Working With Forex Brokers
When you start forex, you need to choose yourself one of the forex brokers to do your forex trades. Every forex trader has a broker in the forex market. So, what is a broker? What does a forex broker do? Why do you need to work with them? You can find answers to these questions here;
You can look at the Forex market from either the Broker’s or the Investor’s point of view. In this article, we will use the investor’s perspective. But you can also find articles that take on subjects by the broker’s perspective. Answers for your questions such as “How to be a Forex broker?”, “How much a broker earns?”, “What are the ways to be a good broker?” on this site. Also, the information about “the best broker education institutions by states” will be useful for those who want to be brokers.
Returning to our topic:
In the forex market, currency exchanges are executed by international banks. These banks form a network of banks that they trade with each other. Normally, forex traders don’t have direct access to this interbank network. Forex brokers take currency exchange prices from all the banks in this network and select the best of them.
Your Forex Broker gives you the prices they get from banks. These prices usually are better than you can find since brokers have more credit and access to forex liquidity. Moreover, forex brokers get their prices from multiple banks and choose the best ones to offer their customers. So, the most efficient way of trading currencies is working with a forex broker. This is true all over the world.
So, you can think forex brokers as middlemen between traders and interbank network. They offer the best exchange prices they choose to their customers, to the traders who work with them, with the addition of some small commissions. These commissions are how forex brokers make a profit. And, they carry out their customers’ trade requests to the forex market.
Forex Leverage Advantage with a Forex Broker
One of the advantages of working with a forex broker is the ability to use “forex leverage”. Although different brokers may offer different ratios for leverage, almost all “Forex Trading Brokers” give you this ability.
You may see leverage descriptions in various numbers. These numbers vary between 100:1 and 10:1. These numbers show the ratio of the leverage they offer.
Let’s say you have $5 in your balance, and your broker offers you a 10:1 leverage, this means that you can do $50 worth of trading. If the leverage is 100:1 you would have $500 to do forex.
It sounds really good, doesn’t it? With a small amount of money, you can do big trades. These leverages allow you to make significant profits. However, you should be careful. Forex Leverage can be a trap too. There is a reason for forex brokers offer this. Most newcomers get hyped over this opportunity and burn their balances without thinking. There is even a law for this; all forex brokers have to disclose the risks and tell you about how easily you can lose your money. Of course, this kind of notices come in fine prints. But as long as you know what you do, it is okay.
How do Forex Trading Brokers Make Money?
So, how do forex brokers make their profits? The main way they make their profit is the commission of bid-ask spread. As we talked about it above, forex brokers get offers from banks and they give you the best prices from them. However, the final price you can buy a currency pair from your broker is a bit different than the price your broker get from the bank. This small difference is their commission.
You can see prices written like “EUR/USD = 1.2800/1.2807” on your forex dashboard. Here, the value on the left, “1.2800” is the amount you will get per unit if you sell your EUR/USD pairs to the broker. And, the value on the right, “1.2807” is the amount you will pay per unit if you buy EUR/USD pairs from the broker. As you notice, there is 0.0007 point difference between them. This difference is called “spread” and it is the commission of the broker.
Also, in forex, most values are small like this example. To make things easier, traders use a unit called “pip” and it is the value of the fourth number after the dot. So, in the example above, the spread is 7 pips.
How to Know if a Forex Broker is Trustable?
Unlike the past, today’s forex brokers are subjected to many regulations. All regulated brokers have a standard that they need to fulfill. You may still encounter unregulated forex brokers time to time. So, before doing anything serious with a broker, you should try to find some information about their regulation. More importantly, you can check if they are regulated by searching them on The National Futures Association website (NFA.futures.org). This association keep a log of brokers and keep them in check.
Working with a Forex Broker
Working with a “forex broker” is as simple as creating an account on their online forex platform and doing your trading through their system. This system also allows you to follow exchange rates live and act at the moment you need. After you create an account on a forex broker’s website, you will have an account balance for the money you can use for your trading. You will transfer some money into this balance from your bank account, and you will be able to transfer your forex balance to your bank account.
To work with forex brokers, a trader creates an account on the broker’s web platform. The account creation process takes a few days is similar to creating a bank account. Traders required to fill papers and verify their identity.
DEMO: You can also create a demo forex account to test the platform. These demo accounts don’t require you to provide any paperwork. The main difference is that the money in demo accounts is play-money and you cannot put in or take out any money. It is just for testing and learning about forex.
After you create your forex broker account, you will be able to log into your broker’s forex dashboard where you can place your forex trades into the market. And, if it is not a demo forex account, you can deposit some money into your broker account to do your forex trades, and you can withdraw your money out when you want.
Actual Balance and Net Balance
In the forex dashboard, you will notice that your account has two different balances. The first balance is called “actual balance” which doesn’t include your open trades. The second balance is called “net balance” and it shows what your balance as it would be without any open trades.
For ease of learning, we are trying to be short of articles with specific meaningful terms. This is basically all you need to know about “how to start working with Forex Brokers” for now. For more detailed explanations or choosing a good broker, you can check our other articles by clicking on the related links on this page.
On this page, we tried to share some very basic information about forex brokers. Hope that it will be useful to begin working with brokers and demo forex accounts for beginners.
In this article about “Forex Trading Brokers” and “What is a Forex Broker?” question, we tried to present an easy-to-understand definition. We hope that it can be useful for understanding Forex trading for beginners.
If you want to learn more about opening an account on forex broker websites, follow the links on this page.
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