Are you looking to earn humongous profits through forex trading? Are you looking to hire a broker for handling your forex trading? Worry not, we have devised a comprehensive guide to address your queries regarding brokers.
The retail forex market is one of the most traded financial markets in the world. It is not a surprise that more and more people are turning to forex trading to make a quick buck. If you’re new to forex trading, then hiring a certified broker is the right way to dip your toes.
Want to know how to get started with retail forex trading? Read on to find out everything you need to know right from the history of forex up until opening your forex trading account!
History of Retail Forex Trading
The first known and oldest method of exchange was the barter system. Under this system, goods were exchanged for goods until there was a gradual evolution, deeming salt and spices as mediums of exchange. Around the 6th century, gold coins were introduced, serving as currency as they were portable, provided uniformity, durable, and acceptable.
While this was widely accepted, gold was eventually replaced once the Bretton Woods System appeared after the end of the Second World War. This aimed to create an environment that would allow global economies to recover from the losses caused by the war. This was done by exchanging currencies with foreign countries by pegging the value of the US dollar to gold.
The Euro currency was established after the treaty for the formation of the European Union in 1992 was successful. This gave European banks a benefit as it removed the risk involved in exchange in a global economy.
The 1990s saw the emergence of internet trading, which made the process of exchange much easier for traders. This also gave way to globalization and capitalism as numerous markets flourished. Electronic communication allowed interactions between merchants and international banks.
Forex Broker Types: Dealing Desk and No Dealing Desk
There are several types of forex brokers that traders need to make the right transactions. It is important to choose a reliable broker that is competent with respect to fulfilling your goals while trading. There are two prominent types of brokers that we will be dealing with; dealing desk and no dealing desk brokers.
Dealing desk
In the forex market, transactions take place in two ways; the order is either sent to a liquidity provider, which includes banks and similar financial institutions, or they are held by the brokerage, which functions as the provider of liquidity. Brokers dealing with these types of transactions are considered dealing desk brokers.
Trades are processed by these brokers in two ways. The first method involves putting the trades of clients against each other if they are selling and buying the same pair at the same level. The responsibility of a broker is to match these trades, making a profit from the spread since this is not deducted by the spread of the liquidity provider.
Alternatively, if there is no immediate matching position for a particular order, the brokers themselves match the order, hedging your position. They buy a trade and sell it to a trader seeking the same position. Since dealing desk brokers do not pass trades on to liquidity providers, their spreads are usually fixed. This minimizes the risk associated with the conflict of interest arising from hedging of a trader’s position.
Dealing desk brokers create much smaller banks as they do not deal with the massive interbank market; however, the same conditions are imposed by these brokers, and the rates offered by them are similar. This type of broker is considered the best for both beginners as well as expert traders.
No dealing desk
Implied by the name, these brokers do not indulge in dealing with the trades. They merely pass on the trades to the liquidity providers that make up the interbank market who are buying and selling pairs of currencies at all times. This is done by the no dealing desk breakers through a system called straight-through processing (STP), which can automatically pass the trades to liquidity providers.
As opposed to dealing desk brokers, these types of brokers do not match the orders of their clients or hedge the position by taking the other side of the trade. The STP brokers in the forex market are the most common as they bridge the gap between retail forex traders and the interbank system. Electronic Communication Network (ECN) is also another subdivision of no dealing desk brokers.
This function makes it easier for traders to make orders for currency pairs as it would be extremely difficult for the individual forex retail trader to reach the interbank market on their own. Their job is to find the best bid and enquire about the spread on the market. After this, the spread is offered to the individual retailer along with a commission taken by the broker.
Dealing Desk vs. No Dealing Desk Forex Brokers
While both of these types of brokers have their benefits, each broker is different as they function according to their trading models. The foremost role of a broker is to inform you about who you are trading against and the location of the execution of your order.
Let’s take a look at the pros and cons of each forex broker.
Pros of dealing desk brokers
- Order filling: One of the biggest advantages of trading with dealing desk brokers is the 100% fill rate, even if the condition is that of an extreme non-liquid condition.
- Fixed spreads: Dealing desk brokers offer fixed spreads without the additional cost of commission. These are also wider spreads, which allow you to clear your loss and profits with ease. This is done via your trading prices instead of discounting the cost of commission by your trading profit and loss.
- Low initial cost: Dealing desk brokers accept as low as $1 to start trading with. This is beneficial for beginners who are exploring the forex market for the first time. It also allows them to test the waters without bearing significant losses. The low capital can award traders with higher leverage.
