A forex broker refers to an individual or firm that plays the role of an intermediary between the trader and the interbank system. The interbank system, on the other hand, refers to the bank networks trading with each other in the Forex market.
If you want to trade, the forex broker provides you with actual prices of the banks having access to forex liquidity and lines of credit. Many FX brokers will use multiple banks to offer their clients pricing, and in the end, they will offer them the best available prices.
Forex Trading Risks
Forex trading can be a complex and risky investment. Unfortunately, the forex instruments aren’t standardized, and the interbank market has different regulations. Forex trading is usually unregulated; therefore, you have to be cautious when investing in this field.
The interbank market has many banks that trade with each other globally. So, these banks are the ones to determine and accept credit and sovereign risks. Fortunately, they have already come up with internal processes that help them stay safe all the time. However, it is a safe industry for the banks because the regulations are usually imposed, which will help protect each bank that will participate.
Understanding the Forex Broker
There are many forms of trading, but for the forex exchange market, it is a 24-hour market operating globally. Among the clients include retail currency traders. They have to use the platforms to know the direction of their currencies. Moreover, the other clients are large financial services firms who will trade on behalf of their customers or investment banks.
If you want to trade individually, you’ll only handle a small portion considering the overall foreign exchange market.
The Forex broker plays different roles in the foreign exchange market. In this market, the transactions occur between paired currencies. And for these currencies, they are only from ten countries that can afford to make up to G10. So, these nations and their currencies are; Euro (EUR), U.S. dollar (USD), Japanese yen (JPY), sterling pound (GBP), New Zealand dollar (NZD), Australian dollar (AUD), Swiss franc (CHF) and Canadian dollar (CAD).
However, other Forex brokers allow you to trade using other currencies, especially in the emerging markets.
If you’re using a forex broker, you have to open a trade, and to do so; you have to buy a currency pair. While closing the trade, you will have to sell the same pair. You can decide to change euros to USD; for example, with this, you will buy the EUR/USD pair. And to do that, it means you will buy euros but with U.S. dollars. When you want to close your trade, you will sell the pair, which is the same as buying U.S. dollars but using euros.
When you are closing your trade, if the exchange rate will be higher, that’s how you will make a profit. On the other hand, if not, that leads to a loss.
How To Choose an FX Broker
The first characteristic of considers is a secure trading platform. After all, you can’t hand over your hard-earned money to any platform because it claims to be legit.
An added advantage is that it is now easy to check the credibility of any forex broker. In each country, there are regulatory bodies responsible for separating fraudulent forex brokers from trustworthy. If you’re new, consider checking this list of best Forex Brokers.
Depending on your geographical region or country, here is a list of some corresponding regulatory bodies:
- United States – CFTC ( Commodity Futures Trading Commission) and NFA ( National Futures Association).
- Australia – ASIC (Australia Securities & Investment Commission)
- United Kingdom – PRA (Prudent Regulation Authority) and FCA (Financial Conduct Authority).
- Switzerland – SFBC (Swiss Federal Banking Commission)
- France – AMF (Autorité des Marchés Financiers)
- Germany – BaFIN (Bundesanstalt für Finanzdienstleistungsaufsicht)
It is, therefore, essential to think before you invest in an FX broker. Depending on your geographical region, make sure that the Forex Broker you choose is a member of regulatory bodies.
- Deposit and Withdrawal
An excellent type of FX broker is one allowing you to deposit and withdraw hassle-free. There is no concrete reason that should make it hard for you to deposit and withdraw your profits. The only reason they can hold funds is when facilitating trading.
The broker, therefore, will hold your money, ensuring your trading experience is more effortless. So, don’t expect other reason that can make them give you a hard time to withdraw your earnings. Choose a force broker who ensures your withdrawal process is smooth and speedy.
- Transaction Costs
With transaction costs, it does not matter with your currency because, in the end, you’ll experience transaction costs.
Any time you enter to trade, there are charges such as spread or commission to be subjected. So, the best broker’s trading platform is the one offering cheap rates and most affordable.
However, there are times that you can sacrifice low transactions to get a reliable broker. And in such a case, look for a way to balance between low transaction cost and security of your money.
- Trading Platform
If you’re to trade online, most of the trading activities will be on your broker’s platform. Therefore, consider a broker with a stable and user-friendly platform.
Before you sign and deposit your money in a broker’s system, check the trading platform to confirm what it offers. For example, the free needs feed technical and charting tools, and how it presents the information you need to trade. After the review, you can now make your decision.
The Bottom Line
Before you make a step to register with a forex broker, take time to look for the best Forex broker. It will help you avoid making the wrong decision that might cost you. Nevertheless, choosing a top broker provides you with robust resources, access to the worldwide banking systems, and trade at a low cost. You will have nothing to worry about; your money will be safe. Besides, you can also open a small account and make a fortune with your trading skills.