If you’re looking to try your hand at foreign exchange trading (forex), you’ll need a broker to do so.
Brokers make forex more accessible, especially for those who don’t have a lot of capital to begin with. More importantly, however, they help lower the risk on your trades. Forex is the world’s largest financial market, so it’s highly liquid and volatile. Exchange rates fluctuate, current events can impact the value of a country’s currency, and trading on margin — using money borrowed from your broker — can be risky.
The right broker can help you get past all that. However, as The Balance points out, the wrong one can present themselves as a risk, too. That’s why it’s so important to bear these considerations in mind when taking on a broker.
Essentially, brokers are the middleman between yourself and the market, buying and selling currencies on your behalf in exchange for a small commission. And though most have equal access to the market, the methods they use to trade can vary.
For beginners, consider dealing desk (DD) brokers, who provide you with fixed spreads, or the difference between a trader’s buy and sell rate when trading currencies. No dealing desk (NDD) brokers, like FP Markets, do the opposite, letting you trade freely in accordance to economic announcements. Your gains will tend to be more significant with NDDs, but they’re also the riskier of the two.
Meanwhile, other brokers use electronic communication networks (ECNs) to provide transparency, giving traders the information they need to make decisions. ECNs then execute buy and sell orders directly between traders, bypassing the dealing desk. Finally, straight through processing (STP) brokers are considered a cross between DDs and ECNs.
Due to multiple stories about traders getting scammed by their brokers online, you may be wary about taking one on. Not to worry — as long as the broker in question is regulated, they’re guaranteed to be following fair and ethical trading practices.
Most notably, regulated brokers are transparent, so you know exactly where your money goes each time. They lay down all the rates and fees for potential and existing traders on their platform. This can be seen in how users can open a trading account on FXCM, and then they’re immediately informed about the business’ commissions rates. This award-winning broker also apprises clients on how it collects compensation, as collection can vary per trade.
Regulation also ensures that a broker can keep your data secure and can bounce back from losses, so you get the quality of service you deserve. Some regulatory bodies include the UK’s Financial Conduct Authority (FCA) and the International Financial Services Commission (IFSC).
When choosing a broker, consider if they offer the account type you need, which will depend on how much money you deposit when opening one. This can vary from micro (£10) and mini accounts (£180-360) to standard (£3,600-7,200) and even managed (£1,400) accounts.
In particular, managed accounts are perfect for those who don’t want to execute the trades personally. In contrast, micro accounts are a good option for beginners or those starting with low capital.
Of course, additional features are what make particular brokers stand out from the crowd, so find a broker that you feel will benefit you the most. For instance, eToro is available on mobile, making it perfect for traders who are always on-the-go. Meanwhile, other brokers, like LQDFX, offer welcome bonuses if you open an account with a minimum initial deposit.
Trustworthy brokers also offer resources that can help you hone your trading skills over time. In particular, AvaTrade is well known for promoting the financial literacy among its clients with its wide range of research and educational tools. Are you ready to start your trading journey? For more forex guides, have a look through our content here on DumbFunded.