You can bet on the world’s currencies through forex (foreign exchange) brokerage accounts by purchasing or selling currency pairings that react to global economic happenings. The forex market is open 24 hours a day, seven days a week, starting on Sunday afternoon in the United States and closing on Friday afternoon after stock dealers have finished trading. As a result, currency trading is massive, with an estimated $4 trillion in daily transactions, far exceeding the size of the world’s stock and bond markets.
Long and short positions on currency pairs, which calculate the exchange rate between two forms of legal money, such as the euro (EUR) and the US dollar (USD), are taken by forex traders (USD). When the exchange rate moves higher, a long position makes money; when it moves lower, a short position makes money. To initiate a short sell position, a trader does not need to borrow money or assets from a broker, although she may have to pay a rollover fee.
Brokers manage fees like commissions, access to professional advice, and withdrawal requests and hold your money in an account that changes value nightly in response to daily profits and losses. Unfortunately, some brokers bury their fee schedules deep in the tiny print of their websites, requiring potential clients to do their homework before creating an account. Here’s an in-depth look at how to choose a forex broker to assist you in avoiding unpleasant surprises.
What to Look for When Choosing a Forex Broker
To choose a forex broker, you must first determine what type of investor you are and your objectives in terms of currency trading.
Each broker that offers forex investments has its benefits and drawbacks. Regulation, the amount of security these organizations provide, and transaction fees are all key factors to consider. Security features differ from one broker to the next. Some brokers have security mechanisms built-in, such as two-step authentication, to keep accounts safe from hackers.
A large number of forex brokers are regulated. For example, the National Futures Association (NFA) and the Commodity Futures Trading Commission (CFTC) regulate forex brokers in the United States, France, Germany, Switzerland, Austria, Canada, and the United Kingdom. However, not all brokers are licensed, and traders should avoid unregistered firms.
Brokers’ platforms also range in necessary account minimums and transaction costs. You should make a budget for your investment life before jumping on a trading platform. Determine how much money you want to invest, how much you’re prepared to pay in fees, and your objectives. There are numerous aspects to consider while selecting the best platform for your needs. Before becoming involved, make sure to consider as many factors as possible.
Understanding Currency Pairs in Forex
Before you open an account, you need to understand the fundamentals of forex trading, from currency pairs to pips and profits and everything in between.
A currency pair is a numerator/denominator relationship that compares the value of two currencies, with a base currency on top and a quote currency on the bottom. For example, EUR is the base currency, and USD is the quote currency in the EUR/USD currency pair, the world’s most popular forex trading instrument. A EUR/USD quote shows a rate similar to what you’d pay in Paris if you needed to exchange dollars for euros. One dollar equals one euro in this formula, so a quote of “EUR/USD 1.23000” shows the euro is trading 23 percent higher than the dollar.
Each ratio is expressed in two to five decimal places and is also available in a flipped-over version that generates a new currency pair that travels in the other direction. To use our example, EUR/USD represents the euro’s value against the US dollar, whereas USD/EUR represents the US dollar’s value against the euro. Therefore:
If EUR/USD is 1.25000/1.00, the result is 1.25000.
The USD/EUR will therefore be equal to 1.00/1.25000 =.80000.
Traders in different nations used to take long and short bets with their local currency at the bottom (the quotation currency), but that changed as forex became popular early this decade. The currency pair with the highest volume is now traded by the majority of participants worldwide. The more popular version is also likely to have a smaller bid/ask spread, which reduces trading expenses.
When the EUR/USD ratio rises, forex traders profit, while when the ratio falls, they lose money. Traders profit from short EUR/USD positions when the rate falls and lose money when the rate rises. While brokers may provide dozens of currency pairings, four main ones draw a lot of attention:
EUR/USD is the exchange rate between the euro and the US dollar.
USD/JPY is the exchange rate between the US dollar and the Japanese yen.
GBP/USD is the exchange rate between the British pound sterling and the US dollar.
USD/CHF is the exchange rate between the US dollar and the Swiss franc.
Profits and Pips
A greater ask price and a lower bid price are displayed in forex quotes. The last two decimals are frequently displayed in large letters, with a pip being the smallest price increment (percentage in point). The number of pips gained or lost once the trade is closed is used to compute profits and losses. Because traders must purchase at the asking price and sell at the bid price, all positions begin with a slight loss. The spread is the difference between the two figures.
This is a standard process because most forex brokers do not charge commissions or fees for transaction execution, relying instead on the bid/ask spread as their primary source of revenue. In addition, although major currency pairs have narrower spreads than minor currency pairs, many brokers now provide fixed spreads, which means they won’t grow and contract in response to market conditions, even if it’s to your benefit.
For their forex positions, traders must choose a lot size. The smallest available trade size for a currency pair is a lot. When trading the US dollar, $100,000 is considered a typical 100k lot, and it used to be the minimum amount allowed by many forex firms. Mini lots of 10,000 units ($10,000 when trading USD) and micro-lots of 1,000 units ($1,000 when trading USD) have changed that.
