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Forex brokers allow you to open and close trades in the foreign exchange market. They are authorized and financially licensed to make transactions on behalf of the trader. This makes the exchange of currencies much more accessible but also more secure. To choose a good broker, knowing what to follow and what to pay special attention to is helpful.
Forex brokers – what do they do?
Forex brokers are financial institutions that mediate transactions in the Forex market. The object of trading is primarily CFDs contracts for difference. There are several hundred licensed entities on the financial market with which you can open an investment account. The choice is vast, but the list of things to pay attention to is not short.
Forex brokers are intermediaries – this is how the activity of brokers and brokerage houses is accepted. However, it is worth knowing that not all models of operation of brokers involve intermediation. Forex brokers’ most popular order processing results in the broker not intermediating the transaction but being the other party. This means that the trader loses their profit for the broker.
In addition, he is the one who provides the traders with the investment platforms and the rates at which they can open positions. Therefore, it is worth opting for a recommended and reliable broker, which should have the appropriate licenses. This means that such an institution is subject to certain laws, as well as to specific supervision.
When a trader feels that his chosen broker is not fulfilling his duties well, he can turn to the Financial Supervision Commission for intervention or assistance. And what if the Forex broker of choice is a foreign broker? First of all, even if the broker operates outside your country and provides services to you, it must be notified by the Financial Supervision Commission. You can quickly and easily check whether the forex broker of your choice has the appropriate licenses.
What does a broker do for traders?
Forex brokers are in charge of arranging transactions between buyers and sellers. Once the transaction is completed, they receive a commission, although they sometimes choose to reduce or eliminate commissions for certain investment products. The activity of brokers is necessary because stock exchanges accept orders of the type of non-members of the business.
Forex brokers are exchange members, executing orders on behalf of their clients. However, a good forex broker will not only be a broker. It should also provide other services – collect data and conduct analysis.
Analysis and marketing
A broker is an intermediary, although this is not his only task. The best forex broker provides analysis, data, and investment tools so that the trader knows precisely which trades are worth making and which are best avoided. Some forex brokers collect data and use various sources, while others develop their commentary, analysis, and advice. A good broker draws information from many sources, and at the same time, they can conduct their research.
Discount broker, and offering the complete package
A discount broker is an intermediary that provides a reduced commission, usually between $5 and $15 per transaction. This broker offers lower transaction costs, and its employees receive a monthly salary rather than a commission. This type of broker does not offer account management or personalized advice. They are simple brokers.
On the other hand, a full-service forex broker executes trades on behalf of investors in a full range of investment products but also provides market research and advice on retirement planning and investments. Traders pay higher commissions for a broker that offers a full range of services.
Technology packages
A forex broker should also provide the trader with the latest technology for executing trades. The age of brokers offers platforms that can be downloaded to a computer or mobile device. Advanced forex platforms provide the user with convenient access, as well as fast and hassle-free execution of transactions.
How does a broker make money?
Forex brokers profit from spreads, commissions on trades, and their businesses. The spread is the difference between a particular currency’s buying and selling price. The spread must be paid once per round of both parties – a completed buy and sell transaction. The spread varies depending on the currency pair and the time when the transaction is made.
A forex broker can also make money on its trades against the customer. This is especially true for brokers that operate under the MM model.
As for the commission, the forex broker usually gives the customer a choice – he doesn’t have to pay a commission but has a slightly higher spread, or he pays a commission but benefits from a lower spread.
If the customer chooses the second option, the commission will be taken from his capital in the trading account – not from the transaction balance. The commission to the broker must be paid when the position is opened. The amount of the commission itself varies, depending on the account holder, as well as the volume of trading. The higher the volume of transactions, the lower the commission the client will have to pay. It is worth keeping this in mind because you can only talk about profits from a trade when the trader considers both the spread and the amount of the commission. Otherwise, the apparent gain of the client will be absorbed by the fees, and the conducted transaction will be unprofitable.
It is important to note that forex brokers usually do not charge a fee for either setting up or maintaining a brokerage account. However, it may happen that a trader will have to pay if his account is not active for some time.
Reviews of forex brokers. Regulated forex brokers
Below is a list of reputable forex brokers that are popular among traders and offer top-notch services.
