Exactly What Role Does A Forex Broker Play In Foreign Currency Trading?

The broker is a key player in foreign currency trading and knowing just what a broker can do for you is essential to your success in trading.

Almost all Forex traders will make use of a broker to handle their transactions and so it is very important to understand exactly what a Forex broker does and what he can do for you.

In general a broker is an individual who both buys and sells for you against decisions which you, the Forex trader, make and which you pass to the broker as orders for him to trade. The broker will then earn his money in a variety of different ways by laying down a range of fees for his services.

In the case of foreign exchange trading, a broker has to be associated with a large financial institution, like an insurance company or bank, in order to provide the funds needed for margin trading. The broker also has to be registered and, in the US, this means being registered as a Futures Commission Merchant (FCM) with the Commodity Futures Trading Commission (CFTC) as protection from both fraud and abusive trade practices. Before you can start trading you will have to establish an account with a broker and may well discover that the number of brokers offering their services online is a little overwhelming. Selecting a Forex broker will require a bit of research work on your part, but, the time which is spent carrying out this research will provide you with an insight into the services which are available and fees which several brokers are charging.

As is true for with most businesses there is no better advertisement than word-of-mouth advertising and so it is invariably a good idea to talk with colleagues and friends to see who they are using and if they have any difficulties with using a particular broker.

If this is not an option, then you might try choosing several online brokers and getting in touch with their help desks to see how quickly they respond to your enquiry and whether you get a good answer to your questions. Bear in mind, however, that any pre-sales service is generally superior to after sales service.

One very important factor is to find a broker who executes orders both quickly and with the minimum of slippage. All online brokers ought to provide automatic order execution and should have a clearly statedclear policy when it comes to slippage. They should be able to tell you exactly how much slippage you can expect to encounter in both fast-moving markets and normal trading.

Next, you have to find out what fees a broker will charge and, in particular, what spread he uses? Additionally, is this spread variable or fixed depending upon the type of account? Are all accounts subject to the same spread or are there, for example, greater spreads on Forex mini trading accounts?

You should take care here. In general, tight spreads produce higher profit for the trader, but there can frequently be a trade-off between the smaller spread and the service which you receive. Consider the whole picture before deciding to use a particular broker.

Margin accounts are the foundation of foreign exchange trading and so you have to be happy that you fully understand a broker's margin account terms before opening an account. You need to know what the requirements of margin trading are and exactly how the margin is determined. Does the margin change, for example, according to the currency traded and is it the same on every day of the week? Also, Is there a difference in the margin for standard and mini accounts?

The software used for trading is also extremely important for the online foreign exchange trader. Get a feel for the software which is available by trying out demonstration accounts with different online brokers. You need to see both reliability and the capacity to perform well in rapidly moving markets and any software needs to offer automatic trading and incorporate special features like trading from the chart and trailing stops. Certain features might only be available at an extra cost, so make sure that you understand exactly what your trading needs are and how much the broker is going to charge you to meet them.

There are of course other things which you will have to know like the broker's policy in regard to minimum account balances, interest payments on account balances, which currencies may be traded and whether non-standard sized lots may be traded. You also want to find out whether clients' funds are insured and the extent of any insurance cover.

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