Brokers and their role in FOREX
By now, you would be very eager to do your first Forex trade. Before getting started you should get introduced to “Brokers”. Who are these people and why do we need one? We will answer this query in this section in detail. Let’s get started straight away then.
Why do we need a broker in the first place? It is definitely possible to directly deal with banks or other institutions and enter into trade of buying and selling currencies. Consider an example, you have lots of cherries in your backyard. You decide to sell them. Where do you go? You go to a market place to sell. Do you sell cherries directly to individuals or you first open up a stall there? You open up a stall. Similarly in case you have to buy oranges, you would be going to a stall and not to individuals asking them for oranges right? Right. So, this is the same case with Forex. There are millions and millions of traders who are trading and offering different prices who meet up through the Forex market. How do you find a trader who matches your preferences? This is where brokers come into picture.
Forex Broker acts as an intermediary between you and the market. They help you find a proper match, a buyer or a seller for currencies. In addition to being an intermediary they also help you with trading platforms, analysing the market, providing charting information etc.
Also, important thing you should know is Brokers are also intermediaries between banks or large institutions and the market. Because of such large players there is always liquidity in the market. When you are buying a currency you might be buying it from a liquidity provider such as a bank or a large institution and vice versa when you sell.
Trader decides the currency pair that he expects will change in value and places a trade. Orders can be placed online and the broker or the market maker passes the trade to a partner in the Interbank Market (Interbank market is an important segment of foreign exchange market where banks exchange different currencies) to fill the trader’s position. When the trade is closed, the broker closes the position in interbank market and credits the traders account with the loss or gain.
How do you know if the broker you are dealing with is a fraud? Don’t panic. Each country has a regulatory body which ensures that brokers are registered with them. Traders can research about the brokers over the web and get all the desired information pretty quickly. For example, in the US, brokers are registered with the US Commodity Futures Trading Commission (CFTC) as a Futures Commission Merchant and Retail Foreign Exchange Dealer. A Forex broker is required to protect the integrity of the market and should encourage an open market without any scams. A trader who finds a problem with a broker can file a complaint against the broker to the respective authorities and look for a solution to a problem.
Check for the year in which the broker was established to understand his reputation and durability. A fraudulent broker is unlikely to stay for long in business. Thus those who have been around for a couple of years must have gained some credibility. Thorough research can be done over the internet to identify the broker you want to deal with.
Brokers provide trading platform. A trading platform is where a trader can enter and check his trades. It’s a means of interaction with the market. Traders should check that the trading platform is easy to understand and is user friendly. Trading platforms should also be verified for order entry options, trading strategies, alerts etc. Brokers normally offer demo trading accounts which can be checked by traders for the ease of use and also traders can learn the trading platform well before entering into real trading.
A broker should also be accessible to the traders throughout. Since the trading happens 24 hours a day, broker should be able to provide customer service during the trading hours in case the trader would need help.
The brokers make money through commissions and spreads – the difference between the bid prices and ask price for a currency pair. Some brokers tend to make more money by quoting wider spreads. All commission and fee details should be clearly stated by the broker and traders should clear all their queries before agreeing upon a broker.
Thorough research can help you identify your broker so that when you trade you can easily spend time on analysis and your trading strategy. The time you spend on this research pays off well. Finally you can be more profitable and successful with your trading. Good luck!