, quick, easy, smooth and hopefully free from fees.
Nowadays almost all Forex trading is done online using a brokers’ trading platform.
Make sure, since you will be using this trading platform all the time, that it is user friendly, easy to customise, stable, and has a good amount of tools and other offerings as you become more experienced.
Many brokers offer several Forex platforms that you can use and maybe grow into as you develop in knowledge and skills as a Forex trader.
Also make sure that the platforms your Forex broker offers has news feeds, technical and charting tools, and gives the info you need in as real-time as possible.
It is crucial that your Forex broker can execute your buys as fast as possible.
If you buy a currency at 1.5 for example, the trade should be filled at that exact price or within micro-pips of it.
With technology and internet speeds as they are now globally there is no excuse for a broker to not fill you at the exact market price that you “click to buy” or “click to sell” at.
A few pips difference in price can make that much harder on you to profit at the trade you had in mind.
No matter how automated an industry becomes, there will always be a margin for error, whether through a technological glitch or through human error.
Forex Brokers are, therefore, not immune to this.
That is why great customer service is absolutely a necessity when choosing a Forex broker.
Pick one that has support on multiple channels and if necessary in multiple languages. It is also good that they offer 24/7 support since you don’t know when your particular problem will arise.
The way that your Forex broker deals with issues and their expediency and availability in supporting their clients is as important as their execution of trades.
Make sure your Forex broker offers great support with long time clients and not just during the sales and honeymoon period of getting a new trader to open an account with them.
A good Forex broker will also provide a host of educational tools and resources that help you grow in trading skills and understanding.
Having a free demo account that you can use and trade “real time” with virtual currency will help you develop a foundation as a Forex trader.
It’s in the Forex broker’s interest to help train, nurture and mentor profitable traders, as they will make more commissions.
Opening a Forex Trading Account
To get an account with a Forex broker, it’s a bit like opening a bank account. It requires paperwork and steps, such as identity verification.
The whole process takes a few days. But once again, with technology, many brokers have an automated digital account opening system that can now be very quick and easy.
However, if you’re looking to test the waters, Forex brokers offer demo accounts for which you only need to provide minimal information to open.
A Forex demo account allows you to get set up and get some practice trading until you’re ready to get started trading with real money.
Forex Brokers Offer You Leverage
The ability to use Forex leverage comes with every account, and it varies in an amount anywhere from 1:1 to 1000:1. A 5:1 leverage means that for every $1 in your account, you have $5 to trade.
This can be great because you have more money to trade and therefore more profits to make.
However, good comes with bad and just as you can make a lot more profit, you can suffer a lot more loss.
Forex brokers are legally required to disclose their leverages and you would do well to use leverages with caution until you are confident and really know what you are doing.
A Forex broker is a crucial partner if you want to trade currencies.
They are your business partner as you trade and the resources they provide, the fees they charge, and how good and fast their platforms are can help you greatly to be a successful trader.
A Forex broker can also hinder you from success and profits so you need to choose wisely.
Choose a Forex broker that is in it for the long haul with you and not trying to make a quick profit from all the new traders, usually at substantial financial loss.
With the help of this guide what is a forex broker, you should be able to wisely choose a Forex broker who will aid you to be a successful trader with all the tools you need and who realises that if you win then they win too, according to research in South Africa.