- Trading bonuses: Dealing desk brokers offer, under certain conditions, free trading bonuses. These rules, although difficult to fulfill, can be tempting for beginners. This also includes bonus promotions free of cost with a deposit.
Cons of dealing desk brokers
- Terms and conditions: Since dealing desk brokers make a small market themselves, they generally run on many convoluted terms and conditions for traders. This paves the way for deceit, as is believed by many traders.
- Conflict of interest: The factor of conflict of interest between the broker and the client is extremely high in the case of dealing desk brokers. This may lead to malpractice, and the broker can include a way to avoid fulfilling his obligations in terms and conditions.
- Price manipulation: Due to the small independent markets made by these brokers and their added benefit from your loss due to an evident conflict of interest, manipulation of prices is tempting. There is also a possibility of a slowdown, frequent requote, freeze, and other such factors.
Pros of no dealing desk broker
- Intermediaries: No dealing desk brokers are merely middlemen between liquidity providers and clients. They do not work against your order, and service is prompt as you receive a price as soon as possible.
- Quicker trades: Since no dealing desk brokers do not have a direct conflict of interest with their clients, the order is conveyed within seconds. There is hardly ever a requote, and if this is the case, a weak internet speed can be the cause.
- Hybrid brokers: Since no dealing desk brokers are divided into STP and ECN, they provide the benefits of both the systems to their clients.
Cons of no dealing desk broker
- Variable spreads: Since no dealing desk brokers do not offer fixed spreads, the movement of prices can be extremely volatile.
- Higher minimum deposit: The minimum deposit for no dealing desk brokers is generally higher than that of dealing desk brokers. This, however, also depends on the individual broker.
What is a Spread in Forex Trading?
In Forex Trading, the brokers quote you two different values for a currency pair. These are termed as the bid and ask prices. The ‘bid’ price is the value at which you sell the currency pair. While the ‘ask’ price is the value at which you can buy it. The difference between these two prices is termed as the ‘spread,’ or ‘bid/ask spread.’
A trader must know the spread as they form the base price for trading currency pairs. This spread is basically the amount ‘no commission’ brokers earn out of the trades. It is incorporated into the buy/sell prices that you trade for, and thus they don’t seek any extra commission.
Thus, a spread can be simply defined as the price difference where you sell or purchase a certain underlying asset.
How to measure the Spread in Forex Trading?
The Spread in Forex is measured by the smallest unit of the price shifts of a certain currency pair called ‘pip.’ In most cases, the pip value of the currency pairs is 0.0001. While for some currency pairs, pip is measured up to different decimal places, for instance, 0.01. By calculating the difference between the bid and ask prices, you can easily obtain the pip values.
Types of Spreads
The types of spreads that you come across on a trading platform differ depending on the type of broker you are trading from. A spread can either reach the lower end or, the higher end in a given course of time. Factors like market liquidity and volatility majorly impact it and, thus, can cause frequent changes in it.
The higher spread reflects a greater difference between the bid/ask prices and results mainly due to higher volatility and lower liquidity. On the contrary, a lower spread reflects a smaller gap and is a result of lower volatility and higher liquidity,
Other than these, the spread is also categorized into these two types:
- Fixed Spread
- Variable Spread
Fixed Spread
As the name suggests, a fixed spread remains unchanged regardless of the current market scenario. This is offered at a ‘dealing desk’ where a broker operates as a market maker or counterparty. This way, the broker can utilize the dealing desk to purchase great positions from their liquidity providers.
They then offer you these positions in much smaller sizes as they gain the liberty to control the prices they display.
Pros:
- A relatively cheaper trading option
- Much predictable transaction costs
Cons:
- Frequent requotes
- High slippage in volatile market conditions.
Variable Spread
In a variable, Spread the gap between the bid and ask prices is never constant. This is mostly offered by non-dealing desk brokers that have multiple liquidity providers for offering them the trade positions. Also, the prices here are passed on to you without any intervention of the dealing desk.
Thus, they have no control over the spreads, and they fluctuate depending on the demand and supply of the market.
Pros:
- No Requotes
- Transparent pricing
Cons:
- Not ideal for new traders and scalpers
- Can be risky at times
6 Crucial Things to Consider When Choosing a Forex Broker
The forex market is a highly competitive financial market. The process of finding the right person as your broker can also seem overwhelming. Having a reliable and trustworthy person as your broker is crucial. Especially if you’re a first time trader looking to dip your toes in the retail forex market.
Worry not, we have devised a checklist of things you should look out for in a forex broker. This comprehensive list will help you select the right broker for your forex trading!
