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Checklists, Expectations and Considerations You Will Want
to Know
It is important to find the right partner in any business, but it’s especially important
when you are placing your funds with a broker in the speculative world of currency trading. Money matters are always serious things which must be carefully dealt with,
especially in business. This is why a lot of people come to depend on Forex brokers
to help them through the tricky ins and outs of the world of currency. But do you
have any idea what a Forex broker is? Many people confuse “forex broker” with “forex
market maker” and use it interchangeably. Let’s look at each a little closely.
Forex Market Maker
A market maker is an institution which has the ability and authority to take deposits
from you directly in its own name and then act as a principle/counterparty to you
on your transactions. Market making function entails that an institution provides
you with two-way pricing (buying & selling price) and assumes the risk of paying
you if and when you make a profit. Generally a market maker will act as an exclusive
liquidity provider to you, and when you buy they will sell to you and vice versa.
How they make profit is, for instance, when you buy from them they go to other market
makers or ECN and buy at slightly better rates. The difference between your buy
rate and their buy rate is their profit. Generally there is no restriction on market
makers on how soon they have to cover their positions against their clients. They
can keep it in their own books as long as they want or lay it off to other counterparties
and ECNs. A market maker plays an important role by providing liquidity and services
that perhaps are not available in other counterparties or ECNs.
A Forex Broker
A Forex broker on the other hand is an individual or an institution who acts as
a middleman between you and a market maker or an exchange (like an ECN). Generally,
they do not take deposit from you but introduce you to a primary liquidity provider
where your account is held. Brokers will provide value added services to their client
for which they charge commissions. Commissions are their main source of revenue.
A market maker can act as a broker and pass your trades on to other counterparties
without assuming any positions themselves, but a broker cannot act as a market maker
unless they are registered and authorized to do so in their jurisdiction.
So how do you choose?
It all depends on what kind of services you are looking for as both market makers
and brokers fulfill different market demands.
In a nutshell, a forex broker will help you by assuming the role of trader as it
keeps a watchful eye on the every-fluctuating foreign exchange market. There are
many different kinds of forex brokers out there, numbering by the thousands. They
have their own set currency prices and spreads, but since there are so many of them
the differences are not alarmingly significant. Then again, one forex broker could definitely
be better than the other and will offer you a better deal– so you need to arm yourself
with information that will help you choose the best broker for yourself.
A Quick Checklist
When out forex broker-shopping, take note of the margins that they provide. As a
guideline, the usual percentages for many forex broker range from less than one
percent to ten percent. Ask about their spreads for the different
currencies that
you are interested to trade and if you meet the minimum amount of funds that are necessary in order to start an account with them. Remember to ask about their schedule
of fees and the corresponding trade sizes. While on the subject of fees, check if
there are any other things that you might need to pay for, like rollover fees for
overnight positions that are held with the provider. These fees are standard every
where but some market makers/brokers can remove this on a case by case basis if
requested.
Features that you should look for include negative balance protection where the
forex broker or market maker will liquidate your position before your account balance
goes into a negative. Continue on to ask about their charting packages and if their
forex trading platform will provide you with a demo account which you can use to
practice on. If you need advice and guidance you may be better off using a broker
who charges you a commission for helping you. If you are making own decisions then you should open an account directly with a market maker or an ECN.
Generally, you need to find out if the company that you are interested in dealing
with has a good reputation and is established in this industry. Be persistent when
it comes to researching on the company history and whether or not there were any
problems or inconsistencies on the part of the company at any given time.
Your Ideal Forex Broker
After sorting out the basics, you ought to proceed by matching the information you
got about the forex broker you are considering with what your needs are. While most
forex brokers will start off by telling you about what they can do for you, you
need to go beyond the icing and dig deep to find out if the cake really is as good
as it seems.
Your ideal forex broker should have low spreads if you are trading actively, but
spreads will not matter as much if you are trading less frequently. This spread is
calculated in pips, which is the difference between the current buying price (Ask)
and the selling price (Bid) at any given time.
Given the nature and style of your trading, the spread becomes more or less of
a factor when deciding a broker or market maker.
Generally speaking, the more you trade
the lower the spread should be to make it feasible for you.
The forex broker who acts as a market maker must also be registered as an FCM, or
regulated under some authority such as ARIF or Polyreg (in Switzerland), or the
NFA in US, FSA in UK etc).
The Tools of the Trade
After narrowing your choices, your next forex broker consideration would be the
different kinds of trading tools they offer to provide you with. Each forex broker
has a different trading platform for their clients, and they usually work with a
wide range of real time charts, news and data, and technical analysis tools – all
of which you would definitely want to tinker with. This is why it is always a plus
point if the forex broker offers to provide you with a free trial of their tools.
It is always best
to see for yourself the different functions of their tools, especially
when it comes to understanding their forex currency trading software. Forex brokers
usually provide both technical and fundamental commentaries, as well as economic calendars and the latest research results that will assist you in making good trades.
The Final Note
Shopping around for a good forex broker is no easy task, but with the right guidelines
you will surely come to find one that is most suited to your liking. Just remember
to consider the broker status, fees, width and breadth of tools offered (including
forex trading software), check out their rates and charts and additional opportunities
for bigger profits through market makers and their special policies that you would
not find in other institutions and exchanges. Keep these considerations in mind
and you will soon be sealing the deal with your forex broker of choice, making great
profits and establishing good leverage for your company and yourself as an individual
in the exciting world of forex market.
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