Introduction to Forex – What is a Forex Broker?

Chapter 9

Navigating the complex world of foreign exchange can be daunting, especially for those new to forex markets. A Forex broker serves as a vital gateway, connecting retail investor accounts with the dynamic realm of currency pairs like EUR/USD.

With an array of forex trading platforms available, choosing the right one is crucial for your financial journey. It’s essential to understand how CFDs work, as many investor accounts lose money when trading these instruments. Selecting a broker that aligns with the stringent guidelines of the Financial Conduct Authority enhances safety in these volatile financial markets. So let’s see what Forex broker is and how to choose the best for your trading business.

What is Forex broker?

Forex brokers are intermediaries who have the status of investment companies. However, despite their importance in number, their impact on the foreign exchange market is relatively limited compared to that of the other main players in Forex (central banks, commercial banks, brokerage companies or hedge funds).

Some forex brokers are independent, while others are associated with banks or major financial organizations. So many brokers offer different interfaces, tools, commissions and customer service.

But, in their mode of operation, there are mainly two categories of brokers.

Dealing desk and no dealing desk broker

The first category is that of “No dealing desk” brokers who will act as intermediaries between the investor and his purchase or sale operations and the banks who will ensure the effective quotation of currencies. The second category is that of “Dealing desk” brokers who work directly with the market.

All of these brokers offer a range of management tools and information. The forex broker normally allows access to several trading platforms. It offers real-time price action charts, technical analysis tools, and market information.

Most often, it is possible to test the platforms offered for free. It also provides technical commentary and financial information schedules.

Forex Trading Platforms

The trading platform is your portal to the forex market. And the platform of your broker must have the features of being user-friendly and stability. Therefore, it should be easy to use, visually pleasing, has various technical and fundamental analysis tools, and that trades are entered and exited with ease.

On the other hand, a badly made interface can result to costly order entry mistakes. One good example is accidentally adding to a position instead of closing it, or going short when you need to go long. Fortunately, most brokers off free demo accounts so that you can try out the trading platform before opening and adding funds to your account.

Tips for choosing an online forex broker

Regulatory Compliance

Of course, you wouldn’t want to put your thousands of dollars to a company who simply claims they’re legit. What you need is a high level of security, and it’s the number one factor you should look into. And you can find out by checking the credibility of a forex broker.

Brokers must register with the Futures Commission Merchant (FCM), and their actions are regulated by the Commodity Futures Trading Commission (CFTC). You can normally find this information on the broker’s website or that of its parent company.

Also, check the regulatory authority to which the broker depends. Indeed, they are not all as strict or active. The FSA (regulator in the United Kingdom), the NFA, and the CFTC (American regulators) are among the most demanding authorities.

Therefore, you can turn to a broker whose head office will be in London or New York. The currency market being an unregulated over-the-counter market, it is essential to contact a company regulated by an authority to which you can turn in the event of a dispute.

There are global regulatory agencies that help separate the legitimate from the fraudulent.

• United States – National Futures Association (NFA), Commodity Futures Trading Commission (CFTC)
• United Kingdom – Financial Conduct Authority (FCA), Prudential Regulation Authority (PRA)
• Australia – Australian Securities and Investment Commission (ASIC)
• Switzerland – Swiss Federal Banking Commission (SFBC)
• German y – Bundesanstalt für Finanzdienstleistungsaufsicht (BaFIN)
• France – Autorité des Marchés Financiers (AMF)
• Canada – Autorité des Marchés Financiers (AMF)

To see the complete list of Forex regulatory and supervisory bodies for each country, click here: https://www.100forexbrokers.com/forex-regulation

Proper regulations help you to see if your broker is well capitalized. This applies in the event of trading losses, keeps your funds in secure and segregated accounts, and maintains fair dealing practices. We strongly recommend that you choose a regulated broker with clean records.

Trading Execution Speed

A good broker must fill you at the best possible prices for your trades.

Such that there are no important news release, surprise events, or normal liquidity, your broker should fill you at, or close to, the market price you see when clicking the buy or sell button. In addition, it is critical to verify that when making a request, it should be fulfilled with a minimal delay.

For instance, let’s say you have a stable internet connection, if you buy EUR/USD for 1.1686, you should get it at the price or within micro-pips of it. This is most important especially if you’re a scalper. With just a few pips in difference in price can make that much difficult on you to win that trade.

Costs and Fees

Every time you enter a trade, you have to pay for either a spread or a commission. That’s why it’s only natural for you to get the most affordable rates.

The spreads are brokers’ main source of compensation. The tighter the spreads, the less cost it is for you to enter and exit a trade.

Additionally, spreads vary with each currency pair and tend to be tighter for high volume pairs. Spreads should not be larger than 5 pips for the major currencies.

Customer Support

Brokers will always have a problem and you can’t avoid that. No matter how perfect they are, they still have their flaws. Therefore, you should choose a broker that you could easily contact when issues arise.

Before opening an account with your chosen broker, test out its customer support through e-mail, telephone, or chat. If you don’t get the response you expected, maybe you have to move on to the next broker.

Trading tools tailored to clients

Forex brokers offer several trading platforms to their clients. This may be an “in-house” platform developed internally by the broker or third-party platforms like MetaTrader. These trading platforms offer real-time charts, technical analysis tools, real-time information and data, and even trading assistance.

With the new regulatory provisions, the differentiating factors between brokers will largely be based on the technologies brokers provide to their clients. This explains the development of automation tools allowing brokers to offer their clients more efficient and pleasant-to-use trading platforms. The aim is, of course, to attract more traders.

Copy trading is an additional tool made available to clients by certain brokers. It allows you to base your trading decisions on financial information generated by other traders with the possibility of automating the replication of the decision-making of gurus (experienced and copied traders) whose portfolios are open and positions taken visible by all.

Before committing to a broker, request free trials to test the different trading platforms.

Tight commissions and spreads for the Forex broker

Forex brokers generally do not earn commissions, so this spread is their only source of income. By comparing brokers, you will realize that the differences between the amounts of spreads on CFDs and Forex are as large as those of the commissions of stock brokers.

Trainings and education

Brokers must provide a quality service that demonstrates their in-depth knowledge of the financial markets and through which they will be able to gain the trust of investors. Webinars, ebooks, MOOCs, trading videos, regular macroeconomic updates, articles, etc., there is no shortage of possibilities for training and supervising traders who use their offers.

The objective is simple: to provide its clients with the best possible training and give them all the cards to trade successfully! By having access to all the information and being trained in the tools, clients transform into true professional traders, positioned for success and satisfied with their broker!

Different types of accounts 

Many brokers offer two or more account types. The smallest account that can be opened is called the mini account, which allows you to exchange your currencies by putting a minimum of around 500 euros. This allows you to test the services of the forex broker. Then, the standard account, often from 2,000 euros, allows you to benefit from more services or trading tools. Premium accounts start from 10,000 euros and offer “VIP” services.

The new regulations require brokers to offer limited risk accounts with guaranteed stop orders for each position to prevent investors from losing more than their initial stake. This phenomenon is made possible by the leverage effect, which is very common in Forex because the price differences (the sources of profit) are barely a few cents.

Bottom Line

When setting up a forex trading account, consider brokers that offer a user-friendly experience, excellent customer service, and educational resources to help you grasp the intricacies of online trading platforms. Remember, while the opportunity for profit exists, you must be prepared to afford the high risk of losing your money in the ever-fluctuating foreign currency market.

Opt for online forex brokers that are transparent about the fact that a significant percentage of retail investor accounts lose money when trading CFDs. Look for a platform that is offered a wide range of tools and features to support your trading decisions.