Atish Patel – FX Trader, Trainer & Support Coach for Samuel & Co Traders
Trading the FX market can initially be quite overwhelming with the huge amount of information available online. With so much room for interpretation, I fully understand the difficulties one may come across when trying to build a strategy and be consistent in the markets. Going forward I aim to simplify some principles surrounding the FX market starting with some basics. Please feel free to comment and ask any questions and I’ll be sure to answer them!
Forex brokers are firms that provide retail traders with access to a platform that allows them to buy and sell foreign currencies.
A forex broker works as an intermediary between you (the retail trader) and the interbank system. (If you don’t know what the interbank is, it’s a term that refers to networks of banks that trade with each other).
A Forex broker will offer you a price, from the banks of which they have lines of credit and access to forex liquidity. Many forex brokers use multiple banks for pricing, and they’ll offer you the best one available.
To get a live account with a forex broker, it’s a bit like opening a bank account and requires basic information such as identity verification. The whole process can take a day or two. However, if you’re just looking to test the waters, forex brokers also offer demo accounts for which you only need to provide minimal information to open. A demo (or practice account) allows you to get set up and get some practice trading until you’re ready to get started trading with real money. A great place to start!
What to Look For When Choosing a Broker
Regulated Forex brokers all bear the FCA stamp of approval. The FCA – Financial Conduct Authority – is the gold standard for all UK-licensed operators. According to FCA requirements, all FX brokers must submit periodic financial statements of their investment holdings, and annual reports for audit. The FCA takes a no-nonsense approach to verifying the financial well-being of FX brokers.
When you’re searching for a regulated FX broker, you can cross check the broker and FCA list of regulated brokers to ensure that everything is above board.
A flashy or professional looking website does not guarantee that the broker is FCA Regulated. Due to concerns regarding the safety of deposits and the integrity of the broker, accounts should only be opened with firms that are well regulated.
Each Forex Broker has different account offerings, including Leverage and Margin. Forex traders have access to a variety of leverage amounts depending on the broker, such as 50:1 or 200:1. Leverage is a loan extended to margin account holders by their brokers. For example, using 50:1 leverage, a trader with an account size of $1,000 can hold a position that is valued at $50,000. Leverage works in a trader’s favour with winning positions since the potential for profits is greatly enhanced. Leverage can however quickly destroy a trader’s account since the potential for losses is magnified as well. Leverage should be used with caution. The law requires forex brokers to disclose this and they typically do in the small print.
- Commissions & Spreads
When you open a forex trade with a broker, they pass it through to the market for you. In the process of this, they offer you a price for the currency pair that is slightly different than the price they can get.
You’ll see it shown in quote form as EUR/USD 1.3600/1.3605, for example, where the first number is what the broker will give you if you want to sell the currency pair, and the second number shows what the broker will charge if you want to buy the pair. The difference of 0.0005, or 5 pips, is the broker’s commission (or spread). The spread may widen or narrow depending on the trading supply and demand and these figures are transparent to the trader.
The wider the spread, the more difficult it can be to make a profit. Popular trading pairs, such as the EUR/USD and GBP/USD will typically have tighter spreads than the less traded pairs.
The beauty of the spread from the broker’s point of view is that it’s taken from your leveraged trade size, not your account balance size.
- Customer Service
Forex trading occurs 24 hours a day, so a broker’s customer support should be available at any time. Another thing to consider is the ease with which you are able to speak with a live person, rather than a time consuming, and often frustrating, automated service.
When considering a broker, a quick call can give you an idea of the type of customer service they provide, wait times and the representative’s ability to concisely answer questions regarding spreads, leverage, regulations and company details. Do the basics!
To summarise, if you have confidence in your forex broker, you will be able to devote more time and attention to analysis and developing your forex strategy. A bit of research before committing to a broker goes a long way and can increase your chances of success in the forex market.