What is a Forex Broker?
This is a common question I see asked online about forex and it’s an important one.
Forex broker give you the ability needed to trade. Simply put, brokers are the medium through which you trade.
If you want to make forex trades, you need a way to access the actual platforms/interbank to trade.
What you do is deposit money into an account with the broker, similar to the way you’d start a bank account.
Banks offer you a place to store you money, gain interest, credit, etc.
Forex brokers provide you with benefits also, including your ability to trade the forex markets.
Usually they offer training, information, news, one-on-one help, technical assistance, and more.
It’s overwhelming, no doubt, if you’re a beginner and are trying to choose which forex broker to trade with.
As you can expect, more brokers than ever are popping up on the internet as the popularity of forex continues to grow. This is great for us- increased competition means these sites are forced to offer traders (you and me) bonuses and services so we will choose them over a competitor.
In addition to offering services, many brokers have eliminated most of their trading fees in order to entice you to trade with them, which means we get to keep more of our money.
The longer you’ve been trading the forex markets the more brokers you’ve likely used. When I first started trading, I was wooed into signing up with various trading sites that promised me things that I realize now are unattainable, such as access to ‘secret trading methods’ or ‘exclusive forex robots’ that would ‘make you rich’.
I cannot stress enough that the broker you use is probably the most important step in becoming a successful forex trader.
When choosing a broker, it’s important to consider what they can do for you.
As I said, forex popularity has spawned a lot of competition so there are brokers out there that actually offer exceptional services that will actually help you make money trading. Guides, platforms and personal coaching are some of the things you can expect from certain forex brokers.
Choosing a Broker for Forex Trading
A lot of forex beginners ask how to choose among many brokers and which type of brokers are the best to go with.
I will briefly break down the types of brokers and provide my pros and cons of each one of them.
There are four types of brokers to choose from.
Remember, it is important to do some of your own research on brokers and find ones that pique your interests.
Also, as with most things forex related, approach every site with caution. These are websites that you’ll be putting money into so make sure they are trustworthy. For every one good broker there are five bad ones.
Unfortunately for prospective traders in the United States, it is likely that you’ll have a limited number of brokers available to you.
There are some out there that will take in U.S. customers though- I will provide a list of those brokers in another article.
As I mentioned, there are four types of brokers.
Market Maker/Dealing Desk (MM/DD): The market makers or “dealing desk” brokers are those who offer fixed spreads on forex pairs. Oftentimes, they provide quotes that are usually lower or higher than the actual market prices at the time. They are often paid depending on the spread of said pairs. At times, they often take opposite positions of their clients. In laymen’s terms, your losses are the broker’s gain. Be careful of these types of brokers and like any broker, trade at your own risk.
No Dealing Desk (NDD): These types of brokers are often the ones that get good marks. Simply put, they are not dealing desk brokers. With these brokers, you don’t to worry about prices being manipulated or unusually wide spreads. In fact, the spreads are lower than DD Brokers. Yet, expect the spreads to be higher during major economic announcements. The prices are often real market prices. With these brokers, they mostly charge commission.
Straight Through Processing (STP): With these brokers, all transactions are done by a computer. The process occurs instantly with no broker intervention. Perhaps the best type of all NDD types. These brokers are often associated with another type, which will be discussed next.
Electronic Communication Network (ECN): Like the STP brokers, these are done by computerized transactions. These brokers are the most transparent as they provide a lot of information to their clients. All prices and spreads are real-time once again, with no broker intervention. As with all NDD brokers, they mostly charge commission in trades.
Again, it’s best to do your homework on whatever brokers interest you. Reviews are helpful as it should give you a pretty good indication of what you’re looking at.
If you’re a beginner to forex and all of this seems confusing to you, don’t worry. You can learn all of this stuff and more through a forex course.
Forex Broker Regulation
This is another thing to be conscious of when choosing a broker- regulation.
Make sure your forex broker is regulated before you put money into it.
The regulation depends on the country the broker is located in.
Again, do your research.
Figure out the appropriate regulation status where you live (or wherever the forex broker you choose is based out of) and verify they are certified.
Unfortunately, there are traders who get scammed out of deposits, earned revenue, etc.
If a forex broker is not regulated then your options of who to turn to in a dispute is limited.
The regulations mean the broker is allowed to legally operate under the governent- if there’s an issue with your account or a financial dispute, you are then able to resolve this issue with the ‘higher ups’.
Consider regulation as insurance.
99% of traders never have problems with shady brokers, but it’s a matter of being safe then sorry. You don’t want to wind up on the wrong end of a scam crisis.
There have been incidents where forex traders are left stuck when their unregulated broker suddenly shuts down overnight, leaving the trader with no way of getting their money back. Because the broker was unregulated, there is no one else to appeal to.
So, beginners to forex, be careful!
This leads me to my next point.
Best Broker for Forex Trading
I’ve used 10+ forex brokers in my time and what makes these guys stand apart from the others is the
- ease of their platforms
- guides/content on website to help you trade
- personalized help from broker team
My advice on brokers depends on where you’re from, how much money you have to trade and what your goals are.
I am happy to offer personalized advice on forex trading. Just email me at [email protected] and say “I need help choosing a broker!”
I’ll talk to you about your situation and recommend a broker from there.
I’ve been offering free help with finding a broker for a while now- anyone I can help not get scammed is a bonus for me.
Looking forward to hearing from you!
If you haven’t already, get access to my free PDF on forex trading trends- check the sidebar to the left of this post.
If you want to learn to trade forex, go here.