Understanding an FX Broker
Forex market is no different from a street market: a place where buyers and sellers meet. If the latter deals with apples and iPods, the former deals with different currencies. The FX market is a place where traders/investors come together to buy or sell their assets. However, the buyers and sellers are usually thousands of miles apart and need a middleman to execute the trade for them. These middlemen are called forex brokers.
Forex Broker’s Role
As mentioned above, forex brokers act as an intermediary between a buyer and a seller to execute trades. They also function as middlemen between a trader and a liquidity provider (a market broker/institution acting as a market maker in a given asset class). To sum up forex traders’ roles in a few words: function as a link between trader and market, trade on trader’s behalf (this is less frequent, but when it happens brokers link traders with some big-name players in the foreign exchange market), and educate traders by providing them with a great deal of information on trading and demo accounts to practice the trade.
FX Broker Commission
Forex brokers make their money by charging a fee/commission per trade in return for carrying out buy or sell orders. Some brokers charge both a fee and a spread (the difference between the bid price and the asking price) on a trade, while others offer commission-free trades. The latter probably earn a commission by spread widening. For example, consider the GBP/USD pair has a sell of 1.5080 and a buy of 1.5085, the 5 pip (5/100 of a cent) difference is what the broker earns.
Open an FX Trading Account
Given below are five simple steps to open a forex trading account.
Forex Leverage is Sharp on Both Sides
In the FX market, leverage is as high as 100:1 (i.e., for every $1,000 in the account trade up to $100,000 in value can be done). Though high leverage is risky, traders are aware of the underlying reason, i.e., the proper management of the account the more manageable the risk, otherwise brokers would not offer the leverage. Further, since spot cash FX markets are big and liquid, traders can enter and exit a trade at the preferred level with minimum slippage than in other less-liquid markets.
In FX trading, currency movements are monitored in percentage in points (pips, the smallest currency move and depends on the pair of currency). These movements account for only a fraction of a cent, e.g., when a currency pair such as GBP/CAD moves 100 pips from 1.7400 to 1.7500, it is only a 1-cent move of the rate of exchange. Currency exchanges should be carried out in substantial amounts in order to enable minute price movements to get translated into sizable profits when magnified via leverage use. When dealing with large amounts like $100,000, minor changes in the currency price can result in considerable profit or loss. Some of the high-leverage forex brokers today are XM, JustForex, FxGlory, AAFX, freshforex, and Alpari to name a few.
Those planning to step into the FX market should proceed with caution. Looking at the past, people will realize that several FX traders have lost money because of the many bogus get-rich-soon schemes that promise too-good-to-be-true returns in a thinly regulated FX market. There is no transparency in price in the forex market plus each broker has its quoting system. It is up to the traders who transact in this market to thoroughly research the broker pricing to make certain that they get a fair-and-square deal.