Forex Brokers and Spreads

Forex trades are constantly growing in popularity. New Forex broker companies are opening up at a very high rate. Many people who are accustomed to working in 9-5 jobs are leaving their jobs and starting to trade with hard currency. There are many explanations for the growth of the forex currency market, some of the most obvious is its size, its simplicity, and its potential benefits.

When one thinks about foreign exchange transactions compared to other world markets, such as the stock market, some very basic differences should come to mind. These include greater liquidity, more volatility, greater multiplier effect, as well as lower trading fees and lower costs. We have already talked about the liquidity, volatility and leverage offered in the forex, so now we are going to learn a little more about trading costs and commissions, compared to other global markets.

Take the stock market, for example. When one trades with stocks, which by the way is a very common phenomenon for currency traders to test stocks before currencies (a lot of people fail to trade stocks and then go back to the forex market, and with reason), the way the transactions are carried out is for the investor to make purchases and sales by paying commissions on both sides of the transaction. What does that mean? When you trade in shares, you usually do it in collaboration with a broker, who charges you a fixed amount per transaction, a dollar amount per share, or a scale commission based on the size of your transaction. This commission applies when you buy a stock, as well as when you sell it.

Now let's talk about Forex trading. The vast majority of online Forex brokers advertise in very large letters on their website that do not charge any commission for trades. With the exception of a few brokers, the currency market allows traders to open and close positions with no commission whatsoever.

Therefore, it does not cost anything to trade in Forex. This, of course, raises the obvious question: How do Forex brokers make money?

This is where it gets complicated. It is true that many brokers do not charge direct commissions for trading in the Forex market, but brokers dedicated to currency trading do not perform trades that tell traders the goodness of their hearts. You can be sure that they are profiting from your services and these are usually quite high. They charge what are known as spreads.

Before understanding what the spreads are and how they are calculated, it is important to understand a fundamental principle on how the Forex trading system works. Everything is based on supply and demand, just like any other market. If there is a greater demand for dollars, the value of the dollar rises against other currencies. This is precisely how spreads are defined and calculated.

The spread is the difference between the price at which a broker is going to buy the currency for you and the price at which it is sold. So, for example, if you open a position where the base currency is the dollar, and since there is no shortage of dollar demand, the spread of this operation will almost always be smaller than a spread for a less common currency . Why? This is again, by supply and demand. The agent will have no problem at all in selling the dollars you just bought, so you do not need to charge the operator, bone you, a higher spread. Now that, if the base currency of the position is the Vietnamese Dong, it is understood that it is very likely that the spread will be higher.

Another feature that Forex brokers take into account when calculating spreads is the type of account in which you are trading. Mini accounts are typically associated with higher spreads. This is, of course, because the agent has to compensate for the relatively low amount of capital being traded at a higher spread, so that he can make a profit.

Now that we have established how attractive Forex trading is, it is not totally free. Next we will establish the difference between the forex spreads and the commissions of the stock market. The main difference is that in the Forex, it is usually only charged the spread of a single side of the transaction, the buying side or the selling side. When you buy or sell the currency, it is when the brokers in general, get their benefits by charging the spread.

It is extremely important that Forex traders understand the importance of the spread when it comes to choosing a forex broker. The difference that a pip can make on the spread of a broker can be the difference between a successful Forex trader and one that fails completely in the currency trading market.

To summarize, let's look at a concrete example of a spread to understand exactly how it works. Let's say we have a USD / CAD purchase price of 120.00 (which is the price at which the agent is willing to buy the USD) and a sale price of 120.05 (the price at which the agent is willing to sell the USD ). In this case, the spread is equal to 0.05, or 0.0005 dollars, and the money goes directly into the pockets of the broker.

There is a lot more to say about spreads in the Forex market, such as if a broker offers fixed or variable spreads, but at least now you have a better understanding about what they are.

