Here's the story of why you need a good and fair Forex broker, the middlemen of foreign exchange, the one that makes you come out as a winner.
Have you ever seen a buzzing crowd of businessmen picking up phones and shouting calls on a foreign exchange trading floor? Those men are collective of forex brokers actively helping traders to allocate capitals and execute market orders. Eventually, with their help, each trader can potentially make profits.
What's a Forex Broker and Why You Need Them?
Traditionally, a trading lot in the foreign exchange market required approximately 100,000 units of base currency to effectively pass a market. For example, a single lot in GBP/USD (Pound sterling/US dollar) is equal to £100,000.
Therefore, only traders with high capital and large investment bank can join in. That is where a forex broker comes into play. Forex broker can help an average retail trader to enter forex trading with leverage. In its essence, leverage is a system where a forex broker may leash a trading lot for a margin.
This is how leverage works:
Thomas got only $10,000 and he's short $90,000 (out of 100,000 base currency) to pass a single lot in USD/JPY. In short, he needs a forex broker to lend him enough money.
Thomas found a forex broker that offered him 1:50 leverage. Without hesitation, Thomas took that offer. Now, he can trade under 2% margin of the original lot, that's equal to $2,000. Effectively, he's left with the remaining $8,000 to be traded in the forex market until it hits margin call.
TLDR; If you're not rich-blooded like Warren Buffet, you'll need a forex broker to lend you enough money to play the forex YOLO games.
Everything You Need to Know About Trading with A Forex Broker
You may start online trading with just about any forex broker. However, if you want to actually profit, you have to carefully select them. In order to do so, you need to check all these things:
See also: Forex Brokers Comparison
A. Check Their Identity and Legitimacy
The first thing to come in mind is the quality of your select forex broker. Needless to say, the quality of a forex broker is directly linked to how they are regulated and from where they operate.
By the way, do you know that a shady forex broker can operate on an offshore island without any clear regulation? Yes, it's true and that's the dark truth in forex market reality. Be wary my friends! Shall you be tempted with their overly unrealistic offering, we're here to wake you up!
To avoid those traps, you need to scrutinize the legit-ness of your broker. Go Ahead, find the answers for these questions:
- Where's their headquarter? Is the address written on their website actually refer to an actual place?
Yup, you need to find their actual address. If you can't locate it via internet global map, most likely it's a fake address.
- Who regulates them? Are they under the jurisdiction of a regulatory body?
A good, legit forex broker will be regulated under a legal regulator. Some of these are; NFA and CFTC for the North America region, FCA for the UK, ASIC for Australia, or CySec for Cyprus.
- To whom shall I send my complaints or questions? Can I get a satisfactory answer?
By norms, a brokerage provides customer service or sorts to answer all your question. If the answer is satisfactory to you, it's a good sign to start trading with them.
B. Examine the Trading Terms and Conditions
If you want consistent profits from your trading positions, you have to make sure that your forex broker is playing fair. Simply put, check their trading term and conditions before opening a live account.
We know it's not easy to understand the wall of text imposed by your broker to hide their true intention. But fret not, we'll make it simple here!
Step one, check their market model!
A market model is how a forex broker transmits your trading request to the market. For instance, a good bonafide forex broker will transmit your market order through STP or ECN network without any intervention (i.e., no re-quote).
Step two, check their trading costs! There are multiple ways a forex broker can charge you for their service. Most of them come down to spreads and commissions. Therefore, make sure you can get them as low as possible!
Step three, read more info below!
C. What Do They Offer?
Well, of course, it all boils down to what the forex broker offers to you. However, you need to check how sensible and realistic those offers are if you don't want to fall into a trap. As a beginner, it's very common for you to get lured by fantastic offers, such as high leverage above 1:50, commission-free accounts, or even no deposit bonuses!
Think again! CFTC and NFA heavily imposed strict rules on leverage and bonus deposits for a reason! One such reason is the risk of overtrading and trading under a limited margin. In other words, the broker basically lends you a huge amount of money to lure you to trade like blind, hungry rats! And guess what, the rats got depraved and the broker pocketed your loss as profit!
We do understand that you as a retail trader, only possess limited capital. But, don't make it a reason to engage over trading with an irresponsible forex broker. Instead, pick a fair and reliable forex broker with realistic offers for their leverage! Remember, trade with a fair forex broker and win like a boss!
See also: How to Choose the Best Forex Broker
D. How Do Forex Brokers Maintain Their Customers?
This is arguably the most important thing to note. A good broker will not rob you blind and leave you like a rag once they done with you! So, the big question eventually comes down to this, how does a good forex broker maintain a sustainable relationship with their clients aka you?
Good question really, but too many times we've heard so many scams and bad news of them... Fret not! Good forex brokers actually exist and they do have clients with lasting relationships for years and years to come. You may check one of our reviewed brokers here.