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How does a currency broker help?

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This article is published in collaboration with Scutify, where you can find real-time markets and stock commentary from Robert Marcin, Cody Willard and others. Download the Scutify iOS App, the Scutify Android App or visit Scutify.com.

Trading in the foreign exchange market is a big thing. Every day, there are many traders who buy and sell currencies in the forex. But trading here needs a forex broker in order to execute their trades. Hence, there are many forex brokers who earn based on this. While most of the fees and commission are frank, there are still a few which are hidden. Hence, in order to choose a good forex valuta broker, it is essential to know their earning strategy.

Who is a forex broker?

He is the one who initiates your trade on currencies in the forex market. Irrespective of the profit or loss you make, there is a certain amount of fees/commission that he charges. So, what he does is, acts on the orders received by you on your trades, whether it is to buy or sell by operating over the counter on the forex market. AS this market is not subject to same regulations as other markets, the forex broker also may not be subject to the rules from the government. In the forex market, there is no mechanism of centralized clearing and hence you need to be sure of your counter party. Hence, there is a need for a reliable broker.

Apart from this, there are people/brokers globally who are buying and selling currency in forex market. And there are changes in exchange rate due to the massive trade done by the central banks, not for changing the price, but for policies. As brokers are the only way to trade in the forex, they may make changes to bid/ask prices for a pair of currency which are different from many competitive markets and which will impact the market as well. For this reason, it's essential to choose a broker who is not only reliable but trusted as well.

Then there are events where the second broker makes the bid on behalf of the first broker, who is unable to place the bid due to any type of work obligations. In this case, the executing broker will not get anything but the client and the first broker will. As the second broker is giving up the profit, this process is named as "giving up" and is considered as professional courtesy.

Fees/commission:

A broker earns only from your transactions at the forex market. It all depends on the bid price and ask price of the trade. The price you receive for selling your currency is called as bid price and the price you pay to buy a currency is called ask price. The difference in these prices is the earnings that the broker makes. While this is the fees, he can also charge you some commission for making the trade. This where you have to be careful. There are brokers who say that they do not charge any commission and silently take away the increased spread between the bid price and ask price. Hence, the spread can be changing. For the broker, this can either be fixed or can be variable which depends on the market move. For example, when there is an increase in the interest fees, there could be more spread for the broker. Hence, pricing plays a big role. Hence, brokers who work with many exchange markets get good offers or quotes and hence they are costly as well.In case the broker has two parties to transact with, the process of payment is called "each way".Though it is a slang way of speaking, this is a commission that a broker earns from both parties for facilitating the security transaction for them.

Starting to work with the broker:

A broker is actually an intermediate person between you and the various banks. Depending on the list of banks that he is associated with, liquidity and his relationship with the banks, you will be offered. To start working with a forex broker, you need to have a forex trading account. For this, you will need to fill in some forms with some personal identification numbers and it will take a few days to open the account. This is required if you are serious with trading. But if you are new and are looking to just check, they also have demo accounts which will help you practice.

Once an account is set, the broker may offer you leverage which can be in nay ratio. With leverage, it can be good and bad also because as the trade happens, the leverage increases as per the ratio set. This means, if there is a loss, it can be applicable to that too.

This trading account will show 2 balances. One of which will be the actual balance which does not include the open trades and the second one is the net balance, which is the one that reflects your balance as you close all your trades.

At this stage, the broker offers you a spread of the trade. You should check for the percentage of it based on the bid and ask prices. It also depends on the leverage that he offers but does not depend on your account balance.

Choosing a brokerage firm:

With so many brokerage firms in the market, choosing the right one is the key. But here, the spread is not the only point to look for, as many give you a detailed bill of the commission/fees charged for the trade. Here are some other points to look for in the brokerage firm:

1. Check the capitalization of the firm

2. The length that it has been in service. This shows their experience and professionalism too.

3. Number of banks that the firm has relationship with

4. Its transactions on a monthly basis

5. Its spread, rollover, interest rates etc.

6. Check its policies like margin policy, rollover policy etc.

Conclusion:

As a valuta broker trader in forex, you are always the one who pays the spread and the broker is the one who earns it. There should be clarity in what is charged and for that, there is a necessity to choose a reputed and reliable broker. But the best broker is the one who is reputed and give you the liquidity that will help you to complete your trade. But do remember that the brokers have their set of rules and processes that they ought to follow but he should also be one who should think about your profitability too.


This article was written by Adam Monson for on .

This article published in collaboration with Scutify, the best app for traders and investors. Download the Scutify iOS App, the Scutify Android App or visit Scutify.com.

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