XTB
XTB is a Polish Forex broker founded in 2005 and debuted on the Warsaw Stock Exchange in 2016. Its regulatory body is the Financial Supervision Commission. It offers more than 5,400 financial instruments, including real stocks and ETFs (also read: Where to buy ETFs). Trading costs are relatively low, and leverage is 1:30 (also read: Margin trading and leverage). There is no minimum deposit, and the demo account is free. In addition to the FSA, the broker is regulated by the FCA, CySEC, and IFSC.
eToro
The forex broker eToro was founded in 2007 in Israel. As part of its services, it offers several valuable features, such as CopyTrader, which allows you to copy other traders’ trades. The Popular Investor program, on the other hand, enables top traders to earn money by sharing their trades. eToro allows you to trade stocks without fees or buy cryptocurrencies on the exchange. In this case, the trading costs are not high either, the leverage is 1:30, and the minimum deposit is $50.
The eToro forex broker offers to make transactions on American and European markets. Traders can use the desktop version or the advanced mobile application, allowing them to make transactions from anywhere in the world at a time of their choosing )also read: Forex trading application).
Interactive Brokers
This broker offers the ability to trade multiple types of assets with a single account, including CFDs alongside the underlying stocks. The IBKR Trader Workstation platform lets you view and trade stocks, futures, options, metals, Forex, funds, bonds, and CFDs from duplicate and trading accounts. As for trading costs, active traders have lower rates and more significant balances.
Interactive Brokers has 1.54 million accounts and $10.01 billion in capital listed on NASDAQ. Thanks to IB’s SmartRoutingSM system, low commissions can be charged, as well as the best price execution. The broker offers free trading platforms and tools to satisfy any trader, whether a beginner or an advanced person.
Admiral Markets
This broker has been in business since 2001 and serves more than 120,000 clients from more than 130 countries worldwide. This broker is for offices in 16 countries. This forex broker offers very fast order execution, relatively low spreads, and free access to Meta Trader 4, Stereo Trader, Meta Trader 5, and Admiral Markets Supreme Edition.
IC Markets
This is an Australian online stock broker that began operations in 2007 and operates under the ECN model. ASIC, or the Australian Securities and Investments Commission, is responsible for the control and regulation. The advantage is instant customer service. It is worth knowing that IC Markets broker has different types of accounts – for scalpers, day traders, and algorithmic trading machines. For some time, this broker has been top-rated among traders from Europe, as it is not bound to European financial rules.
CMC Markets
This is one of the oldest brokers, operating since 1989. It is a well-established, listed, and well-respected broker in the UK, which has adapted to the ever-changing brokerage environment. CMC is listed on the London Stock Exchange, and its symbol is CMCX.
What documents are needed to open a brokerage account?
Having already known how to choose the best forex broker, it is worth knowing what documents are needed to open an investment account. Indeed, it will be an ID card or passport, with the help of which the trader will confirm his identity. The broker may also ask him to send him a scan of his identity document. It may also happen that the trader will have to confirm his residential address, for example, by providing proof of payment for Internet or electricity. In addition, a copy of both sides of a debit or credit card will be needed to open a brokerage account.
With this type of data, the forex broker can confirm the authenticity and security of the user’s account. This is required by the Financial Supervisory Commission.
What issues should I pay attention to choose a good broker?
When looking for a good broker, you must consider commissions and fees, comfort and convenience of use, customer service, and the variety of available products.
Commissions and fees
If the broker a trader chooses charges high commissions or fees, the profits from his investments will be lower. It is worth checking whether a particular broker offers to make transactions without commissions. If such, it is worth checking whether these products overlap with the ones the trader intends to trade. Commissions and fees hit the portfolio hard, so choose a broker that offers them as low as possible. Some forex brokers charge account fees, while others do not but charge higher commissions or spreads.
Comfort of use
The point is that the forex platform offered by the broker means a smoothly running system without any glitches. Every second matters regarding trading, so the platform should not delay the trader’s movements. Moreover, no one wants to spend too many hours in front of the computer because of a non-functioning platform. Use should be hassle-free, and the broker’s job is facilitating, not restricting daily activities.
