Foreign exchange, also known simply as Forex or Fx, is a financial market in which currencies are traded. There is no central marketplace for the foreign exchange market; instead, transactions are generally carried out through brokers. Since the market became available to retail traders in the first few years of the 21st century, there has been a rise in the number of brokers to choose from. Traders must dedicate plenty of time to research their options to identify the broker that matches their needs.
Reasons why brokers are important
A foreign exchange broker serves as a bridge between two parties: the buyer and the seller. Although it is possible to directly trade currencies through banking institutions, brokers supply other services like charting software, analysis tools, and considerable amount of leverage. All of such can be advantageous to traders.
Trades can be done generally through two kinds of brokers, and these are: market makers and electronic communications networks, or True ECNs. Market makers establish both the bid and ask prices based on their own interests, and act as counterparties to each Forex transaction. What this means is, whenever you sell, they must buy from you, and vice versa. ECNs on the flip side do not create prices, but just bridge market participants to one another. They consolidate prices from several market participants, such as banks, market makers, along with other traders in their network, and show the best bid/ask quotes on their proprietary trading program. Whether you work with authentic ECN brokers or market makers, listed here are several things to keep in mind to help you choose the right broker for you.
Tips on choosing a broker
Regulation - Confirm if the brokerage you’re interested in is regulated by a major overseeing body. If the firm is regulated, then you can rest assured that it is honest and transparent. In the US, brokers should seek registration with the US Commodity Futures Trading Commission and be a member of good standing with the National Futures Association. Each country outside the USA has its own regulatory body. A forex broker that is headquartered in a jurisdiction that is lacking in or has minor Regulation may be a riskier location to open a trading account than one that is operating in a location with strong regulatory compliance and enforcement.
Year established - Look for a broker which has been in the business for a decade or more. Longevity signifies that the company understands what it is doing and how to look after their clients.
Reviews - Prior to transacting with a broker, make sure to research what others say about them. Look into reviews about a broker’s convenience and cost of transactions, customer support, and reliability.