CHARACTERISTICS OF AN EXCELLENT BROKER

When choosing a Forex broker it is very common to research all the features that are available as they should directly affect your buying decision. While this makes sense as a consumer, some of the features may not be necessary, and frankly even be overbearing.

One of the biggest overrated features that is commonly found is something called Auto chartist. This piece of software, randomly, chooses the technical patterns in the table, putting them to your attention. In theory, it's a great idea. But the reality is that by using this software, you are doing nothing to advance your knowledge as a marketer. There is no reason to trade in the forex market if you are not willing to learn it.

Another big problem with this software is that often technical guidelines are given that are suspicious by nature. For example, a pennant pattern on the five-minute chart is nothing to worry about. While the pennant pattern is displayed on the weekly chart as well, the truth is that it shows too many poor quality patterns since the software seems to lack filters to keep away some of the technical adjustments that are not so relevant.

Other factors to consider

Forums are a complete waste of time when it comes to your Forex broker. Most of the forum discussions that can be seen in these topics tend to be non-real. In other words, it's just a lot of people lighting each other on the Internet. At best, you will have plenty of ignorant people trying to convince you that your trading setup is correct, even though you have no idea what they are doing. In the worst case, it becomes a primary school including insults and nicknames.

The analysis may be exaggerated at times. It all boils down to the particular analyst that the company hires. Most of the known analysts are working for the larger brokerage firms. Quite often this is highly respected analyst, but the smaller broker may hire someone who does not necessarily know what they are doing. One of the biggest signs for a suspicious analyst is if they focus primarily on short periods of time. If the analyst tends to display a large number of graphs of five, 15, and one hour, it is very likely that your goal is to generate more trading and thus split your money faster.

One of the most common time wasters you will encounter with Forex brokers is the Dow Jones news source on their MetaTrader4 platform. Although the content of the news is certainly acceptable and professional, at the moment of receiving the news of the platform, the markets are already affected and therefore become useless. It is almost impossible to compete with brokers who use Bloomberg terminals and T-1 connections for their news services.

While not all of these services are dangerous, they may necessarily be a reason to open an account with a specific Forex broker. You will find that most forex brokers are essentially the same, and offer very identical packages. To be honest, the industry is simply not as innovative. By focusing on what is truly important to you in particular, you will find that you will not be absorbed by a Forex broker based on "empty calories."

The Uncertain Future of US Brokers

The United States of America has long been known as the "land of the free and the home of the brave", but when it comes to the Forex market, this term takes on a completely unique meaning. Increasingly restrictive NFA policies designed to protect US investors have been chasing and, in some cases, punishing US currency brokers. The rates imposed to maintain a brokerage firm are prohibitive for most, and trading conditions are limited compared to those in other regions of the world where regulation is less stringent.

In August 2012, FX Club (also known as Forex Club), formerly one of the best brokers in the United States, abandoned its RFED license, the regulation required to accept retail customers. Since then, the company has been accepting only institutional customers, and will likely continue to do so, at least for the foreseeable future. As part of this change, FX Club became another currency broker, replacing its CEO (after OANDA and GFT, among others), with Michael Klena, of E * Trade, who came to lead the change of the company.

Although the FX Club abandoned its RFED license, the NFA continued to investigate the broker, charging the company for $ 300,000 administrative violations, which the broker solved the day the claims were made.
Just two months after the FX Club closed its doors to US retailers, Advanced Markets made the same strategic decision, opting to give up its RFED license and operate only with institutional traders. This decision is much less surprising, since Admiral Markets (aka AMIFX) has always held that only a handful of retailers are admitted who presumably can transfer their accounts quickly with the broker's help if necessary.

What comes next in the forex retail market in the United States is uncertain, but if the NFA fines and increased regulations on brokers are a clue, it would not be surprising if other US brokers throw in the towel . Although I do not think that industry giants like FXCM or Forex.com will disappear in the short term, smaller entities may find themselves fighting an uphill battle. Some may not be interested in fighting much longer.

Is a Good Idea to Change Forex Broker?