Customer service
Excellent customer service is also essential. While it may not be the main criterion to follow when choosing a broker, it is necessary. Sometimes customer service is needed at the least expected moment. Then the trader will want to contact the broker as soon as possible and explain his problem. In this way, the trader will not lose valuable time that could be spent on making transactions.
Variety of investment products offered
A wide range of financial instruments is significant. Traders who want to have a diversified investment portfolio must not limit themselves to a narrow range of products. It is necessary to check beforehand what a particular broker offers. It is also worth determining how long it takes to deposit and withdraw. After all, everyone wants to execute orders quickly without unnecessary waiting.
Transparency
A broker should be open about its commissions, fees, and other transaction costs. A forex broker who tries to hide this kind of information is not honest and reliable. Forex brokers that are well-established in the market will not attempt to hide their pricing from potential clients in any way.
Supervision
Security when it comes to finances is critical. It is worth betting on brokers controlled and regulated by severe financial authorities. For example, in Poland, this is the Financial Supervision Commission. As for global regulators, it is the British FCA or the Cyprus CySEC. An adequately regulated broker guarantees safety, honest and reliable services, and assistance in case of any problems.
Brokers should list their regulatory bodies at the bottom of the home page. Some go a step further and even post a list of ethical rules that apply to them. Transparency, as well as the supervision exercised, are two factors you should consider when choosing a Forex broker.
Education
Beginner traders are also interested in the trading training materials offered. In most cases, forex brokers offer some educational materials, but some offer a high-quality training section.
A good forex broker will offer high-quality multimedia courses that start with the basics of currency trading, through terminology and concepts with real-life examples, ending with fundamental and technical analysis and strategies and indicators. For a new trader, this is a lot. Most people learn better from mixed materials – read and video, and the more variety, the better.
Some brokers also offer webinars and sometimes actual seminars. When it comes to Forex, there will always be something to learn, so it’s worth taking advantage of the knowledge that’s available within your Forex account.
Forex platform
Every broker provides its clients with a platform with the help of which users can make Forex transactions. It is worth paying attention to what tools the chosen broker offers. Some of them use the most popular investment platforms, such as Meta Trader 4 or Meta Trader 5, and additionally provide a proprietary platform, as in the case of xStation from broker XTB.
So how to choose a good broker?
It is necessary to check it beforehand. It is worth choosing a broker in the same way as, for example, a car. It’s best to read all reviews, customer complaints, and detailed information about the broker. It is worth considering all pros and cons. It is best to test demo accounts brokers offer before deciding (also read: Plus500 demo account).
Types of forex brokers. The best brokers for forex
There are four ways to process forex orders. It is a good idea to check in advance which model the chosen forex broker operates.
Forex Market Maker broker
This is the most popular model of operation for forex brokers. Such a broker is responsible for creating the trading environment. Regarding the practical dimension, it looks like this: he is the other party to the transaction, and then he decides whether he wants to hedge, such as with a liquidity provider. Why is this the most popular model of operation? It is the most profitable model of the process. Every participant in the financial market is there to make money. The situation is similar for brokers – their goal is, of course, to make money. The Market Maker model is a model that hides a conflict of interest. The broker is the other party to the transaction – if he does not protect himself, his earnings will be the trader’s loss, and the trader’s profit will be a cost to him.
Although such a description may not inspire confidence, the most prominent traders operating in the MM model have such competitive offerings. The fact that they have the proper licenses dramatically reduces the possibility of some manipulation. A Forex broker serving in the MM model often conducts marketing targeting beginners. They are more likely to lose capital and most susceptible to the vision of getting quick and easy money. The more experienced a trader is, the less willing forex MM brokers are to serve such a client.
Forex broker NDD
NDD stands for No Dealing Desk, and this type of broker is an inevitable evolution of the Market Maker broker. In this model, the broker is also the other party to the transaction but operates without a dealing desk. And what is a dealing desk? It’s about analyzing transactions and checking whether positions can be opened. However, this is a model that is increasingly being abandoned. Most trades are executed automatically, and no one stands in the way of a trader’s position opening. The NDD model is a type of MM broker, but it can be said that it is adapted to the current times. Trading costs are the same as the MM model, but you must reckon with the spread and swap.