Trustworthiness
Your hard-earned money should be in reliable hands. This is why when you trust a broker with your money, you should be sure that he is dependable.
It’s very simple to verify the credibility of the forex broker. All you need to do is find out the national regulatory agency for brokers in your country. They will have the verified database of all certified and legitimate brokers. Make sure you do good background research before you give any broker an all-access pass to your money!
Transaction Cost
When you are doing forex trading, you’ll find the cost of every transaction a burden on your pocket. That is why you should try and find cheaper rates for all your forex transactions.
Every time you make a forex trade, you will have to pay commission or the spread to your broker. It is all about exploring the right balance between a dependable broker and an affordable transaction rate.
Ease of Deposit and Withdrawal
If you choose a dependable broker, then you will not have to worry about transacting your funds. Your broker is holding on to your money so that it’s easier for him to make trades. Likewise, it shouldn’t be difficult for you to withdraw funds when you deem possible.
Generally, brokers don’t make it difficult for you to handle your funds. But if you start feeling that your broker is hesitant, you should investigate the reasons.
A Good Trading Platform
All the forex trades that your broker will make are going to be through online platforms. All brokers are heavily dependent on the trading platforms for coming up with predictions and making trades. That is why you should ensure that the broker’s trading platform is easy-to-understand and efficient.
The trading platform that your broker uses is a big deciding factor. So, make sure the potential broker’s trading platform has the following features:
- Charting tools
- Technical indicators for technical market analysis
- News Feed
Timely Execution
If you want to make the most out of forex trading, then you should hire a broker with good trade execution sense. This way, you’ll always get to grab the best market rates at the right time.
You should ask the execution strategies that your broker has and if they will suit your trading habits. Especially in typical market instances like regular news releases, surprise events, normal liquidity. The speed at which your broker satisfies orders is important, especially if you’re a scalper.
Satisfactory Customer Service
Good communication between you and the broker is just as important as the security of your funds. If you have seamless communication regarding issues and problems, then you can rest assured your money is in good hands.
Read reviews and compare performance levels after-sale since that’s when you might experience a different attitude from brokers. Your broker should support you through the entire trading process with your best interests at heart.
Beware of Forex Bucket Shops
If you are new to trading, finding the right broker can be rather tricky. In case you do not check the authenticity and verify the broker well, you can end up in the wrong place. A Forex Bucket Shop is a brokerage firm that practices dubious trading activities. From delayed actions, frequent requoting/misquoting to slippages, all of their actions are biased to favor the broker.
How do Forex Bucket Shops work?
The main idea of bucket shops dates back to the time when there was no internet access readily available. This was when the brokers used to take the client’s trading orders and shove them into a bucket instead of getting them executed. By taking advantage of the client’s lack of knowledge of the trading marketplace, they used to carry out unfair practices.
Bucketeers created a dummy marketplace and tricked traders into betting against their bucket shop instead of the real market. This is how they managed to manipulate the price movement and other factors into their favor. However, the availability of the internet has changed the complete scenario as of bow. But Forex Bucket Shops still exist!
Presently, you can find these in the following listed forms:
- A fraudulent firm that makes telephonic sales to sell off brokerage and weak/false investment opportunities. They can often be highly manipulative and usually make calls/SMS for this purpose.
- A brokerage firm that claims to make trades on your behalf while making wishy-washy promises. They make unusual delays until the prices change to benefit themselves and not you.
- A fake firm that claims to be a pro forex broker and creates a dummy marketplace for the traders. These direct you into making trade the way that favors and brings in profit to them only. Meanwhile, they will manipulate the situation to display genuine losses to you.
How can you identify Forex Bucket Shops?
To identify a Bucket Shop out of genuine ones, there are a few things that you can observe:
- Check whether your orders are actually being placed into the forex market or not. You can do this by verifying the actual price charts and check if they are moving parallelly.
- Verify the real market flow and the one being displayed to you. Check if they do not match or if most of the unmatched amount is being sent to the real Forex market or not.
- If they directly benefit from your losses, the investment opportunities laid out can be a fraud. You can notice this if all or most of your returns are non-profitable.
- If the trade requests made by you are not being processed as promised every time. Also, if the withdrawal requests always take more than a working day to process.
- If, after a certain price point, you witness frequent requotes or deal withdrawals.
- If you witness frequent requotes without a valid or specific reason.
These are some of the most noticeable features that you can observe to spot a Forex Bucket Shop.
