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.

How to choose a broker to invest in the forex market?

The Broker or Broker is the financial institution in which we are going to deposit our funds to open an account and invest in Forex.


You have to take into account a number of factors to make the right decision since there are many brokers in the market and each offers a range of variables that must be taken into account.


Below we will describe the main variables that should be taken into account when choosing a broker to invest in the currency market.


1. The capital of the Broker: It is important to know the capital of the Broker because at the time we make a profit we have to be sure that the Broker has enough funds to pay us. In general Brokers do not disclose this type of information, but you can find out the payroll of employees who work for the broker, how big the organization is, how many clients operate with it, and several more factors may come to our notice.

2. Market and products offered: We have to know in which markets we plan to operate, and in what products we want to invest. There are brokers that offer foreign exchange, commodities, futures, among other financial instruments.


3. Commissions: There are brokers that do not charge commissions and that their profit comes only from the spread or exchange differential (difference between the purchase and sale price of an asset).
If we choose a Broker that if it charges commissions, we have to take into account what those commissions are; can be commissions for the purchase and sale, commissions for withdrawals of funds, commissions for maintenance of accounts.


4. Spread: The spread as we said before, is the difference between the purchase and sale price. Investors always prefer a small spread to pay less to the Broker. Spreads can be fixed or variable. If the spreads are fixed, this means that in times of greater volatility they will always remain fixed. If the spreads are variable, then in times of less volatility the spread is lower but in times of greater volatility, the spread will be greater.


5. Services: Brokers usually provide a number of services that can be of great help to traders. Technical analysis, fundamentals, recommendations, news and graphics are usually the key. Beginning investors have to take this service very seriously as the customer managers in Spanish can assist in all these issues.


6. Customer Service: We have to verify if the Broker we choose there are people who speak Spanish and can help us with any inconvenience or doubt. There are Brokers that also enable communication through chats, telephone assistance, email, and all this during the 24 hours. Besides of course those who assist us must have knowledge in financial markets.


7. Execution: One of the most important variables to take into account when choosing a Broker is the speed of executions. The best thing is that the execution is automatic, then when we want to enter or leave the market at a certain price, generally the Broker respects.


8. Stop Loss and Limits: It is necessary to find out if the broker respects the Stop Loss and limits that we place in our platforms. It is important as these are the limits of profit and loss that we allow ourselves.


9. News: Not all brokers allow their traders to trade in news feeds as the market is very volatile. For operators that operate with news, this is one of the most important points to ask.


10. Regulation: There are official entities both nationally and internationally that regulate the operation of brokers. Broker regulation is not a 100% guarantee, but it can help. The most important regulatory agencies are the NFA (United States), CFTC (United States), FSA (United Kingdom) and the CNMV (Spain).


11. Fund Withdrawals: Each Broker has different times to respond to our requests. The security of our funds is a must, therefore receiving the requested funds on time is essential. It is also good to corroborate that the bank with which the Broker works is known and respectable.


12. Trading Platform: There are different forex platforms in the market, it is important to first try out the free demo, see which tools the platform has, and if it is complete. In addition, platforms can be download, no download, for mobile phone, and more.


13. Investment: We must find out what the minimum deposit required by the Broker is if we are interested in investing small amounts.


14. Broker Type: There are different types of brokers like Market Makers, NDD, Dealing Desk or ECN. The differences between them are as follows:
- Market Makers: they are market makers.
- NDD: "No Dealing Desk". No intermediary operating room. The operations are executed automatically.
- Dealing Desk: They have an operating room that intervenes in the operations that the Investors do.
- ECN: "Electronic Communications Network". They operate directly connected to the market where market makers, banks and traders are operating offering the best bid / offer prices.

In short, it is important to choose a broker who is serious and professional and suits our needs.

How Forex Works?

In Forex (FX), as in other markets, trading is speculation. Traders buy (go long) or sell currencies (go short) in anticipation of market behavior either bullish or bearish.

Currency is always quoted in pairs (eg EUR / USD, GBP / EUR, etc.) Each time a trader trades with a pair (say EUR / USD), it means that the base currency is bought (on the left ) and selling the quoted currency (on the right side) simultaneously.

For example, the EUR / USD has a price of 1.2915, which means that 1 € = 1.2915 $. If the investor believes that the price of the base currency (in this case EUR) will increase (to be revalued or appreciated) against the USD, then it will buy EUR / USD. If, on the other hand, you think that the EUR will lose value against the dollar (depreciate), it will sell the EUR / USD pair.

Forex Market: What is Forex?

Forex is the acronym for "Foreign Exchange" (FX) and refers neither more nor less than to the global currency trading in all markets. It is the largest financial market in the world and, because it is not centralized (that is, there is no central stock market such as, for example, stocks), it allows trading currencies through a global network of banks, brokers , financial institutions, companies and investors during the 24 hours of the day.

The Forex market, Forex or simply FX was born in the decade of the 70s in order to improve monetary flows derived from international trade, namely: facilitate the sale of national and international currencies at real prices. Currently, the volume of transactions exceeds USD 1.5 trillion, becoming the most liquid market with the largest number of operators.

Due to the ease of speculating with any currency and the high profitability that is offered, many governments have established control policies on foreign exchange transactions to avoid devaluation or excessive revaluation of one currency compared to others. Logically these phenomena affect directly to the internal and external economy of any country.

Although there are more than 182 currencies, the most traded currencies are the dollar, the euro, the pound sterling, the yen and the Swiss franc.