One important reason you may have to switch Forex broker is certainly fear for the security of your deposits. If you ever ask your broker to withdraw some funds from your account, and it becomes excessively slow or unresponsive, then this is an excellent reason to switch brokers immediately. Of course, if you hear some reliable information about your broker's financial situation or ethics, it will also be good to consider a change. It is advisable to check from time to time the professionalism of your broker, even if you have obtained some good results, requesting the withdrawal of some of your recent earnings. If there is an unwarranted delay, it is advisable to close the account immediately and, if necessary, threaten to contact the corresponding regulator.

Moving from critical reasons to more common reasons, one of the factors that urged more than one customer to change brokers is the average level of spreads that are charged. For example, there are still brokers charging a spread of 3 pips in the EUR / USD pair. While this was the norm a few years ago, today it is considered extremely expensive. Switching to a broker that offers the EUR / USD at 1.5 pips or less makes sense, since the spread becomes the "cost of doing business", and over time can generate a loss in operator income, especially if you trade frequently using short time frames.

Another good reason to switch brokers can be an unstable platform. If you find that the trading platform is disconnected very frequently or that it takes a long time to execute an operation, then this is a convincing proof of incompetence or dishonesty. Dishonesty is more likely if these disconnections or freezes happen every time you are trying to enter a trade where you would have made profits quickly. Of course, it is important not to be paranoid and not to blame your broker for all your losses. However, as the Forex market does not have a centralized place, brokers have a commercial incentive to "shadow" their spread just above levels where many of their customers have stop-losses set in open trades. determining whether your broker is acting shady is to see if these price movements do not match the price feedback of other brokers.

Watch two or three. If your broker tends to produce sudden and unexplained spikes in price, which are not followed by other brokers, it is time to think about moving away from it.
A good way to get a better understanding of whether a particular agent is the best for you is to think about what the brokers are actually doing, and see things from their point of view. In order to do this, it is helpful to start with some facts about Forex trading:

1. Most currency brokers are not really trading any currency in the market. They are simply providing a price indicator, in the movements of which their customers can bet in exchange for two effective quotas: the spread or commission, and a small charge during the night that incurs each night any position that is left open. These brokers are in antagonistic relationships with their customers: they make money when their customers lose and lose money when their customers win.

2. The remaining currency brokers tend to monitor the trades of customers who have profitable trading data, and cover the aggregate positions of these traders with a bank. These brokers have a less contradictory relationship with their customers, but they may still face problems in the proper way of covering themselves in rapidly evolving markets.

3. The real Forex market is dominated by four large banks which together account for about 85% of the market volume. These banks provide liquidity to the smaller banks, which in turn do the same with smaller banks, who then provide liquidity to the brokers, and so on in the chain in size and importance. This tends to mean that the smaller the broker, the worse the price and the spread that is willing to give, since they themselves will not be able to get premium prices. The dilemma here is that these smaller brokers tend to offer lower minimum deposits. The more money you have to deposit, the better the service that will be available to you. Of course, this does not mean that you have to go higher up the chain than the one that is appropriate for your account size. In general terms, it is a good idea to adapt the Forex broker to the size of your account.

4. Much of the Forex market has a bad reputation and is poorly regulated. When these facts are combined with the natural tendency of the human being to be tarnished by greed, it creates a profitable vacuum for unscrupulous brokerage houses that have no reputation to protect. This is not to say that small Forex brokers are fraudulent, but do not assume that your deposit is secure just because you opened an account with a broker. However, if that broker has a public reputation and is subject to regulations, you will surely be able to sleep peacefully.

There are other good specific reasons that may play a role in determining the choice a broker are as the availability of a specific pair that you want for trade, platform, quality of customer service and other "concrete" things. Now that we have covered all of the critical aspects to consider when choosing a broker, it is time to shift your focus on how you can conquer the forex markets - with hard work and patience, of course!