Forex broker STP
STP stands for Straight Through Processing and means automatic and simple order processing. This model also has an element of the MM model, but unlike the MM model, all trades are automatically collateralized with a liquidity provider.
When opening a trade, a trader opens it with a broker, which then hedges with a liquidity provider. This model is often referred to as brokering. In this model, instead of the spread itself, there is very often an additional fee in the form of a commission. However, with an STP broker, the spread is often quite a bit lower.
Suppose an STP forex broker charges a commission for transactions. In that case, the commission for opening or closing a position is likely the broker’s earnings, and it is not hidden in the market spread. MM forex brokers often also include an STP option available to customers with a richer portfolio. However, this is not a rule, so carefully review individual brokers’ trading terms and conditions beforehand.
ECN forex broker
Until recently, ECN was the most desired broker model by traders. ECN is the skin of the Electronic Communication Network. It means an electronic communication network. As for the practical dimension, it is a model similar to the stock exchange model. In this case, the broker tries to connect the two sides of the transaction. It will not exactly be a liquidity provider for the traders; it could be another client, for example. In the same way, it looks on the stock market.
However, in practical terms, this is not a perfect reproduction of the stock market model for two reasons:
- A forex broker may try to improve liquidity by being a party to some of the trades,
- Liquidity providers have a significant advantage over ordinary users.
The second case is about the advantage of the last look – the last glance. At the last second, the liquidity provider has the right to back out of the transaction, seeing if it can’t achieve a favorable price at a particular moment. The liquidity provider at this advantage operates in the MM, ECN, and STP models, so this is not a problem related only to the ECN model. For traders, the transaction cost will be the commission, spread and swap, with the commission going straight into the pocket of the chosen broker.
Forex brokers that operate on the ECN model either take it upon themselves to create the entire order pooling infrastructure or, of course, they can buy one. This means higher costs for the broker’s operations with lower potential profit. Unless such a broker has a vast number of clients, this is one of the reasons why this model is not so popular. ECN does not automatically mean the cheapest offer. It may be the case that even a MM forex broker will offer lower opening and closing costs.
Forex platform for beginners – what should it be?
As already mentioned, individual clients trade Forex with the help of an investment platform. Many tools are designed for Forex trading. Some are simple, while others are equipped with many advanced features. And what should a forex platform be like for beginners?
Intuitive operation
When it comes to traders who are just beginning their adventure with the stock market, a tool that is easy to use will work best. It would be good if it had described individual functions correctly and allowed to open orders straight from the chart.
Simple interface
For a novice trader, the interface is also of great importance. It should be easy to read so the trader can quickly orient himself. Ideally, there should not be too many icons on the home screen. It would be good if the different elements had different colors. The best forex platforms come with an option to personalize the settings, such as the template and the color of the charts.
Useful investment features
A forex platform for beginners should be equipped with additional features. However, they must be helpful as well as adequately described. Too many advanced options can make it too complicated for a trader to use the tool. And what features will make trading easier for beginners? It will undoubtedly be the ability to make one-click trades and copy trades from other traders. Forex calculators are also handy.
From opportunities to reduce investment risk
Forex investments carry a fair amount of risk, as the market is characterized by extreme volatility. However, some platforms allow you to limit the number of possible losses by having access to orders, such as stop losses. As a result, if a specific price level is reached, the position automatically closes.
Meta Trader – a forex platform for beginners
Both the younger version of the platform and the older one are powerful investment tools. However, they are a suitable option for beginners. In particular, despite the many additional features, they are still easy to use (also read: Meta Trader 4 vs Meta Trader 5).
Thanks to their immense popularity, it is also essential that many helpful instructional videos can be found on the Internet, which illustrate step-by-step how to make trades or use the available indicators. If any problem arises, with the help of a browser, it is straightforward to search for what is causing it and find a solution. When it comes to less popular platforms, it is not that easy.
How to invest in the Forex market?
Forex is the largest and most liquid market in the entire world. Similar rules of the game apply here as in other financial exchanges. It is worth following a few rules that will allow you to make investments efficiently and effectively.
