What is a forex broker?
A forex broker is an individual or an institution that facilitates the buying and selling foreign currency for you as a trader. An example of a forex broker is our website called Tender Forex, as our platform acts as the ‘middleman’ that enables you to speculate on a forex pair’s value without buying any physical currencies.
What is forex trading?
Forex trading is the practice of speculating on a currency’s price as measured against another currency’s price (for example, how strong the British pound is compared to the US dollar.) Because you’re not actually taking ownership of any notes or coins outright, but instead predicting their value, you as the trader need a platform to speculate on. The provider of this platform is your brokerage or broker.
How does a Forex brokerage account work?
Forex brokerage accounts work in slightly different ways depending on the region you trade in, so how it’ll work will be determined by which broker you choose. We try to make our Forex accounts simple to use.
The following is a summary of how a forex brokerage account will work:
- A forex brokerage account is either an investing account (where you buy actual currencies and own the money outright) or a trading account (where you’ll speculate on currencies’ values in the market.) With us, you’d open a CFD trading account, which we’ll explain a bit further on
- Because the forex market never sleeps, a good forex brokerage will give you 24/5 access to foreign exchange trading. With us, you can trade forex from 5 am Monday to 6 am Saturday (UTC+8). These long trading hours are made possible because forex transactions are completed over the counter (OTC), rather than through a central exchange.
- You’ll then need to select a currency pair to trade in. With us, you can trade over 80 currency pairs, including major pairs like GBP/USD and EUR/USD, but also more minor and exotic pairs like USD/ZAR or AUD/CNH
- Forex is traded in lots. These are standardized ‘batch sizes’ of currency pairs you can speculate with. For example, a standard lot is 100,000 units of the base currency – but you get smaller denominations as well. So, before you get started, you’ll need to determine the lot size and amount you’re comfortable with spending
- Remember, it’s not just about lots – both your position size and the price of the instrument need to be factored into the cost. Plus, other fees may apply
- The way a Forex brokerage account works is that you are in charge, not a fund manager. So, you’ll need to watch and study the market movements of the currencies you’re trading on and keep a close watch on any open positions, setting alerts not to miss any significant moves
- For the same reason, you’ll also want a good risk management strategy in place to maximize your chance of profit and minimize your chances of a loss
How to choose a Forex broker
The forex market is the biggest, most liquid (and often the most volatile) market in the world – so you really want a forex broker you can rely on. Here are nine factors to consider when choosing a foreign exchange broker:
Regulatory compliance
The first and foremost thought in your mind when choosing a broker is that they strictly adhere to the law. You want to partner with someone who’s above board –these institutions are handling your forex transactions, after all.
IG Group is a trusted entity regulated by numerous regulators across the globe, including the FCA, BaFin, MAS, ASIC, NFA, CFTC, and others who have strict regulatory requirements that govern exactly what we can do and how we must do it and also require the firms they supervise to hold client funds in accounts separate to their own. This ensures that the cash remains yours, rather than IG’s.
IG International Limited is licensed to conduct investment business and digital asset business by the Bermuda Monetary Authority (BMA).
This means that your money is ringfenced – we’re not allowed to use the money you trade with for our business activities. It also means that your money is completely protected in the unlikely event that we become insolvent.
Leverage and margin amounts
The levels of leverage and margin amounts available to you are also a crucial factor in your decision.
Leverage is a feature of some trading instruments. It means that the majority of your position size is, essentially, borrowed from your broker. When opening a forex trade, you’ll put down a percentage of its value, known as the margin, and your broker will put up the rest.
It also means that your initial outlay to open a trade is only a fraction of the position’s actual size, but both profits and losses are calculated based on the trade’s full value. This means both profits and losses can substantially outweigh your margin amount.
Your total exposure compared to your margin is known as the leverage ratio.
Let’s say you want to buy 1000 shares of a company at a share price of 100 cents. To open a conventional trade with a stockbroker, you’d be required to pay 1000 x 100 cents for an exposure of $1000 (not including any commission or other charges).
However, with leverage, you can pay a fraction of this cost upfront. If the margin amount was 20%, you’d pay just $200 to open a position worth $1000. Both your profits and losses would, however, be calculated on the full $1000.
If you went long on your trade and the company’s share price goes up by 40 cents, your 1000 shares are now worth 140 cents each. If you close your position, then you’d have made a $400 profit – double your initial margin amount of $200.
The reverse would be true if you went long and the share price dropped by 40 cents, you’d have made a $400 loss – double your initial amount paid. So, there’s a substantial risk of profits or losses outweighing your margin amount.
This is what makes the leverage ratio of the forex broker you’re trading with crucial. A high amount of leverage means you can make far more with a small amount of capital than you could otherwise. However, it also means you’re at risk of losses far outweighing your position size, and you’d forfeit that entire amount if your prediction is incorrect.
When researching forex brokers, you might come across extremely high leverage ratios – but be aware, using excessive leverage puts you at risk of enormous losses, which could cripple your trading strategy.
We also give you negative balance protection.2 This means you can’t lose more than the equity available in your account. If your balance does go negative, we’ll bring it back up to zero at no cost to you.
Spread and commission rate
The margin rate you’ll pay to open a position isn’t the only amount you’ll pay. When trading forex, you don’t pay any commission to us – but you will pay for something known as ‘the spread.’
The spread is the difference between the buy and sell prices when you open a forex trade. In most cases, we charge our spread on top of the market spread, as our fee for the trade. These charges apply to CFD trades with forex.
The spread amounts are largely determined by the market’s economic conditions. The more volatile a market is, the wider the spread will become to manage the volatility. We can usually offer our minimum spread, but when market prices go wider, our spread will increase.
What’s the best forex broker for you?
The best forex broker for you will depend on your trading style and the goals you hope to achieve. Whatever those may be, the right forex broker for you will have:
The market hours that you’ll most want to trade, depending on your chosen currency pair – we have 24/5 trading, plus weekend trading hours
A platform that works for your needs – we offer our classic platform, mobile app, ProRealTime, L2 Dealer and MT4
No hidden fees – we offer free deposits and withdrawals
Ultimately, the only way to find out which forex brokerage is right for you is to try platforms out and see what works for your specific FX strategy.