
A forex broker refers to an individual or firm that plays
the role of an intermediary between the trader and the interbank system. The
interbank system, on the other hand, refers to the bank networks trading with
each other in the Forex market.
If you want to trade, the forex broker provides you with
actual prices of the banks having access to forex liquidity and lines of
credit. Many FX brokers will use multiple banks to offer their clients pricing,
and in the end, they will offer them the best available prices.
Forex Trading Risks
Forex trading can be a complex and risky investment.
Unfortunately, the forex instruments aren’t standardized, and the interbank
market has different regulations. Forex trading is usually unregulated;
therefore, you have to be cautious when investing in this field.
The interbank market has many banks that trade with each
other globally. So, these banks are the ones to determine and accept credit and
sovereign risks. Fortunately, they have already come up with internal processes
that help them stay safe all the time. However, it is a safe industry for the
banks because the regulations are usually imposed, which will help protect each
bank that will participate.
Understanding the Forex Broker
There are many forms of trading, but for the forex exchange
market, it is a 24-hour market operating globally. Among the clients include
retail currency traders. They have to use the platforms to know the direction
of their currencies. Moreover, the other clients are large financial services firms
who will trade on behalf of their customers or investment banks.
If you want to trade individually, you’ll only handle a
small portion considering the overall foreign exchange market.
The Forex broker plays different roles in the foreign
exchange market. In this market, the transactions occur between paired
currencies. And for these currencies, they are only from ten countries that can
afford to make up to G10. So, these nations and their currencies are; Euro
(EUR), U.S. dollar (USD), Japanese yen (JPY), sterling pound (GBP), New Zealand
dollar (NZD), Australian dollar (AUD), Swiss franc (CHF) and Canadian dollar
(CAD).
However, other Forex brokers allow you to trade using other
currencies, especially in the emerging markets.
If you’re using a forex broker, you have to open a trade,
and to do so; you have to buy a currency pair. While closing the trade, you
will have to sell the same pair. You can decide to change euros to USD; for
example, with this, you will buy the EUR/USD pair. And to do that, it means you
will buy euros but with U.S. dollars. When you want to close your trade, you
will sell the pair, which is the same as buying U.S. dollars but using euros.
When you are closing your trade, if the exchange rate will
be higher, that’s how you will make a profit. On the other hand, if not, that
leads to a loss.
How To Choose an FX Broker
- Security
The first characteristic of considers is a secure trading
platform. After all, you can’t hand over your hard-earned money to any platform
because it claims to be legit.
An added advantage is that it is now easy to check the
credibility of any forex broker. In each country, there are regulatory bodies
responsible for separating fraudulent forex brokers from trustworthy. If you’re
new, consider checking this list of best Forex Brokers.
Depending on your geographical region or country, here is a
list of some corresponding regulatory bodies:
- United States – CFTC ( Commodity Futures Trading Commission) and NFA (
National Futures Association). - Australia – ASIC (Australia Securities & Investment Commission)
- United Kingdom – PRA (Prudent Regulation Authority) and FCA (Financial
Conduct Authority). - Switzerland – SFBC (Swiss Federal Banking Commission)
- France – AMF (Autorité des Marchés Financiers)
- Germany – BaFIN (Bundesanstalt für Finanzdienstleistungsaufsicht)
It is, therefore, essential to think before you invest in an
FX broker. Depending on your geographical region, make sure that the Forex
Broker you choose is a member of regulatory bodies.
- Deposit and Withdrawal
An excellent type of FX broker is one allowing you to
deposit and withdraw hassle-free. There is no concrete reason that should make
it hard for you to deposit and withdraw your profits. The only reason they can
hold funds is when facilitating trading.
The broker, therefore, will hold your money, ensuring your
trading experience is more effortless. So, don’t expect other reason that can
make them give you a hard time to withdraw your earnings. Choose a force broker
who ensures your withdrawal process is smooth and speedy.
- Transaction Costs
With transaction costs, it does not matter with your
currency because, in the end, you’ll experience transaction costs.
Any time you enter to trade, there are charges such as
spread or commission to be subjected. So, the best broker’s trading platform is
the one offering cheap rates and most affordable.
However, there are times that you can sacrifice low
transactions to get a reliable broker. And in such a case, look for a way to
balance between low transaction cost and security of your money.
- Trading Platform
If you’re to trade online, most of the trading activities
will be on your broker’s platform. Therefore, consider a broker with a stable
and user-friendly platform.
Before you sign and deposit your money in a broker’s system,
check the trading platform to confirm what it offers. For example, the free
needs feed technical and charting tools, and how it presents the information
you need to trade. After the review, you can now make your decision.
The Bottom Line
Before you make a step to register with a forex broker, take
time to look for the best Forex broker. It will help you avoid making the wrong
decision that might cost you. Nevertheless, choosing a top broker provides you
with robust resources, access to the worldwide banking systems, and trade at a
low cost. You will have nothing to worry about; your money will be safe.
Besides, you can also open a small account and make a fortune with your trading
skills.
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