The forex market is a decentralized market and involves all aspects related to trading and exchanging currencies at current/determined prices. It is the world’s largest financial market in terms of trading volume. According to the Bank for International Settlements, the average daily turnover in the global forex markets is approximately $5.09 trillion as of April 2016. The relative values of various currencies are not determined by the forex market, but it contributes to setting the current market prices of currencies against one another.
The foreign exchange is operated through financial institutions at several levels. The banks that operate behind the scenes turn to a few financial firms referred to as “dealers”, who actively trade currencies in large quantities. Though some insurance companies and other financial institutions are involved, most forex dealers are banks. Therefore, the behind-the-scenes market is referred to as the “interbank market”. Dealers involve in very large trades, running into millions of dollars. There is no supervisory entity to regulate the actions in the forex market because of the sovereignty issue involved when dealing with two currencies.
The history of modern forex trading can be traced back to 1973, but online forex trading happened for the first time in 1994. This combined with the technological developments, especially in the field of communication, enabled the participation of retail traders in the forex trading. With the widespread growth of the World Wide Web or the Internet, retail forex trading segment also witnessed a great deal of expansion. Online forex brokers that offered platforms for trading currencies came into existence. Today, there are hundreds of online forex brokers and with an investment of $50 to $100 anyone can start trading currencies.
Individual speculative retail traders constitute one of the growing segments of the forex market, in terms of both size and importance. Their participation is indirect as they access the market through forex brokers. Retail forex brokers are controlled as well as regulated in the US by the National Futures Association and Commodity Futures Trading Commission. Regulatory bodies around the world have also stated regulation the forex brokers with a view to minimize fraud and create a safe environment for retail traders. However, regulation is very stringent in some countries and less stringent in some other countries. Regulated forex brokers have to meet minimum net capital requirements, maintain segregated accounts for companies’ funds and that of traders and comply with other requirements as specified by concerned regulatory authorities.
The forex market is unique in many ways. They are as follows:
The trading volume is huge and the forex market represents the largest asset class in the world. This makes the currency market the most liquid financial market.
The currency market does not have a central marketplace for foreign exchange.
It operates for 24 hours in a day, except weekends. The currency market is open from 22:00 GMT Sunday (Sydney) to 22:00 GMT Friday (New York).
A variety of factors affect the exchange rates.
The margins of relative profit are low when compared with other fixed income markets.
The availability of leverage helps to enhance profit. If not used with discretion, leverage has the potential to enlarge losses.
As such, the forex market is referred to as the market that is closest to the ideal of perfect competition, of course notwithstanding the intervention by central banks.
Types of Forex Brokers
Mainly, there are two types of retail forex brokers that offer opportunities to speculative currency trader. They are No Dealing Desk (NDD) Brokers and Dealing Desk (DD) Brokers/Market Makers. In the broader forex market, NDD brokers serve as agents of the customers and seek the best price available in the market for each retail order. They deal on behalf of their retail customers. They earn by charging a commission or a mark-up on the price they obtain from the market. On the other hand, DD brokers/market makers act as principals in their transactions with their retail customers and quote a price that they choose.
No Dealing Desk Forex Brokers
These brokers never take the other side of the trades placed by their clients as they are only connecting two parties together. NDD brokers can be subdivided into Straight Through Processing (STP) and Electronic Communication Network (ECN) brokers.
STP Forex Brokers
STP brokers route their clients’ orders directly to the liquidity providers who work with them and have access to the interbank market. Typically, these brokers work with many liquidity providers. Each provider quotes their own bid and ask rates. STP brokers add a small, but fixed, mark up and pass on your order to a suitable liquidity provider. Most STP brokers offer variable spreads.
ECN Forex Brokers
ECN brokers enable clients’ orders to interact with those of other participants (banks, hedge funds, retail traders, and even brokers) in the network. This is to say that the participants trade against each other by accessing the best bid and ask prices. This type of brokers often charge a small commission on each trade.
Dealing Desk Forex Brokers
This type of forex brokers make money by providing liquidity to their clients and through spreads. Market makers often take the other side of their clients’ trades. Clients of DD forex brokers do not have access to the real interbank market rates. However, because of stiff competition among brokers the rates offered by these brokers are often very close to the interbank rates.
Now that you have some idea of the forex market, how it works and the different types of forex brokers, let us see how to choose a trusted forex broker.
Choosing a Trusted Forex Broker – Some Tips
If you are new in the field of forex trading or want to start currency trading, the first thing to be necessarily done is to identify a trusted forex broker to work with. It has been observed that beginner forex traders do not pay sufficient attention to this aspect only to find out later that this can lead to serious outcomes that affect the profitability of the trades. Other aspects that need to be evaluated by the forex trader include the trading platform offered by the forex brokers and the minimum deposit that is required to start trading. This article aims to provide a few tips on how to choose trusted forex brokers to pair with and achieve the financial goals that you have set for yourself.