The greater the unit size, the fewer pips are required to break even or lose money. The following example demonstrates how this works, with both transactions earning the same profit.
.00001 is the standard EUR/USD pip.
When you purchase EUR 100,000/USD at 1.23000 and sell at 1.23001, you “earn” 1 pip.
× 100,000 = $8.10 per pip x 1 pip = $8.10 profit (.00001/1.23000)
When you purchase EUR 10,000/USD at 1.23000 and sell at 1.23010, you “earn” 10 pips.
81 cents per pip x 10 pips = $8.10 profit (.00001/1.23000) x 10,000 = 81 cents per pip x 10 pips
The sword, of course, cuts both ways because a long or short trade with a large unit size moving against you will create losses faster than trade with a small unit size. That implies you should thoroughly research your new endeavor before investing real money and learn risk management skills such as proper position sizing, holding periods, and stop-loss strategies. Free pip calculators, widely available, can greatly aid this work on the Internet.
What Does “Margin” Mean?
Margin accounts are used to open new forex accounts, allowing clients to purchase or sell currency pairs with a total deal value substantially bigger than the money required to fund the account. For example, individuals in the United States can generally open accounts for as little as $100 to $500 with a 50:1 margin , providing considerable leverage – which means your trade size will be larger than your existing account balance.
For example, a forex trader with a $500 account at a 50:1 margin broker can place long and short bets up to $25,000, or 2.5 times the mini lot size. Leverage is risky because it can wipe out accounts overnight, but it makes sense because currencies move slowly in quiet periods and carry little risk of default. Thus the dollar or euro is unlikely to go to zero. Even yet, at times of crisis, like the wild British pound and euro gyrations after the United Kingdom decided to exit the European Union in 2016, FX volatility can reach historic highs.
Forex brokers do not charge interest for using margin, unlike stockbrokers. Still, overnight positions will incur rollover credits or debits , determined by the relationship between the interest rates in the currencies that make up the pair. The total trade value, not simply the fraction above the account balance, determines the credit or debit in this calculation. At its most basic level, a trader with a long position in the higher interest-bearing currency will be paid overnight. In contrast, a trader who holds a long position in the lower interest-bearing currency will be paid nightly. When selling short, do the opposite calculation.
How to Choose a Forex Broker
When looking for a reputable forex broker, take your time to ensure that your funds and trades are handled properly. All forex brokers in the United States must register with the National Futures Association (NFA), a self-regulatory government organization dedicated to openness. Verify the broker’s compliance with the NFA website, and look for any complaints or disciplinary proceedings that could influence your ultimate decision.
Because brokers can be hacked or go bankrupt, the safety of your funds and personal information is more crucial than anything else when you register a forex account. Unfortunately, unlike stockbrokers, who have the Securities Investor Protection Corporation (SIPC) to protect their clients’ funds if the brokerage goes bankrupt, forex brokers in the United States do not. Even worse, if a forex broker does not offer negative balance protection, which guarantees that you will not be requested for more money than your account balance if a position fails, a forex broker can recover more than your account balance through legal action.
Regulatory capital requirements increased significantly after the 2008 financial crisis, but that didn’t stop a wave of bankruptcies in 2015 when the Swiss franc fell overnight. Many accounts went into negative balances in minutes, exposing them to additional liability—those who were lucky enough to survive lost everything when the broker went out of business. Prospective consumers should remain with the most renowned brokerage companies, ideally those linked to a large bank or well-known financial institution, as a take-away lesson from that terrible circumstance.
To sell its services and grow its businesses, the forex industry in the United States utilizes the terms “introducing broker” and “white label.” A smaller company that introduces clients to a larger broker in exchange for rebates or other incentives is known as an introducing broker. White labeling is when a small business rebrands a large broker’s trading platform, allowing the big operation to execute trades in the background. These approaches may raise operating costs, leading to wider bid/ask spreads and higher fees.
Examine a broker’s funding and withdrawal procedures before handing over any funds. When you load your account with checks or wire transfers, some require extensive wait times before trading, while others levy high costs when you withdraw funds or terminate the account. When a broker asks you to fill out long documents, complete surveys, or meet with a representative in an attempt to change your mind, account closure can be stressful. Getting your money returned from less reputable organizations can take up to a week or longer.
Through chat, phone, and e-mail, customers should have convenient access to help and trading desks. Look for coverage available 24 hours a day, seven days a week in the United States, which means you can contact the broker any time between Sunday afternoon and Friday afternoon. Before you fund the account, test the broker’s response time by using the chat interface and dialing the phone number to see how long it takes for a customer service representative to respond.
