Whether you like it or not, a trader’s life would not be complete without the forex brokers. It is vital that you comprehend how they function, how they make money, and how to keep yourself away from bad brokers and their bad practices.
With that being said, let us understand more about a forex broker.
What Is A Forex Broker?
It is a company that gives traders access to the forex market. Meaning, forex brokers are the middlemen between the market and the traders. Forex brokers offer a wide variety of services like forex trading platforms which are utilized to sell and to buy foreign currencies.
The moment you send orders through the platform, your forex broker will try to match the order with either its internal group of traders or send it to external providers to look for the best opposite order. Every time you place sell orders, they have to match with agreeing to buy order or vice versa.
They also account for a moderately small account of the everyday turnover of the forex market. According to a research, from a total market of $5 trillion, retail forex makes up around 5% of it.
Types of Forex Brokers
Forex brokers have mainly two types: the dealing desk and the no dealing desk type of brokers.
They are called the market makers and they offer liquidity to their consumers and make the market for them. They were given that name because they are the major source of liquidity for their clients. Mostly, these types will take the position of the client’s opposite side. If you are selling, the DDs are buying from you, and vice versa.
No Dealing Desk
This type of broker does not pass the orders of their clients through a DD or dealing desk. What they do is to basically act as the middleman between clients and liquidity providers, either external or internal.
The moment you place your trade with NDD brokers, they will try to match your order first with the internal pool. If no matching orders are found, your order will be forwarded to external liquidity providers like hedge funds, mutual funds, banks, and other brokers.
How Do They Make Money?
Mainly, a broker’s income usually comes from spreads, and other sources like trading platforms, commissions, and other additional services.
It is the difference between the ask price and the bid of the currency pairs. That difference is the profit of your broker. Some DD brokers propose fixed spread, mostly, spreads are not constant and dependent on the up-to-date conditions of the market.
Aside from the spread, brokers may also charge you a fixed rate of fee or commission for every trade. However, profit from these are quite low because of high competition amongst brokers.
Another source of major income for brokers are the forex trading platforms. If you are an expert trader, you might be looking for offers from trading platforms that your brokers provided. The major thing to put to consideration is that the service offered rises your efficiency and profitability more than the cost of expense. On the other hand, newbies are fine with the features offered by free platforms.
Some forex brokers may offer additional services with pay. With a small amount, you may access a wide variety of instruments that are tradable, trading signals, professional market research and information on the market depth.
Whichever type of forex broker you choose, see to it that you examine and choose the right broker that fits your trading needs.