Regulation is the most important factor when choosing a broker. Next comes pricing, the responsiveness of customer support and the trading platforms offered.
The leverage a broker offers should be the last factor considered. Trading with leverage of 100 to 1 is very risky, so anything more than that is unnecessary.
Decide which currency pairs you will trade, the position size you will trade and how many trades you will execute each month. Then look at the pricing to work out which pricing plan is right for your trading.
Some brokers will advertise very small spreads – but these only come when you pay commission. These commission structures will often entice you to trade too often, and too big. Sometimes it’s best to pay the higher spread and avoid these commission structures.
There are thousands of brokers around and numerous scams. One of the biggest red flags is when clients struggle to withdraw cash from their trading account. Before depositing money into a trading account, do your research and visit forums and Facebook pages to see if their clients have had a problem getting money back from the broker.
More brokers are registered in Cyprus than anywhere else. There is a reason for this – Cyprus is the easiest jurisdiction to register a broker. Avoid brokers that are only registered in Cyprus and nowhere else.
Forex Broker FAQ
What exactly is a Forex Broker?
A Forex broker acts as an intermediary between traders and international currency markets. They do this by providing a platform and capital.
A trading platform provides traders with access to the interbank market. The interbank market is a collection of technology platforms used by banks to trade with one another. The broker platform provides traders with live prices, the ability to execute trades, and tools like charts.
Most traders use leverage to trade, and brokers provide leverage by effectively lending capital to their clients.
What is Leverage?
Leverage, also known as gearing, allows traders to take positions using capital borrowed from a bank. The trader’s margin account is used as collateral against the loan, and any losses are subtracted from the margin account.
There is more than one way to trade with leverage. A margined trading account gives traders access to leverage as mentioned above. Derivatives also give clients access to increased buying power. When a trader buys a CFD, future, option, or spread position, they must pay margin to enter the trade. In this case, the margin is like a deposit against which any losses are offset.
Forex brokers offer leverage of anywhere from 50 to 1,000 times a trader’s margin, though this usually depends on the account size, trade size and volatility of the currencies being traded.
What is a Pip?
For most currency pairs, a pip is the smallest change that can take place in the rate. It will usually be the fourth number after the decimal. If a currency rate is quoted at 1.1515 and it moves to 1.1516, then the rate has increased by one pip.
Some pairs are quoted to five decimal places, in which case the pips are measured in decimals. If the
EURUSD pair is quoted at 1.17895 and it moves to 1.17898, then it has increased by 0.3 pips.
What is the Spread?
The spread is the difference between the buy and sell price. So, if the EURUSD pair is quoted at 1.17485 to 1.17489, the spread is 0.4 pips.
In the above example, a trader would buy at 1.17489, which is the offer (or ask) price. If the trader wanted to sell, they would sell at 1.17485, which is the bid price.
How do Forex Brokers make money?
Brokers either charge commission, or add their fee to the spread. Sometimes they do both.
Commission is calculated as a percentage of the value of the trade. Commission is deducted from a trader’s margin account.
If a broker makes money on the spread, they will quote a wider spread than the spread available in the interbank market. So, if the EURUSD pair is quoted at 1.17480 – 1.17485 in the interbank market, they might quote the rate at 1.17470 – 1.17495. If a client bought at the broker’s offer price, the broker would buy at the lower price in the interbank market, giving them a 1 pip profit.
Why do Forex Brokers need to be regulated?
Forex brokers need to be regulated for two reasons: risk and fraud.
Most traders use leverage. Most brokers have thousands of clients, and all the positions a broker’s clients hold can add up to significant exposure. If a broker does not manage its own risk properly, it can be wiped out if market volatility increases. This would mean the broker’s client accounts can also be wiped out. It also poses systemic risk to the market. Regulations force brokers to take adequate measures to ensure they do not put client accounts at risk.
Brokers are also regulated to prevent fraud. Client accounts and the broker’s working capital need to be separated. If client money is used to run the business, this amounts to fraud. Regulatory oversight is needed to make sure this does not happen.
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