The only way to trade any Forex pair is through a Forex broker. These brokers are an integral part of the Forex trading universe. So what these companies do? You can view them as the middlemen who will play o position on your behalf. These brokers vary from small companies to very large ones with billions of dollar transactions.
A bit of history
Forex brokers used to contact business over the phone. If you wanted to place a trade, you would call the broker and give instructions of what to buy or sell. Nowadays, all brokers use state of the art cloud systems where a trader can trade almost everything with a click of a button. This gives you the option to gain access to reputable brokers and place trade on various financial markets, including commodities, derivatives, insurance, equities, mutual funds, etc. The trades still go through your broker who earns a commission for placing the trades on your behalf.
This technological change gave the option for individuals to access the markets. Brokers, in turn, are now able to aggregate each individual trade and consolidate these trades. These trades are then mostly run by big financial institutions.
How Brokers make money
Forex brokers are for-profit organizations. Some are big enough to sponsor multimillion-dollar events such as Formula 1. The main income of the broker is through spreads. A Spread is the difference between the bid and the ask price. A currency pair, for example, EURUSD might have an exchange rate of 1.1110 but when you want to place a buy position you buy at 1.1113 and a sell position at 1.1108. This difference between the bid and ask price is called the spread. Depending on your broker, the spreads may vary. Some brokers are really greedy, and this difference is pretty high, so before you choose a broker make sure you are fully aware of the spreads the broker charges.
Choosing a broker
It is crucial to find a reputable broker who will be ideal for your needs. Due to technological advancements, it is now very easy to become a broker with little investment and thus there are several brokers who are there just to scam people and take their money without offering any quality services. Also, online forums are dominated by brokers’ employees or brokers’ affiliates. You must be careful when you choose your broker and take into account your own needs. What your needs might be? Platform simplicity, tools availability, training, number of currency pairs, other financial instruments to trade such as cryptocurrencies, shares, CFDs and other.
Without question, you need to find a reputable broker who is regulated by a national authority. Regulated brokers offer you the security that your funds are safe. Choose a broker who is regulated in the U.S. by the National Futures Association (NFA) and Commodity Futures Trading Commission (CFTC), by an authority from a European Country such as CySEC (Cyprus), FCA in the UK, FSCA in South Africa and others. Also, search for a broker who is a member of the Financial Services Compensation Scheme (FSCS) or the Investor Compensation Fund (ICF).
A regulated broker will not only offer the safety of your funds but also the confidentiality of your personal information. Never assume that a nicely designed website means credibility. You need to do your research and find out about the broker’s regulatory compliance.
Deposits and Withdrawals
Some brokers allow small accounts with initial deposits of as low as $50. There is nothing wrong with small accounts since with leverage you can increase your buying power by even up to 500 times. There are multiple account types, standard, micro, mini and professional accounts. Their main difference is the available tools and deposit amounts, most of the time as a new trader these do not play a big difference. Check also deposit/funding time needed because some brokers might require even a couple of days to fund your account. As regards ways to fund your account, brokers accept a number of funding payment forms ranging from wire transfer to PayPal, skrill, etc.
Withdrawals policies and procedures are something you need to carefully check before funding your account. Some brokers charge a fee for withdrawals and to complete lengthy forms. This procedure can be frustrating and cumbersome so read carefully the conditions listed by the broker.
Do not be afraid to ask questions regarding funding and withdrawals procedure with a broker representative. After all, it’s your hard-earned money and you have every right to choose where to give it. Do not be fooled by pushy representative because it is their job to get your money, they earn big commissions when they sign up a trader.
It is inevitable that at some point in time you will have to contact the customer support of your broker. Do not wait until an issue appears. In fact, contact customer support before even funding your account. You should look for a broker that has 24/7 customer service covering all time zones. You might be in Japan and your broker is in Canada. If the broker doesn’t have a 24/7 customer support, inevitably you will either must use emails or lose sleep.
You also need to test their response time and ability to assist. How long it takes for them to reply to your chat or email? When you call do they answer immediately or do they call you back? Also, when you speak with one of their representatives are they knowledgeable enough to assist you? Some brokers who do not have a 24/7 customer support outsource this service to other companies. The third-party company might not be able to help you and they just open a ticket for you with the broker so one of the broker’s representatives can reply to you during their office hours. You do not want that.
Audit their reputation
“If there is smoke, there is a fire”. Before choosing a broker, do your own research regarding their reputation. Even if a broker is regulated, it does not mean that they are good for you. Search for news related to the broker. Check if there are any pending legal cases against the broker listed in any news site or if there are officially complaints initiated by their customers. Just search for the broker and add after the broker’s name “legal issues” and search for news. If you cannot find anything then you can go ahead and consider opening an account. Reviews websites and forums are another great source but have in mind that many of the comments and reviews are fake since brokers in their efforts to increase their reputation filled the internet with these fake comments and reviews.
The trading platform used to be your phone. Fortunately, now there is the internet and the technology to place your trades and connect to your broker using a trading platform. These platforms include a desktop version, a web version, and a mobile version. Most brokers offer all three versions. The most commonly used are the MetaTrader versions, NinjaTrader, Trading Station and ZuluTrade. Some brokers have developed their own to suit their specific needs. One trading platform can give you a slide edge over the other but at the end of the day, it’s your decisions that affect the outcome.
Check their security and how efficient it is. Do they have just username and password or they offer additional security measures such as two-step authenticator, sms codes and email verifications? Also, search the web if they had a security breach in the past and find out how they handled the situation.
Think of your broker as your partner. Make sure you do your research and choose wisely according to your needs and budget. Before deciding on a long term broker for your trading needs, it is normal to test few of the brokers before deciding which one fits your needs so do not warry if you have two or more active accounts.