Acceptance of investment risk
Risk to an integral part of any investment. It is worth knowing about it beforehand and accepting its existence. Then it is easier to get possible failure. It is best to always have in the back of your mind that, in the worst-case scenario, you could even lose all the capital you have invested.
Also read: Forex trader
Cool calculation
Investments are best approached in cold blood. In this case, emotion is not a good advisor. The best investors know that being guided by emotions and making trades under excitement or stress is not a good move. It is worth trying to control your emotions, and of course, it isn’t easy, especially at the beginning of the investment adventure, but this skill is handy.
Learning to invest
Every investor should know that choosing a Forex broker is not the end of the story. With the start of the investment, or preferably even before, the constant learning begins. A trader should keep abreast of all trends related to investing and learn new things continuously. It’s best to get knowledge from various sources, including online articles, ebooks, audiobooks, and online and onsite training courses (also read: Forex training courses for beginners). These types of courses are free as well as paid. This allows the investor to be a form tailored to his expectations.
Investment strategy
Do not undertake to invest without a predetermined plan (also read: Forex strategies). An investment strategy is the basis of successful investments. Depending on the trader’s expectations and needs, he can choose a ready-made design or create his own. In the second case, he will have to take selected elements from various investment strategies and, based on them, create an individual investment strategy.
Demo account
Theoretical knowledge is essential, but the practice is equally important. To gain skills and experience without risking losing your money, it is worth opting for a test account with a particular broker. This allows you to find out firsthand whether investing is a good occupation and test your investment strategy’s effectiveness. Spending at least a few months on a demo account will allow you to become thoroughly familiar with the platform and the trading rules. Reputable forex brokers provide demo accounts free of charge. Some for a limited period and others indefinitely.
Diversify your investment portfolio.
Diversification involves placing money in different financial instruments. This allows you to protect at least some of your capital, and novice investors should focus precisely on protecting their capital. Diversification means investing in different assets or different industries. This ensures that when some financial instruments lose value, others can rise so much that they will, at best, make up the loss. If not, the investor will still not lose all of his capital but only part of it.
Learning the basics of investing
Before starting to invest, it is necessary to prepare yourself substantively adequately. It’s about learning the rules of the market and becoming familiar with investment terminology. This will ensure that the investor will be familiar with the subject and that the basic concepts will not be incomprehensible to him.
Investing according to your knowledge
The investor should invest money in those financial instruments that are familiar and understandable to him. It is advisable to start with one asset, and gradually, with a deepening knowledge of other financial instruments, you can expand your investments. It is best to start investing in small steps. Then you can limit your investment risk.
Forex brokers – the most critical information
Below are the questions and answers to the most frequently asked questions concerning forex brokers.
What is a forex broker?
This institution mediates the trading of assets in the foreign exchange market (also read: Investing in the forex exchange). A broker allows private investors to place instructions for buying and selling in the forex market.
How to open a forex account?
Setting up a forex account is quick and easy. Usually, all the paperwork can be quickly done online. First, you need to go to the broker’s website with whom you want to open an investment account and click – “open an account”.
Afterward, you must enter your data and attach a scan or photo of your identity document and proof of address. Finally, you need to answer some questions about your experience as an investor.
What is the monthly fee for a forex account?
The maintenance is free if a trader actively uses a forex account each month. However, the broker may start charging costs if he does not conduct any transactions for a long time. They usually amount to 40-50 USD per month.
What can be traded in the forex market?
The forex market is a foreign exchange market. It allows trading in so-called currency pairs (also read: Forex currency trading). For example, the EUR/USD pair stands for the euro and the US dollar. You can also trade commodities in the forex market, such as natural gas, oil, tea, or coffee.
What is a forex demo account?
You can practice forex trading with virtual money in a forex demo account. You can make duplicate transactions on it as on the real forex market.
However, it is worth remembering that the demo account is used in particular to familiarize yourself with the investment platform and its functionalities. Therefore, it may happen that the conditions in the demo account may not be identical to those in the real version.
Forex brokers are designed to make it easier for traders to make investments, so take the time to choose wisely. This will make the investments more efficient and the trader’s movements instantaneous. Considering the factors mentioned above, you can select the best forex broker.