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Forex
To trade in Forex markets, you need a Forex Broker. But let’s understand the Forex Market first.
A fruit-vegetable market is no different than a Forex market in concept. Just the way you go to the street market to buy vegetables and fruits, knowing that that is the place where you would get them, you go to Forex- the market place to trade various national currencies.
The buyers know that they will find sellers of fruits and vegetables at the street market. Similarly, the sellers know that if they opened their stalls in the street market, the buyers would come to them automatically.
The Forex market is the largest in the world, and also the most liquid as trillions of dollars change hands daily.
So where is the Forex Market?
Forex Market does not have a centralized location, but it is an electronic network of brokers, institutions, banks, individual traders- who trade via banks mostly. So the traders- buyers and sellers may be situated 1000 miles away. To find the buyer or seller of your interest, you need some type of mechanism, and that is the place of a broker.
The Forex Broker
Forex brokers are firms that provide access to the platforms to the traders where they can sell or buy foreign currencies. They are also called currency trading broker or a retail forex broker. These retail brokers deal with a very small portion of the huge foreign exchange market. The currency traders make use of these brokers round the clock to access the currency market for speculation. Even the investment banks provide Forex broker services to large institutions. These forex brokers earn based on the bid, ask, the spread of currency pair.
The Role of Forex Broker
A broker is a medium that the buyers and sellers go to, to sell or buy currencies. The forex broker is the middleman or retailer between the market and you. He will find the respective buyer or seller in the market to match your specific requirements.
The forex brokers give access to trade all major currency pairs like- GBP/USD, EUR/USD, USD/CHF, and USD/JPY and the g10 currencies and their respective exchange rates. They also give you Forex News with latest updates and analysis.
The forex broker buys the currency pair and opens the trade for a trader and similarly closes it by selling the pair. To state an example- if a trader wants to trade Euros for U.S. dollars- they will buy the EUR/USD pair. They spend U.S. dollars to buy the Euros. Now, when they close the trade, they would simply close by giving Euros for U.S. Dollars. If the exchange rates happen to be higher on the closing of the trade, they profit from it, else incur a loss.
But they are not just middlemen between you and sellers or buyers but also between you and the “liquidity provider.”
Now, what is a Liquidity Provider?
To understand liquidity providers, it is essential to understand liquidity. Say, you want to exchange or buy a certain currency. You need to find someone who wants to sell the currency you are looking for. If abundant people want to buy the currency you want to sell, then it is a start. Now you also need to find those who want to sell the currency that you want to buy. If there is a multitude to sell what you want, then you are in good shape. Because when there are abundant buyers and sellers, then the market is “liquid.” This is one way for it to be liquid. There is another way too.
Say you want to buy a certain currency. Now there are not lots of sellers, but those sellers are selling in large quantities. You are still in good shape- the market is liquid.
The sellers who sell large amounts are referred to as liquidity providers. This is so as they are putting liquidity into the markets. These usually comprise large financial institutions or banks that trade on a large scale.
Liquidity Providers trade in large quantities. The probability is that when you sell, it is a liquidity provider who buys off you, and when you buy, most probably a liquidity provider sells to you. With them around, there is always someone to trade with. So the broker passes on your trade to a liquidity provider- matching your contract to a liquidity provider- a bank or financial institution, to trade with.
What to Look for in a Forex Broker?
The following aspects must be examined before choosing a forex broker-
Regulatory Compliance: Ensure the reputation of a forex broker. You can look up the National Futures Association (NFA) to see the reviews. And the broker should be registered with Commodity Futures Trading Commission (CFTC) as Retail Foreign Exchange Dealer and Futures Commission Merchant. CFTC protects users from fraud and abusive practices on the part of brokers.
Account Details: Forex broker has different types of account offerings as Leverage and Margin, Commissions, and Spreads.
Other aspects include Initial Deposit that should be as low as $50; Ease of Deposits and Withdrawals; Currency Pairs Offered; 24×7 Customer Service; Trading Platform
How do I interact or communicate with a forex broker?
The broker in the norm would be someone you called up to help you buy or sell currencies. The times have changed so much with the advent of the internet and technologies that the broker is not a person but a firm providing trading software or platform.
Trading Platform
A trading platform is software that you use to buy or sell currencies. The software can be accessed on the internet and downloaded on your computer. They help you to trade Forex.
There is also the option of forex brokers that enable you to trade through web browsers. You are then not limited to your personal computer and can trade from anywhere that gives you net accessibility, without requiring to download the software.