The basic two methods that can be used to pick a forex broker are the Simplified method and the professional method. They are briefly described below.
The trader chooses a broker with the best star rating based on the reviews. However, it is to be noted that in this case there are no guarantees about the quality of the broker whatsoever. Though a high star rating seems to point to the most trusted forex broker that the trader can work with, there is no guarantee that the feedback is genuine. This method is therefore not recommended.
This involves a complete research on various aspects before choosing a trusted forex broker. Given below is a step-by-step method that a trader can use to choose a forex broker to work with.
Step #1: The trader should have clarity regarding the goals to be achieved through forex trading
The choice becomes easier when the trader writes down the basic features that the forex broker needs to have. The trader can write these down easily by answering the following questions.
What currency pair would you want to trade in?
Can you pay a commission when engaged in forex trading?
Are you comfortable with fixed or variable spreads, and if so, how many pips?
What is the capital investment that you have allocated for forex trading? (Answering this will help the trader choose the type of account)
What is the platform that you would like to use for trading?
What is the leverage ratio that you are comfortable with?
What indicators and tools are required that will help you to trade forex?
Do you use the scalping technique?
Are you looking at hedging?
Do you want the one-click execution feature to be made available?
Will you trade while on the move or are you looking for trading alerts?
Would you need a trailing stop?
Do you want to use a Dealing Desk or an ECN/STP broker?
How do you want to transfer funds to your trading account (choice from among wire transfer, PayPal, credit card, etc., can help the trader to choose the broker)?
What is the fee you are ready to pay for the transfer of funds and withdrawal of your money from the account?
The above are only suggestions and not an exhaustive list. You can add to the list of questions provided to conduct your own research.
Step #2: Study the Forex Brokers’ Websites
After the trader has answered the questions and obtained clarity on the requirements, it is a good idea to visit and study the websites of the shortlisted brokers that satisfy the requirements. It is important to read through their policies and rules and try to get a feel of their method of doing the business. Checking the regulatory status of the broker, finding out whether the requisite licenses are in place, ascertaining the genuineness of their addresses and phone numbers and other contact details, etc., are important jobs that the trader has to do to be able to decide as to which broker to choose. Absence of a physical contact address on the website should tell the trader that the forex broker is not the right one to work with. The presence of a live chat facility and/or telephone numbers does not matter at all. Trusted forex brokers always have their physical addresses listed out.
Website appearances do make a statement about the owners and their businesses. Trusted forex brokers are likely to have websites that are professional and filled with relevant information. It will also be noticed that they are almost always fully functional.
Another important aspect that needs to be checked is the broker’s regulatory status. It is always advantageous for a newbie broker to open an account with a regulated broker. These brokers will be compliant with major financial and regulatory requirements and therefore maintain higher levels of integrity and reliability as far as the traders and their finances are concerned. Some of the different regulatory authorities around the world are: United Kingdom: FCA, UK; United States: NFA, CFTC; Japan: FFAJ, FSA Japan; Canada: BCSC, OSC, CIPF; Switzerland: SFDF, FINMA, ARIF; Sweden: Swedish FSA; Australia: ASIC; Hong Kong: SFC; Denmark: Danish FSA; Dubai: DMCC, DFSA, DGCX, ESCA; Spain: CNMV.
Other countries of the world have their own regulatory bodies to supervise the activities of forex brokers’ in their respective countries.
Step #3: Go through reviews of selected trusted forex brokers
Though reviews may point the direction that needs to be followed by the trader, it may also leave them confused. It is easier to choose a broker if they follow the belowsaid rules while checking out on the reviews.
#1: In case the broker has been in operation for more than a decade, it is almost sure that the company has an idea of the business and they are likely to stay.
#2: That the broker is regulation-compliant is an indication that they are serious about the business and care for their clients’ money.
#3: If the broker offers many products for trading, such as stocks, futures, commodities, options, CFDs, etc., it is a pointer to the fact that the broker has a large business base and is catering to a number of clients.
#4: If any reviews talk about a large number of withdrawal denials or profit cancellations for the clients, the trader should investigate more into the matter. Trusted forex brokers will not give a chance for any such reviews.
#5: It is a good idea to read reviews written by other professionals.
Step #4: Additional Tips to choose Trusted Forex Brokers
Important factors that should be considered when selecting trusted forex brokers by the trader include transparency, reputation, ease of withdrawal and deposition of funds, and customer service that is offered.
Finally, as the most important one, the trader should sign up with a broker only after due clarifications of all doubts from the customer service personnel. It may happen that their websites are not updated with the latest changes.