What is a Forex Broker?
The Personal Computer and the Internet have brought more retail traders to the market than never. Online trading expanded globally, and Forex brokers spotted the opportunity by offering leveraged access to the largest market in the world – the foreign exchange market.
A Forex broker, therefore, is a link between the market and the trader. Via leverage, it gives traders the possibility to speculate on the currency market moves.
Nowadays, a Forex broker is more than just that – a broker that intermediates access to the currency market. Its role expanded as new markets appeared and grew in popularity.
From the same trading account, a retail trader can be active on the gold, oil, or even the cryptocurrency markets. It increases the number of strategies to use from the same account and provides an opportunity to diversify the trading account against correlated market moves better.
What is a Forex Trading Account
Depending on how the Forex trading broker’s activity is organized, different types of trading accounts exist. And, with that, different trading conditions.
For instance, some brokers are organized as market makers. Also called dealing desks, they mirror the actual market and offer traders similar conditions via the trading platform. Effectively, the trader deals with the broker, without the positions to be transferred to the market. In this case, most likely, the broker offers a fixed spreads account and charges a commission too.
Some other brokers route all or only some of their client's orders to the liquidity providers they work with. In the case all the trades go thought the liquidity providers, the brokerage house operates a no-dealing desk business. If only some of the trades go to liquidity providers, and the rest are kept in-house, the broker's model is a hybrid one – a combination between dealing and no-dealing desks.
Obviously, the more liquidity providers a broker works with, the better the trading conditions it can offer – low spreads, lower commissions, multiple types of trading accounts.
The trading accounts differ based on the exchange broker’s business model. No-dealing desks, for instance, use either the Electronic Communication Network (ECN) technology or the Straight-Through Processing (STP) model.
In this case, the broker deals variable spreads that change with the market conditions – they tighten when there's little or no market volatility and widen when important economic news hits the wires or when there's little or no liquidity (e.g. during position roll-over from one day to another). The significant advantage here is that the broker guarantees a filling when there's a market and doesn’t send re-quotes for a trade “at the market”.
How to Start Trading with a Forex Broker
All Forex brokers have an online presence and advertise their services both to current customers and to prospective ones. To enroll with a broker, all one must do is to follow a few simple steps:
- fill in personal details;
- ID verification;
- answer a few questions regarding trading experience;
- fund the trading account.
It takes sometimes from a few hours to a couple of days to be up and running – it depends mostly on the ID verification process and the funding method used to deposit funds.
How do Forex brokers make profit
The main income source for a Forex broker is the spread between the bid and the ask price. Each currency pair or financial instrument provided by the brokerage house has two prices – bid and ask. Buying always takes place from the ask price, while selling from the bid.
In other words, assuming you bought the EURUSD pair at 1.1030 and the quotation rose to 1.1058. The difference between the two prices is 28 pips. When you bought, you used the ask price on the pair. If deciding to close the trade, you must square it. To do that, when closing it, the trade broker definition means selling from the bid price.
The spread differs from a currency pair to another and from financial product to financial product. For instance, the tightest spread is typically on the EURUSD, the most popular currency pair, while the cross pairs (i.e., the ones that do not have the USD in their compose) have a wider spread.
Besides spreads, brokers also charge commissions that vary based on the volume of each trade and the type of trading account. Moreover, some withdrawal methods are subject to fees, but that depends from brokerage house to brokerage house.
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