Forex Brokers – Everything You Need to Know
Familiarizing yourself with the basics of financial literacy is vitally important. Every woman should know how to choose the best forex broker before she starts trading.
Choosing the best forex broker is a crucial decision every new trader has to make. This is why you must be careful in choosing the right broker and do your research before diving in.
I agree, the topic of forex trading is vast enough as it is. However, the forex broker you choose is going to be your largest trade. This is because you will be giving a portion of your investing capital to the brokerage company. You will be expecting that broker to trade with it and make you a profit.
No matter how great your forex trading strategies are, if your broker is not trustworthy, you are going nowhere. While choosing the right forex broker, you need to make sure your hard work does not go to waste.
This article will help you gain the necessary insights successfully to select the right broker for your needs.
Table of Contents
What is Forex Trading?
The term “forex” is short for “foreign exchange.” It is also sometimes called FX trading. Forex trading is the conversion of one currency into another one. The forex market is one of the most active markets in the world. It averages around $5 trillion worth of daily trading.
A foreign exchange (or forex) marketplace allows buyers and sellers to transfer currency between them. Through the foreign exchange, people can convert one currency into another.
Most of the currency conversion that takes place globally is done to earn a profit. The amount of currency that is exchanged each day results in price movements of these currencies. This then makes those currencies fairly volatile.
It is for this volatility of the currencies that traders love the forex market, as it brings them higher profits.
What is a Broker?
A broker is an individual or a company that acts as an intermediary between traders and financial markets. Without a broker, you cannot invest or trade. This happens because only brokers are allowed to carry out trades on these financial exchanges. Brokers are essential members of the exchanges.
In their true sense, brokers are obligated to work for their clients’ benefits. In doing so, they earn money through commissions from clients, fees, or the financial exchange itself.
Apart from providing you access to the liquidity market, brokers also provide you with research and market intelligence on the apps they operate. They also offer attractive discounts, which allows traders to trade at a lower cost. This has made trading doable for everyone instead of just the rich.
Other services that a broker may provide include:
- Platforms to trade on
- Proprietary software
- Analytical support
- Investment estimation and forecasts
- Risk-management alternatives and strategies
What is a Broker in Forex and Why Do I Need One?
A forex broker is similar to a stockbroker, real estate broker or crypto broker. A forex broker acts as an intermediary between you and the currency exchange market.
A forex broker’s services and experiences differ greatly from that of, say, stockbrokers. This is because trading is done over-the-counter (OTC) in the foreign exchange market.
As a private investor or trader, you would not be able to participate directly in currency exchange channels. This is where a forex broker acts on your behalf.
These forex brokers negotiate deals with liquidity providers (or simply large international banks). They then offer their clients a connection to these exchange channels.
The foreign exchange market is extremely volatile. However, that volatility also leads to monumental profits. Since the lot size in this market is typically high, forex brokers differ greatly from other types of brokers.
They provide a larger margin advantage.
One can also start investing with a lower starting capital due to the leverage and margin in forex trading. However, you do need a concrete trading plan before you decide to turn your $100 into exponential gains.
All of these factors allow clients to enter the foreign exchange market easily although they do carry with them a huge risk of losses if done carelessly.
How Do I Choose a Good Forex Broker?
A forex broker can make or break your trading success. But with dozens of forex brokers in the market, which one is the right choice for you?
Here are a few things to look out for.
1. Compliance with Regulations
The first thing that you need to check is a forex broker’s reputation. A reputable broker complies with the necessary regulations.
For example, in the U.S., a trustworthy forex broker would be a member of the National Futures Association (NFA). Moreover, they would be registered with Commodity Futures Trading Commission (CFTC).
It doesn’t matter how flashy and professional-looking a broker’s website is. If they are not in compliance with important organizations such as the ones mentioned above, don’t trust them with your money.
Each country has its regulatory bodies. These organizations exist to provide you with security and assistance in case of a conflict. Therefore, always make a safe choice and go for a regulated forex broker.
2. Considering Your Needs and Trading Personality
Another important thing to remember while looking for a broker is to assess your own needs and determine the type of trading personality you have. You can ask yourself questions like:
- How frequently am I going to day trade?
- Do I want to trade small moves or capture big ones?
Determining your needs and trading personality is extremely important. It helps you set your trading path for the future.
To help you get a good idea of your investor personality, you can fill out a questionnaire provided in Trading for Success, which contains comprehensive questions to determine your trading style.
If you are someone who day trades a significant amount, consider an electronic communication network (ECN) broker.
If you want to make bigger trades, you can look for someone other than an ECN broker.
The forex broker you choose will also depend on the starting capital you have. Choose a broker that matches your capital.
Another thing to keep in mind is the different transaction methods that different brokers allow. In the end, select a forex broker that best fits your needs and personality.
3. Currency Pairs Offered
In the foreign exchange market, currencies are exchanged in the form of pairs called currency pairs.
The three main types of currency pairs are:
- Major currency pairs. The most commonly traded pairs globally.
- Minor currency pairs. Pairs that don’t include the U.S. dollar (also known as cross-currency pairs).
- Exotic currency pairs. The currency of a major economy or one that includes the currency of a developing economy.
Have a look at how many different kinds of currency pairs your broker offers. Most brokers offer access only to major currency pairs. Therefore, you should check which currencies you have access to.
4. Leverage and Margin
Leverage is the capital you can borrow from a broker. In that way, you can make a trade that is larger than the capital you own.
Before acquiring leverage, you have to put down a small advance deposit known as margin.
Many people see leverage as a handy tool. However, it is a double-edged sword. While it does allow you to trade, it also significantly increases the risk of loss.
In any case, you should make sure your broker offers this service if you need it.
5. Customer Service
Since forex trading occurs 24 hours a day, a good forex broker will be available for help whenever you need it.
One way to assess whether a broker provides good customer service is by reading customer reviews.
6. Trading Platform
The trading platform is where you will be the most. It is the place you will perform your trades, which is why you must consider the trading platforms.
Every new trader should make sure that their broker’s platform and its app come with ample tools. These tools can be analytical and technical.
Plus, users should be able to enter and exit trades with ease.
A well-designed user interface can go a long way in avoiding mistakes that can turn out to be costly.
Other features to consider include:
- Demo accounts
- Backtesting features
- Strategy builders
- Automated trading options
The Bottom Line
The forex market is highly competitive, with opportunities to grow your capital if you know what you do.
For anyone looking for a forex broker, having confidence in your broker is key. This way, you can learn more as you devote more time to actual trading.
But choosing the right broker is not something you can learn in a single day. Along with doing your research by reading reviews and researching the broker’s reputation extensively, you also need to know the basics of finance and increase your awareness of the risks involved. This is the knowledge my blog and books can help you build in a short amount of time. By the time you have read my book, you will be well on your way to trading confidently.
If you enjoyed this article on Forex Brokers – Everything You Need to Know or have any questions for me, please feel free to leave them in the comment section below!
Recommended Resources: If you’re interested in learning more about online trading, check out my book “Trading for Success; 8 secrets why women are better forex traders” and take a deep dive into my blog.