Exactly What Part Does A Forex Broker Play In Foreign Exchange Trading?

By Author: Donald Saunders
Total Articles: 84
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Most Forex traders will use the services of a broker to handle their transactions and so it is very important to understand exactly what a Forex broker does and what he can do for you.

In general a broker is an individual who both buys and sells on your behalf against decisions which you, the Forex trader, make and that you give to the broker as orders for him to trade. Your broker will then earn money in a variety of different ways by laying down a range of fees for his services.

When in comes to Forex trading, a broker must be associated with a sizeable financial institution, like a bank or insurance company, in order to provide the funds needed for margin trading. The broker also must be registered and, in the United States, this means registering with the Commodity Futures Trading Commission (CFTC) as a Futures Commission Merchant (FCM) to protect himself against both fraud and abusive trade practices. Prior to starting your trading you will need to set up an account with a broker and could find the number of brokers who offer their services online is a little overwhelming. Picking a foreign currency broker ...
... will require some research work on your part, but, the time that is spent carrying out this research will provide you with an insight into the services which are available and fees which are being charged by a variety of brokers.

As is the case with most businesses there is no better form of advertising than word-of-mouth advertising and so it is often a good plan to talk with colleagues and friends to see who they are using and whether they have any difficulties in using a particular broker.

If this is not an option, you could try selecting a few online brokers and getting in touch with their help desks to see how fast they answer your enquiry and whether or not you get a satisfactory answer to your questions. Remember, however, that any pre-sales service is often superior to post-sales service.

An extremely important factor is to find a broker who executes orders both quickly and with the minimum of slippage. All online brokers ought to provide automatic execution of orders and should have a clearly statedclear policy on slippage. Your broker should be able to tell you precisely how much slippage you can expect to encounter in both fast-moving markets and normal trading.

Next, you will have to know what fees a broker will charge and, most importantly, what spread he works on? In addition, is this spread fixed or variable depending upon the form of account? Are all accounts subject to a single spread or are there, for example, greater spreads on mini Forex accounts?

You need to be a little here. In general, tight spreads mean more profit for the trader, but there can frequently be a trade-off between the tighter spread and the service that you get. Study the whole picture before deciding to use a particular broker.

Margin accounts are the basis of Forex trading and so you have to be happy that you understand a broker's margin account terms before you set-up an account. You must know what the requirements of margin trading are and how the margin is determined. Does the margin change, for example, with the currency traded and is it the same on every day of the week? Is there a difference in the margin for mini and standard accounts?

The software used for trading is also extremely important for the online Forex trader. Take the opportunity to get a feel for the software which is available by testing out demonstration accounts with various online brokers. You are looking for both reliability and the ability to perform well in fast-moving markets and any software should offer automatic trading and ideally include special features like trailing stops and trading from the chart. Some features may only be provided at additional cost, so make sure that you understand precisely what your trading needs are and how much the broker will charge you to meet them.

There are of course other things which you will want to know like the broker's policy regarding minimum account balances, interest payments on account balances, which currencies can be traded and whether or not non-standard sized lots can be traded. You also want to find out whether or not clients' funds are insured and the extent of any insurance coverage.