A classic forex broker acts as an intermediary between traders and the foreign exchange market, which is the global marketplace for exchanging national currencies against one another.
Today, forex brokers online provide traders access to a trading platform that allows them to buy and sell foreign currencies. The primary roles of a forex broker is to provide traders with this access to the forex market, execute trades on their behalf, and offer various related services that facilitate the trading process. Forex brokers can offer a range of services and tools designed to assist in trading activities.
Choosing the right forex broker requires careful consideration of their regulatory status, fees, service quality, and the trading platform offered.
Key functions of a forex broker
Market access: Forex brokers offer individual traders the ability to participate in the global forex market; a market dominated by banks, major financial institutions and huge corporations. Through brokers, traders can engage in trading activities 24 hours a day, five days a week. (Note: Since the globe consists of different time zones, forex trading sessions are actually available for considerably more than 120 hours per week if you are on a global platform.)
Trade execution: Brokers execute buy or sell orders submitted by their clients. Execution can be done through a dealing desk (DD) basis, where the broker acts as a market maker, or through a no dealing desk (NDD) model, which includes straight-through processing (STP) or electronic communication network (ECN) methods, directly matching traders’ orders with other market participants.
Leverage: Forex trading can be conducted on margin, allowing traders to control large positions with a relatively small amount of invested capital. Brokers provide leverage, amplifying the potential for profit as well as loss based on the price movements of the currencies being traded.
Note: In some jurisdictions, there are now legal limits in place regarding how much leverage a broker can give to a non-professional trader. There can also be laws preventing a non-professional account from going into a negative balance.
Tools and resources: Forex brokers offer various trading tools, educational resources, and market analysis to help traders make informed decisions. These may include technical analysis charts, economic calendars, trading signals, and educational articles or videos.
Accounts and platforms: Brokers offer different types of trading accounts tailored to the needs of various traders, from beginners to experienced professionals. They can provide access to proprietary trading platforms (developed for a specific broker) and independent trading platforms (used by many brokers). Examples of well-known independent platform are MetaTrader 4, MetaTrader 5, and cTrader.
One advantage with learning how a big, independent third-party platform works is that it makes it easier to switch from one broker to another, since you don’t have to learn a new platform each time. On the other hand, the big platforms can feel rather overwhelming for a novice trader, since they are so packed with a multitude of advanced features.
Considerations when choosing a forex broker
Regulation: It’s crucial to choose a broker that is regulated by a reputable financial authority, such as the Financial Conduct Authority (FCA) in the UK, the Commodity Futures Trading Commission (CFTC) in the US, or other relevant regulatory bodies.
Trading platform: The availability of a user-friendly and reliable trading platform with functional trading tools and features can significantly impact the trading experience, and in the end, your bottom line.
Spreads and comissons: Brokers commonly charge for their services through spreads (the difference between the buy and sell prices of a currency pair) and/or commissions on trades. Understanding the cost structure is important for managing trading expenses. You need to pick a broker and a cost structure that is suitable for your particular trading strategy. If you are employing more than one trading strategy, you might need to sign up with more than one broker to ensure you get the best deals, instead of resigning to a compromise.
Other fees: Spreads and commissions are not the only possible fees. When you evaluate a broker, look at the big picture and take all fees into account that are relevant for your trading strategy and preferences.
Of course, if you are a daytrader and never keep positions open over night, a huge swap fee is not a problem. If you never use checks for deposits and withdrawals, high processing fees for checks are not an issue, and so on. You need to evalute the broker from your perspective.
Customer service: Access to reliable customer service can be vital, especially for new traders who may need assistance navigating the trading platform or understanding trade execution procedures. How do you prefer to reach out to your broker, and is this option available? Is it available during your normal trading hours? Is it available in a language you understad? Examples of common methods are phone call, email and live chat.
Note: Some brokers offer 24/7 or 24/5 trading while their customer support is only staffed during office hours, which leaves traders hanging if there is any emergency outside of office hours.