How to Protect Yourself Against Forex Broker Scams
As profitable as it seems, the retail forex market has its fair share of risks. That is why you should be extra careful and not fall for destructible risks such as forex frauds and scams.
Brokers can be harsh and gutless. But, that doesn’t mean you have to bow down and take their abuse. If you feel hopeless because you think the brokers are advantaged, you’re wrong.
There are many simple and effective ways you can establish control and make the playing field even. Let’s go through some effective tips and tricks to save yourself from frauds and forex scams.
Learn Forex Trading Basics
Before you trust a stranger, also know as your forex broker, with your money, you should know how it’s spent. You should educate yourself on the basics of forex trading and also stay updated with the current news in the market.
This will help you make wise money decisions and also understand what is exactly happening. Just by educating yourself, you can save yourself from petty frauds and have a smooth trading experience.
No matter how hard you try, without proper discipline and knowledge, you will always be blind to scams. Constantly try and improve your trading habits and instill discipline so that you can make the most out of retail forex trading.
Find a Reliable Broker
As we previously mentioned, read reviews and compare fees before settle on a forex broker. Also, check their credibility and price structure for any hidden prices.
Start Recording Your Trading Activity
Just imagine yourself gathering evidence for a possible courtroom scenario. If, in the future, you find yourself scammed, then wouldn’t you wish that you had evidence? Whether it is to back up your claims in court or to make sure your broker isn’t negligent, you should journal every trading move.
You can be vigilant of your broker and his trading activities concerning your account by recording the fills and order requests. This way, you can keep up with his work and also gather evidence if you see some suspicious activity.
Don’t Trust Schemes That Seem Too Good
You’ll come across several online and phone scammers who will promise you 100% guaranteed results. Not only is this impossible, but it’s also unsolicited advice from strangers you don’t know. No matter how lucrative or irresistible the offer might seem, it’s always a scam to extract funds.
You should never invest in anything that you don’t know about. If you are approached by such scammers, ask them for proof. This is where most scammers will step back and fail to show you credibility. That is how you can identify if someone is genuine or just looking to make a quick buck off of you.
How to Open a Forex Trading Account
Opening an account to trade in the forex market is similar to that of opening a regular bank account or any brokerage account. However, before opening an account, you must do some research to ensure a secure and successful trading experience.
Finding the right broker
A broker is required if you wish to trade currencies in the market. Since retail currency trading has become a more regulated activity and decentralized, the reputation of brokers should be thoroughly researched before opening an account.
This can be done by looking into the regulatory agencies and verifying any unfair practice carried out by a broker. The services offered by individual brokers can vary significantly, and therefore, looking into this can help you single out the right broker according to your goals.
Another factor to take into consideration is the fees and commission charged by the broker. It is important to look into this as it could affect the overall profitability of your trades. While some brokers charge a small percentage, others may have additional costs.
Opening a Forex trading account
While this process is not convoluted, traders require some information to get started. The following information has to be included in the application for opening an account:
- Trading intentions
- Trading knowledge
- Trading experience
- Proof of identification
- Minimum deposit
Once this application is filled out, you can go ahead and open a forex trading account.
- The first step is to visit the website of the broker and gauge the type of account available. These can vary from small-scale accounts to accounts embellished with sophisticated features.
- Complete the application form on the website. Once this is done, you will receive a registered username and password that will be used to allow access to your account.
- Using these credentials, log in to the client portal of the brokerage. You will need to transfer some funds from your bank into your account. This can be done through credit or debit cards and an electronic transfer.
- Once your account has sufficient funds, you can start trading. Before making your first trade, consult your broker regarding the trading platform and its features. In some cases, trading simulators are offered to allow traders to do a practice run before investing money into trading.
Following these simple steps will have you on your way to trading on the forex market.
Using margin
After you have opened your forex trading account, you have to decide whether you want to use margin or not. Margin can be referred to as a loan from the brokerage to allow the trader to gain some leverage, multiplying the amount of capital at their disposal to make a trade with.
The amount of margin used by the trader will decide the amount of capital required to be deposited in their account as collateral during their trading activities. This is done to increase potential profits; however, risks can also be multiplied as traders have to cover all the losses incurred, sometimes beyond their investment.
In Summary
Retail forex brokers might just be your saving grace when you don’t have the time and energy to put into trading. However, after knowing everything about them, you are ready to venture out into the market and getting the right broker for you!
Now that you’re well-educated about forex brokers, you are ready to take on the forex trading world! Don’t be too dependent on brokers, have a sense of the market, and contribute to making sound trading decisions!
Learn more about forex trading with a demo trading account at eToro or IC Markets!