Tips for Choosing a Good Forex Broker

In the 70's the Forex market was created, and in the last 10 years it has experienced strong growth thanks to the internet and new technologies. There are studies that indicate that there are daily transactions in the Forex market worth 4 trillion dollars (the New York Stock Exchange moves 50 times less daily).

In addition, individual investors and traders have grown very fast, thus becoming one more participant, although very small in comparison with the Central Banks, commercial and investment. With this great growth in the Forex market have emerged new investment brokers with the aim of attracting retail investors. There is so much broker offer that it is difficult to choose a good broker.

A broker is the financial intermediary in our operations, that is, it is the intermediary between buyers and sellers. 10 tips that you would have to consider to choose a good broker in the Forex market are:

1. Avoid welcome gifts

Avoid all those brokers who offer welcome gifts type 30% welcome bonus. In most cases if you stop to read the fine print of the conditions, you realize that in order to withdraw the bonds or the money itself, you are more likely to end up losing all the money deposited. One fact to keep in mind is that if you want to withdraw your money and do not meet the conditions (almost always), you will be deducted from your account the bonus received or the amount of the gift made.

      2. A solid and respectable broker

Choose a broker with a lot of equity, because the greater the capital of the firm, the greater the protection of its funds. To determine the vitality of a broker, you should look at the number of employees you own. If you are a solid and respectable organization, you will have hundreds of employees, who will be able to assist you 24 hours a day. It is also likely to have hundreds of thousands of accounts. If the firm has few employees it is likely that they have a small capital or they are unable to provide the personal assistance you need.

       3. Regulated Broker

It should be noted that the broker is regulated by a competent entity such as NFA (United States), FSA (United Kingdom), FINMA (Switzerland), among others. We must avoid all those brokers who are in tax havens. Brokers in Europe, Canada, Hong Kong and Australia have adequate regulations, and capital requirements are high. If your company is in a third world country, the current regulations may not be adequate.

        4. Greater Leverage

Leverage can help you reap considerable profits but can also cause huge losses. It is advisable for a broker to provide the leverage so that it can operate effectively in the forex market. Of course, greater leverage means better opportunities for you. Some brokers offer a leverage of 100: 1, which means that for every dollar in your account, you can borrow and use up to € 100. Other brokers offer up to 250: 1. When choosing a broker, you have to take into account the leverage offered, as this could be your ally to win big.

        5. Account Types

It is advisable for the broker to offer different types of forex accounts. For example:

•   "Mini" accounts require a minimum margin or equity that could be $ 250 onwards. With this type of account, you can trade in forex but the level of leverage is lower.
• "Standard" accounts, which require a minimum of $ 2000. This type of Forex account allows you to open larger positions.
•   The "Premium" account allows the opening of even greater positions.

       6.  Real-time information and good graphical tools

Facilitate daily decision making, helping to choose a more optimal investment.

       7.  Have a free demo account

It is advisable that the Broker has a free demo that operates in real time because it allows you to practice and learn from real or fictitious money the features and services of the broker you want to contract before opening a real account.

      8.  Avoid so-called brokers Snipers or Hunters

These brokers often buy or sell based on preset points, usually perform these maneuvers to increase their profits. Avoid this type of corridors. To know who these brokers are, you must communicate and interact with other operators online or through forums.

      9.  Automatic execution


One of the most important variables to keep in mind when choosing a broker is the speed of executions. The best thing is that the execution is automatic, so when we want to enter or leave the market at a certain price, the Broker usually respects it.

      10. Do not pay spot fees


Forex traders do not pay commissions for placing orders, unlike those that operate in futures markets. Actually, a Forex broker is a simple broker, not a broker or broker itself. Therefore, they obtain benefits through the Spread, this is the difference between the value of the "bid" and the "ask".

      11.  Remember the differences between hiring a market maker and an ECN (Electronic Communication Network)

You have to take into account the differences between an ECN and a market maker to know which type of broker can best meet your investment needs.

