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."

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.

Five ways to detect a scammer Forex broker

If you are looking for a new Forex broker, or doubt if your broker is giving you an acceptable deal, then I will leave you a list of some things for you to consider when doing your assessment.

1. Not all Forex brokers are thieves! 

It would be very unfair to take the attitude that Forex brokers are all criminals. What you need to keep in mind is that most Forex brokers do not place their customers ' trades on the real market, and they charge spreads instead of commissions. This means that most Forex brokers are in a direct conflict of interest with their customers: the more they lose their customers, the more money the brokers earn. In fact, their business model is based on the failure of their customers ' trades. 

is a sad fact that most forex traders lose, but this is mainly due to poor trading methods, and does not mean that forex brokers have to act dishonestly to make profits. 

However, more profits are always good news, so there are some tricks that some brokers have in their sleeves to squeeze more money from flexible customers, and here are a few things you should consider.

2. Spreads or High Commissions 

The spreads have gone down very much in the last years. All the more money has you to finance its account, probably it will find better spreads available for you. This is due to the fact that the brokers that offer better spreads, usually need higher minimal deposits. In any case, you really must compare its options. The days of having to pay a spread of 3 pips for EUR/USD have ended.

Recently, more brokers have been introducing models based on commissions, where the clients pay a fixed cash quantity for trade. When it meets this, calculates carefully how much it usually risks in a trade for pip, and then calculate this "spread" who will be paying. Sometimes these offers of spread more commission are designed to do that the offer turns out to be better than really it is, and it is possible only to discover this once I realized personalized calculations.

3. Financing During the Night
Unless you are a pure day trader and close all its positions before 10 a.m. pm or the hour of midnight of London every day, you will pay or it will receive a small quantity (generally less than 1 pip) in every open trade that it has in this moment. This is based on the interest rates differential between the coins that compose this pair in particular, but it is structured by practically every broker as clear loss for the client. Some brokers are much worse than different, and many people do not announce these tariffs - you see it in its declaration the following day once the payment or the deduction has been done. If it gets in touch with most of the brokers, in general they will be prepared to quote its financing valuations overnight. Obtain some quotations and compare them in the same pairs of currencies, and perhaps be surprised for the results. If he likes maintaining trades in the long term, do a few calculations on how much it is probable that he pays in this night financing. You can think that you diminish significantly or you even erase its profit.

4. Execution of Stops / Sudden Increases
It is not understood that the brokers control their own prices. There is no central market, and most of the brokers are not doing trades real: and they can quote any price that they want! Of course, they have to maintain the quite honest prices, since otherwise it might use the prices of other brokers to predict correctly the prices movements, and as result they would lose money. So really he does not have to worry that its broker is going to invent the price.

What might worry him is that a broker can see where its clients are grouping its stop loss orders, and if the general price of the market comes very close to unleashing these stops, the broker might feel very tempted to push its price on this level and to take the profit as soon as possible. This can become even more easy during announcements of news or sudden shocks that have the effect of increasing the general price of the market up or down. A broker without conscience can always send the price a little higher or lower in these moments.

To be just persons, sometimes errors are committed, and the brokers often compensate the trades interrupted after excessive peaks when a sufficient quantity of its clients they complain. Nevertheless, it is something so that you are careful.

5. Interruptions 
There are times when the market is fleeing in a clear direction. If you want to make a trade and cannot get a connection with your broker, or the trade is repeatedly rejected for some unknown technical reason, then be careful. This is a type of a broker who is using unfair methods to prevent his customers from placing winning trades. If it happens a lot, it's a suspicious signal. 

This is not a comprehensive list of things to consider when choosing a forex broker, but are the most common broker problems that can make you win in Forex is much more difficult than it should be if you do not consider them.

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.