Platforms for Forex Trading
The interbank market, a communications system utilized by large banks and financial institutions but lacks a central exchange like the NASDAQ or the New York Stock Exchange, is where currency pairings are priced. These trades inspire forex brokers, but they aren’t required to offer clients the best interbank bid or ask, and they may purposefully advertise wider spreads with lower prices to increase profits when those trades are completed through the system.
Prospective clients can check for conflicts of interest by visiting the broker’s website and examining the trade execution procedures. For example, find out if the broker has a dealing desk that makes a market and takes the other side of a customer trade. A more dependable broker will publish quotations directly from the interbank system via a wholesale liquidity provider or an electronic communications network (ECN) that handles the actual buy and sell transactions. These firms are not part of the professional system yet have direct ties to it.
Forex traders use the broker’s trading software to open and close positions, which should contain a combination of stand-alone, web-based, and mobile platforms. In recent years, Metatrader has established itself as the industry standard for standalone software, with a feature set that includes real-time quotes, price charts, news, research, and customizable watchlists. The MetaTrader 4 tutorial on Investopedia might help you learn more.
Web-based trading is a good alternative to standalone software, but it sometimes lacks capabilities, forcing account holders to rely on other resources to complete their trading strategy. Mobile apps offer the most convenience with the fewest bells and whistles in a streamlined design that typically permits one or two-click trading. When possible, use the full-featured stand-alone program instead of the mobile experience, and save the mobile experience when you’re away from your trading station.
Most forex brokers have demo accounts that allow potential clients to test drive the standalone, web-based, and mobile interfaces while trading currency pairs with virtual money. This software displays the same quotations, charts, and watchlists as the simple system, making it an important tool for evaluating the broker’s bid/ask price-quality. If the broker does not provide a demo account, be wary because it may be employing a substandard or obsolete technology.
When you compare several of these accounts to real-time quotations from a prominent financial website, you can rapidly see which forex brokers deliver the best bid and ask prices in stable market conditions. Take a second check shortly after a Federal Reserve rate decision or other market-moving events, if possible, to examine how currency pairs react in extremely volatile conditions.
Types of Order Entry
The trade execution screen provides a wealth of information on the demo account. Look for a wide range of trade entry types and stop orders and safety features such as Guaranteed Stop Losses and Close All Orders. Many of these order routing strategies are intended to shield traders from severe slippage or the predicted and actual execution price gap.
Any broker you choose should have the following order types as a minimum requirement:
Market Order — the order will be filled at the best available price as soon as possible. In fast-moving markets, this can result in significant slippage, resulting in executions that are pennies or dollars off the bid or ask price listed at the time of entry.
Stop Order – transmits a conditional buy or sell order that becomes a market order at the entry price specified.
Limit Order — a conditional purchase or sell order that can only be filled at or above the entry price.
Stop-Limit Order — This type of order transmits a conditional buy or sell order with a stop price and a limit price. The order becomes a limit order at the set stop price, filling only to the limit price. If the quote passes through the limit price without being filled, the order will be automatically canceled.
Guaranteed Stop Loss – sends an order that will be completed within the specified parameters if the quote passes through that price.
Close All — This command orders to close all open positions at best possible price. In a fast-moving market, this can result in a lot of slippages.
Is there any trading education or tools provided by the forex broker?
Forex broker in Lebanon use a range of materials from reputable brokers to help them make better decisions and improve their trading skills. Look for a section on the website dedicated to education, including webinars and tutorials on the principles of forex markets, popular currency pairs, and market dynamics that cause buying or selling pressure. These materials should offer specific details on how central banks influence currency markets when they rise or drop interest rates and how traders should prepare for these periodic events.
The instructional portion should also cover the trading platforms, currency pairs, and market order types the broker offers. Look for videos, manuals, or other instructions that demonstrate how to create customized watchlists, put up technical charts and display simple quote screens. These educational materials should also cover how to get news and research directly from platforms, eliminating the need to scour the Internet for information.
Using extensive research and economic analysis techniques, currency pairs that offer the finest short-term profit potential should be highlighted. This section should include free third-party comments, expert analysis, real-time news, and live webinars. Look for research that covers the entire world rather than just local markets and a daily economic calendar that lists all market-moving economic releases from all around the world.
Social trading has exploded in popularity in recent years, and most reputable brokers now provide it. Account-holders can connect and share trading ideas, tactics, and insights through a social hub. Some social hubs have taken this notion a step further by providing a copy trading interface that allows you to duplicate other clients’ purchase and sell decisions.
The greatest social hubs will have a ranking system that allows customers to find the most active individuals quickly. These relationships can be quite beneficial when customizing trading platforms, which frequently include API interfaces that allow third-party add-ons. It’s even better if the broker offers a comprehensive add-on library, complete with contributions that make trade management easier.
When shopping for a forex broker, take your time because a bad decision can be costly. Top brokers will have a wealth of resources, cheap trading fees, and access to the global interbank system. So even if you start a little account in the hopes of converting it into a small fortune through your trading talents, they’ll treat your money with care.