It should be remembered that: price volatility in an ECN is often higher than in a market maker's network, ECNs often do not allow leverage, unlike market makers. In addition ECNs usually give the prices that their liquidity providers mark, with the same exact margins, and then charge a commission for each round round transaction. However, market makers can open an account with fewer resources and their platforms are easier to use.

Do not forget that the market maker or market maker covers the position with other operations or does not cover it, so it assumes the risk contrary to yours. That is, if you win the market maker loses, which creates a conflict of interest.

        12.  Good customer service

The customer service is very important because they will help you to resolve any possible incidents that you may have. It is advisable to look for a broker to solve them as quickly as possible, not to hinder the withdrawal of funds, which does not have many complaints from other investors. To know the opinion that other investors have about the brokers in the market you can consult and participate in forums.

Is a Good Idea to Change Forex Broker?

One important reason you may have to switch Forex broker is certainly fear for the security of your deposits. If you ever ask your broker to withdraw some funds from your account, and it becomes excessively slow or unresponsive, then this is an excellent reason to switch brokers immediately. Of course, if you hear some reliable information about your broker's financial situation or ethics, it will also be good to consider a change. It is advisable to check from time to time the professionalism of your broker, even if you have obtained some good results, requesting the withdrawal of some of your recent earnings. If there is an unwarranted delay, it is advisable to close the account immediately and, if necessary, threaten to contact the corresponding regulator.

Moving from critical reasons to more common reasons, one of the factors that urged more than one customer to change brokers is the average level of spreads that are charged. For example, there are still brokers charging a spread of 3 pips in the EUR / USD pair. While this was the norm a few years ago, today it is considered extremely expensive. Switching to a broker that offers the EUR / USD at 1.5 pips or less makes sense, since the spread becomes the "cost of doing business", and over time can generate a loss in operator income, especially if you trade frequently using short time frames.

Another good reason to switch brokers can be an unstable platform. If you find that the trading platform is disconnected very frequently or that it takes a lot of time to execute an operation, then this is a convincing proof of incompetence or dishonesty. Dishonesty is more likely if these disconnections or freezes happen every time you are trying to enter a trade where you would have made profits quickly. Of course, it is important not to be paranoid and not to blame your broker for all your losses. However, as the Forex market does not have a centralized place, brokers have a commercial incentive to "shadow" their spread just above levels where many of their customers have stop-losses set in open trades. determining whether your broker is acting shady is to see if these price movements do not match the price feedback of other brokers.

Watch two or three. If your broker tends to produce sudden and unexplained spikes in price, which are not followed by other brokers, it is time to think about moving away from it.

A good way to get a better understanding of whether a particular agent is the best for you is to think about what the brokers are actually doing, and see things from their point of view. In order to do this, it is helpful to start with some facts about Forex trading:

1. Most currency brokers are not really trading any currency in the market. They are simply providing a price indicator, in the movements of which their customers can bet in exchange for two effective quotas: the spread or commission, and a small charge during the night that incurs each night any position that is left open. These brokers are in antagonistic relationships with their customers: they make money when their customers lose and lose money when their customers win.

2. The remaining currency brokers tend to monitor the trades of customers who have profitable trading data, and cover the aggregate positions of these traders with a bank. These brokers have a less contradictory relationship with their customers, but they may still face problems in the proper way of covering themselves in rapidly evolving markets.

3. The real Forex market is dominated by four large banks which together account for about 85% of the market volume. These banks provide liquidity to the smaller banks, which in turn do the same with smaller banks, who then provide liquidity to the brokers, and so on in the chain in size and importance. This tends to mean that the smaller the broker, the worse the price and the spread they are willing to give, as they themselves will not be able to get premium prices. The dilemma here is that these smaller brokers tend to offer lower minimum deposits. The more money you have to deposit, the better the service that will be available to you. Of course, this does not mean that you have to go higher up the chain than the one that is appropriate for your account size. In general terms, it is a good idea to adapt the Forex broker to the size of your account.

4. Much of the Forex market has a bad reputation and is poorly regulated. When you are